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PPC vs affiliate marketing and fraud 

I was recently reading the comments on a report regarding escalating pay per click fraud and a few commenters said advertisers should switch to affiliate marketing as it was fraud free. Unfortunately, this isn't true.

The comments came after a recent survey published by Click Forensics that states overall industry average click fraud rate was 22.3 percent for the third quarter of 2010, up from 18.6 percent reported for Q2 2010 and the 14.1 percent rate reported for Q3 2009. 

It seems there's been a uptick in sophisticated bot related fraud, where infected computers around the world are controlled by bot herders who instructed the systems to appear to click on PPC ads. Done correctly, it can be rather difficult to detect.

The figures are frightening, but advertisers shouldn't necessarily go running to set up affiliate programs thinking it will be a cure-all.

Affiliate marketing is a great option for some advertisers as most merchants starting up affiliate programs choose to only pay X amount to the publisher based on a lead or sale, rather than a click; so it's based on performance.

Affiliate fraud happens

However, what can happen - and I've seen this first hand - is that a merchant who didn't have any major problems with fraud and chargebacks before, may suddenly start having a problem after implementing an affiliate program.

If an affiliate program has big enough rewards involved in terms of commissions, it can certainly attract nefarious individuals. This has been evident in sectors such as web hosting where commissions upwards of $100 per referred account are paid to publishers.

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How it happens

In a common scenario, a fraudster signs up for the affiliate program and then starts "referring" accounts; using stolen credit card details. A merchant that isn't on their toes and has poor credit card fraud screening strategies in place may end up paying out these commissions, then get hit with chargeback fees on top; which can be substantial. 

The losses can really mount up quickly - remember, when it comes to chargebacks, the financial losses aren't just chargeback fees, it's the time involved in dealing with them. Additionally, the more chargebacks you receive, the greater the chances of your merchant services company bumping up your rates and in extreme cases, terminating your merchant account.

The way to discourage this is to have a commission pending period of a few months; but that can discourage genuine affiliates also; the ones who can refer real business. 

Bear in mind though, if you want to cover yourself and depending on the types of goods or services you sell, the period in which a chargeback could be issued could be as much as 2.5 years - or even more! I explain why here. No affiliate worth their salt is going to hang around that long to be paid.

I can't stress this enough - if you want to start an in-house affiliate program, ensure you have effective fraud screening strategies in place at your orders end of operations. A good affiliate software package can also a big help in identifying suspicious activity.

Recommended affiliate management software 
Used and recommended by Michael - Post Affiliate Pro.
Amazing range of features, economically priced, quick and easy to implement!
Read my review

PPC vs Affiliate marketing - horses for courses

The addition of an affiliate program can be a great way for advertisers and merchants to increase sales and traffic and I would certainly recommend starting up an affiliate program in many instances; but its definitely not without its hassles.

Aside from fraud, you also have to deal with scheduling payments, recruitment and communications; with the latter being quite time consuming. You can always hire a third party to administer the program, but that's where the costs start mounting.

PPC and affiliate marketing both have their place and can both be very effective, but neither are should be seen as a panacea and they each require vigilance in monitoring.

Related:

Affiliate management software
What affiliates want
Recruiting and managing affiliates

Michael Bloch
Taming the Beast
http://www.tamingthebeast.net 
Tutorials, web content, tools and software.
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In the interests of transparency and disclosure, please note that the owner of Taming the Beast.net often receives goods and services mentioned in reviews for free, or may receive payments or affiliate commissions for advertising or referring others to merchants of products and services reviewed.

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