Over the last five years, almost all of the topics I’ve written about focus on some aspect of performance-based advertising. My fascination with the subject stems from a desire to understand the role performance-based ads play in the broader ecosystem for advertisers, merchants and affiliates.

What I’ve come to believe is that the performance marketing world has two very different sides. I’m reminded of a well-loved song from the musical Avenue Q, “The Internet Is for Porn.” We could talk about the divide between mainstream advertising and adult ads, but it’s the divide taking place inside of mainstream advertising that has me thinking “the Internet is for fraud.”

From an advertiser’s perspective, the idea of paying only when an acquisition occurs almost sells itself, especially when that advertiser has a product or service to which they can attach a specific metric. If you are or have ever been an advertiser who has tried the performance-based marketing channel, you have probably run into one of the chief problems – getting sales. It is one thing to find a company or platform that will charge you only on a cost-per-acquisition model, but it is quite another to find one that can actually deliver traffic. And, this is what has lead to the divide in performance-based advertising.

I’ll give a silly but real example involving a company that produces a sugar-free gum without any artificial sweeteners. Selling gum online isn’t easy because you can’t make much money selling packs for $1.50. You can’t scale that business and you certainly can’t afford to advertise widely. Traditional gum makers can afford broadcast media because of their retail presence, but a mostly online seller can’t. So, what are their options, especially if they want to engage in a performance-based approach?

They can set up a percentage-of-sale program, and there will be some sites with appropriate traffic, but is that really going to drive volume in scale? They could do an eBay style approach, paying a flat fee for a new customer, but that approach requires an incredibly sophisticated understanding of a user’s lifetime value. And, it has taken eBay years to come up with their current system. That leaves us with one other model, and it is the Pandora’s box of performance-based online advertising – continuity.

Many associate continuity programs with things we don’t want, i.e., services we sign up for and forget to cancel. Yet continuity programs also may include any number of services we use actively, from offline entities such as gyms to online services like Netflix to GoToMyPC. Yes, there exists a multibillion-dollar ecosystem of continuity that threatens all of performance-based advertising, but the economics of continuity programs make it possible for companies that couldn’t scale otherwise to gain a large number of customers. Like search engine marketing, it contains fraud. However, the fraud here is much more nefarious and much more difficult to extinguish.

Two Types of Fraud
Online performance-based marketing fraud falls into two distinct types: marketing and consumer fraud. Marketing fraud involves an ad running in an unapproved and more importantly deceptive fashion. Consumer fraud involves people buying things they didn’t want.

To understand these types of fraud better, we must also understand how those with traffic make money online today. There are also two types of publishers: the smaller affiliate with a site they own who makes money by linking to merchants, and the larger affiliate who also makes a fair share of money by integrating performance-based ads. Combined, they include a large but not all-encompassing sample of performance- based marketers.

The problems arise with those who don’t look towards performance-based advertisers as a way to monetize their site. They look towards performance-based ads as a means to monetize traffic that others own. This group, known as arbitrageurs, looks at traffic first and at ads as a means for buying traffic profitably. The classic example is one who buys traffic on a click basis but makes money on a per-action basis. The majority of this bunch (those making the money) don’t really care about the products they promote. Whereas an affiliate who owns their own property might worry whether a certain advertiser is not right for their audience, the arbitrageur only worries about converting the customer to cover the media costs.

The Wayward Path
Arbitrage online, like continuity, isn’t inherently bad. The pursuit of money, though, can and does lead people astray, as they put the desire for profit above any awareness of the advertiser or user. For anyone familiar with the lawsuits by Oprah, Dr. Oz, and the State of Illinois, nothing illustrates this better than the marketing fraud via fake blogs that triggered the suit. How fake blogs lead to conversions would be genius were it not so insidious.

The same goes for those perpetrating consumer fraud by profiting from cashback sites. This isn’t the rogue individual but highly technical and organized groups that have specialized in fleecing the second-tier sites that share the cost per acquisition with the user. The problem with both types of fraud is that they don’t garner the type of attention that click fraud does. Most advertisers don’t really understand the magnitude of the fraud problem – hundreds of millions of dollars per year with multiples more in potential brand damage. They also don’t know how to properly guard against it.

Unfortunately, the amount of fraud is only increasing, making it harder and harder for new entrants to succeed online. The divide in performance advertising will widen until we reach a point where new dollars from the outside dwindle. Operating in this world is more and more like swimming with the sharks. It’s possible, but it means having an understanding of the risks as opposed to just focusing on the upside. No one has your best interest in mind like you do.