Report: Advertisers Lost $800 Million To Click Fraud Last Year

The San Francisco Chronicle reports on a click fraud study that claims 14.6 percent of all clicks and $800 million worth of fraudulent clicks were charged to advertisers.

The study conducted by Outsell Inc., a market researcher in Burlingame, seems to have been a survey of "407 online advertisers representing a cross-section of U.S. business."

I do not know if this data is based exclusively on reports from these advertisers, or if advertisers were asked to guess the figures. The study claims that 75 percent of all advertisers say they are a victim of click fraud, 37 percent have or will reduce their PPC spend, $500 million was lost directly due to Google or Yahoo and of the 407, seven percent asked for refunds averaging $9,507 each. The full report is available for purchase at OutSell.

Postscript From Danny. I've now reviewed a copy of the report. Note that:

  • The study involved 407 advertisers, all US-based, targeting mainly business and consumer markets, all working full-time. Together, they are said to control about $1 billion in ad spending.
  • Outsell says the cross section can be extrapolated. However, some degree of advertising is done by individuals who might be doing things like arbitrage (buying search traffic at low prices to send clicks to other contextual ads worth more). People like these and others probably aren't included in the report, yet they have an impact on any estimates.
  • 27 percent say click fraud has caused them to reduce online advertising spending (though whether this is search spending; dropping contextual campaigns or something else isn't covered, nor is it covered if they have dropped with particular search engines, such as second or third tier players). Another 10 percent say click fraud is such a concern that they intend to reduce spend. So click fraud is impacting spend on 37 percent of those surveyed.
  • In contrast, 31 percent said click fraud was a secondary issue or not an issue to them; 33 percent said it was a serious issue they felts providers are controlling. Combined, that's 64 percent who aren't saying they are impacted.
  • Of those 27 percent that have reduced funding, on average, it was cut by 33 percent. But again, whether that was to cut spending on contextual ads (often considered search by advertisers and others, even though it is not) or to cut with particular search engines isn't said other than "the results are relatively evenly split between Google, Yahoo and 'others,'" said the report.
  • Advertisers were asked themselves to estimate fraudulent clicks, meaning the amount billed for AFTER and refunds they've received. On average, this was a rate of 14.6 percent.
  • The $800 million cited in the San Francisco Chronicle article comes from the report taking that 14.6 percent average and applying it to the entire estimated $5.5 billion search ad spend from 2005. Some problems with this being an accurate stat are:
    • Advertisers might be off in their estimates
    • The average rate might not be applicable across the entire spend. In some industries, it might be much higher -- while spend in those industries might be a small percentage of overall search ads spend. Or it could be the reverse.
  • The $1.3 billion in the reports "Click Fraud Reaches $1.3 Billion, Dictates End Of 'Don?t Ask, Don?t Tell' Era" title comes from taking the $800 million figure and adding to it $500 billion, which comes from taking the $5.5 billion spend times 27 percent of advertisers who said they've reduced spending times the 33 percent average cut they've reported. Again, with all these averages, the actual amount reduced could be more or less. And while that additional $500 million is related to click fraud and thus part of the click fraud "problem," lumping it in makes it sound like $1.3 billion in click fraud is estimated, rather than the $800 million figure.
  • The report also reports on the rate people ask for refunds -- 5.4 percent have asked Google; 2.9 percent asked Yahoo and MSN comes next at 1.5 percent. The vast majority of advertisers -- 92.9 percent -- haven't ask for refunds. The report notes this big discrepancy between those who say they've cut budgets because of click fraud (27 percent) or those who have estimated click fraud to be 14.6 percent of spend. It's an important point, because if this much money really is believed to be fraudulently billed by advertisers, why aren't they pushing in larger numbers for repayment? And how come half of them report they do no systematic analysis of click logs. How can estimates of click fraud from this half even be included to make an industry stat, if they've done no analysis of their own?
  • As for refunds, Google by far had the best satisfaction rate, with 63 percent saying they were extremely or somewhat satisfied with actions.

Overall, there are some nice stats from the advertisers in this fee-based report. I found those about refund amounts paid and experiences with the search engines more interesting and probably much more accurate than the extrapolation of the overall click fraud rate of 14.6 percent or a figure of $800 million. The report doesn't leave me feeling those two figures are any more accurate than others that have been put out there.