Last week Google agreed to settle a class action lawsuit for $90 million for click fraud. They're going to give advertisers a credit for future clicks, based on improper charges going back to 2002.

Ninety million bucks sounds like a lot of money, but compared to well over ten billion dollars of clicks they've sold since AdWords started, this is spare change. It's less than 1%.

A lot of people are paranoid about click fraud. I haven't talked about it a great deal, so let's talk about this right now.

How are click prices determined in the first place? By advertisers' bids. And how are bids determined?

Well obviously a lot of people determine their bid prices by guessing a number and then bidding. But the right way to determine your bids is to figure out how much a click is worth in the first place, by tracking conversion of sales or sales leads. Then pay accordingly.

Are you doing that?

If you're not, you're losing WAY more money than click fraud would ever cost you. A few months ago I read an article in the Wall Street Journal about click fraud. They were interviewing this guy who sold private airplanes, and he was complaining that he didn't know what he was getting for his Google AdWords investment, he'd seen signs of click fraud and his faith in the whole system was being shaken.

It seemed pretty clear that this guy had no idea what his cost per lead and his sales conversion was. So he was throwing darts in a blizzard. Sort of like a store owner who never takes inventory, complaining about shoplifting.

Let me repeat: If you're not tracking conversion of clicks to sales leads or sales, it's costing you WAY more money than click fraud.

Last year I had what amounted to a click fraud problem on one certain keyword. For about 3-4 days I had 3X the normal amount of traffic. But you know what happened?

My Click Thru Rate went up, my ad moved from the No.3 position to the no.1 position and once it was in No.1, Google started charging me less for clicks because of the high CTR. I got 4X the traffic but it only cost twice as much. The cost per click went from 19 cents to 7 cents.

Again, for those few days I was spending twice the money as before. But not 4 times. Google's CTR formula inherently gives you discounts for click fraud. Not a total solution, but it does help.

If you've paid much attention to this you see that Google doesn't say very much about it. Why? Because they just can't. If they told everyone what techniques they use to detect it, people who do click fraud would find more ways to get around it.

What I can tell you is that if someone clicks on your ad twice or more in 30 days, you only get charged one time. The most obvious kinds of click fraud, like your competitor repeatedly clicking on your ad, are easily detected and you don't get charged. Furthermore, AdSense advertisers who get caught for click fraud get clicked out.

You know what's way worse than click fraud though?

Trashy "AdSense sites."

If you syndicate your ads on AdSense, these sites cost you WAY more in terms of crappy, costly traffic than click fraud ever does.

We've all seen them - sites full of junky, nonsense text and non-content, whose only purpose is to get people to click on AdSense ads.

You don't want your ads on those sites. Not only do they do a disservice to Internet users in general, they bring you only the lowest quality visitors.

I'm not against AdSense sites - the late Ken Giddens had hundreds of quality examples in his portfolio, with real articles and real content. What I am against is filling web pages with garbage that looks like content to a search engine but not to a real person. And there are undoubtedly dozens or maybe hundreds of gurus teaching people how to do that. This is worse than click fraud.

How do you protect yourself against that? You HAVE to bid separate prices for your AdSense traffic, and you have to track its conversion rates separately. And you may want to deliberately exclude certain sites from showing your ads.

THIS is the No.1 biggest place where Google advertisers lose money. They make money on Google traffic and give it all back on AdSense.

Buyer beware!

Perry Marchall