I just finished reading DNJournal’s year-in-review article, and the issue raised again and again is click fraud.
Will click fraud destroy the domain name industry?
For those newbies out there, click fraud refers to people or software purposely clicking on pay-per-click ads in order to charge the advertiser. Pay-per-click advertising gave domain names a second wind and has been a major force behind recent price increases in the domain resale market. This means that advertisers are funding the run-up in value of domain names. If click fraud destroys advertiser’s confidence you can expect the bottom to fall out of the domain market.
Or will it?
Click fraud has been around since the beginning of pay-per-click advertising but has increased in prevalence now that individuals can profit from it through program like Adsense. Savvy advertisers know that a portion of their clicks are fake and they adjust their bids accordingly. At the end of the day the advertiser cares about one thing: cost-per-action. If the goal of an advertiser is to get mortage leads, the advertiser calculates the total amount spent per lead received. It if is to sell a widget, the advertiser calculates the advertising cost per widget sold.
Cost per action is nothing new. In fact, cost-per-action affiliate programs were around before paid search. Many cost-per-action affiliate programs started out as pay-per-click but changed to a percentage of sales to combat click fraud. You can expect the same thing to happen in paid search – a move from clicks to actions. Witness Snap.com, created by the same company that eventually became Overture/Yahoo Publisher Services. Snap.com has an advertising system in which you bid how much you’re willing to pay per action. Instead of paying $.25 when someone clicks on your ad, you pay $x when someone actually completes an action on your web site.
Will Google and Overture eventually move to this model? Savvy advertisers already calculate their advertising costs this way, but it doesn’t stamp out click fraud unless publishers are compensated for actions only. I think a market that mixes cost-per-action and cost-per-click would even out the playing field. If someone is willing to pay $20 per action and has a conversion rate of 1 in 10, they will show up ahead of someone willing to pay $2 per click. If a publisher’s web site send poor quality traffic to the $20-per-action site, they will receive less per click. (Google has a form of this through it’s “smart pricing” feature).
The future of the pay-per-click model is the biggest issue facing the domain name industry in 2006 according to participants in the 2006 Domain Name Survey. Survey results will be released soon.