• by Wendy Davis  @wendyndavis, July 6, 2006

The prospect of click fraud has spurred more than one in four search marketers to slash paid search spending in the last year, according to a new report by research firm Outsell.

The report, based on a May survey of 407 advertisers, estimates that search engines have lost out on about $500 million in revenue due to marketers' cutbacks in paid search. Overall, 27 percent of respondents said they had curtailed keyword buys; most of that group--53 percent--pared paid search spending at least 20 percent, while a sizable 16 percent completely stopped paid search campaigns.

Overall, the reduction in paid search spending averaged 33 percent, according to Outsell. What's more, an additional 10 percent of respondents told Outsell that they plan to decrease their paid search spending in the future.

The responses indicate that paid search might face some growing pains, said Chuck Richard, vice president and lead analyst at Outsell.

But not everyone agrees that search marketers are cutting back. Peter Hershberg, managing partner at search engine marketing firm Reprise Media, said his clients are increasing rather than paring search spending. "It's totally at odds with pretty much every client experience we've had," Hershberg said of the report.

Outsell additionally reported that 75 percent of respondents thought they had been victimized by click fraud, but only a small fraction of advertisers complained to search engines. Overall, just 5.4 percent of search marketers sought refunds from Google, 2.9 percent asked Yahoo to refund pay-per-click fees, and just 1.5 percent asked MSN to give them their money back.

Of the marketers that complained, 63 percent of those who sought refunds on Google said they were satisfied, compared to 17 percent of those who asked Yahoo for a refund. The average refund totaled $9,507. Outsell also estimated that marketers overpaid by about $800 million for undetected click fraud.

Outsell's report comes just days after Yahoo agreed to settle a click fraud class action lawsuit with an agreement to refund fees attributable to fraud. Google several months ago also agreed to settle a click fraud suit for $90 million--although some attorneys are attempting to derail that resolution.

But, for all the angst over click fraud, the definition of the term remains a thorny issue. In general, click fraud is often understood to mean clicks by consumers who have no intention of becoming potential customers.

While such clicks can occur in bad faith--by competitors, trying to drive up marketing costs, or affiliates, hoping to share in pay-per-click revenue--they also occur without fraudulent intent. For instance, consumers sometimes click on ads by mistake.

In addition, some advertisers automatically assume that a spike in volume of clicks without a similar surge in conversions is evidence of click fraud when, in fact, there could be innocent explanations.

In the Yahoo settlement, click fraud was defined as "clicks generated by persons that did not have a bona fide interest in viewing the content of a Yahoo ad."