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Case Studies
KARAOKE STAR:
The Case of the Disappearing ROI
Background
Karaoke Star (www.karaokestar.com) founders Diane Frerick and Kevin Steele were on the path to generating close to $3M US in annual revenue for their Phoenix-based karaoke equipment seller. Believing in the paid-search model of advertising, they bid anywhere from 40 cents to $3 for keywords that were associated with “karaoke”. Such keywords included, to name a few, “karaoke player”, or “karaoke song”. Once the ad campaign started, they quickly realized their ROI was paying off, and paid-search was seen to be a very lucrative way of securing business.
Spending upwards of $2,000 US per day in online advertising generating on the best of days, $15,000 – $20,000 US a day in sales, business was growing at an impressive 35% per month—a level that far exceeded their expectations and previous year sales. At these growth rates, Karaoke Star was well on its way to becoming a $3M a year revenue company. Except for one small detail—click rates suddenly plummeted.
In the summer of 2003, the revenue dream came crashing down. The number of clicks on certain keywords escalated from 200 to 800, forcing Karaoke to deplete its advertising budget. Previously $2000 US a day in advertising was generating, on the best of days, $15,000 - $20,000 US a day in sales, generating an ROI of between 750-1000% per day; suddenly $2,000 US a day in advertising was generating far less than previous daily sales ranges—generating a negative ROI, down from a positive 750-1000%. Frerick was puzzled at the surprisingly troubling result, “Our orders went down thousands a day but our bills [online advertising] went up thousands a day.”
After some forensic testing was conducted by Clickrisk security analysts, it was determined that Karaoke Star was a victim of click fraud.
The Evidence: Security Forensics and Video
The forensic evidence gathered from web server log analysis, use of Clickrisk Scanner-Pro™ software, and various human forensic processes by Clickrisk security analysts, found that a competitor was one of the perpetrators. The competitor (which cannot be disclosed due to pending litigation) is in the same business as Karaoke Star. Evidence furnished showed the competitor entered the business around the same time Karaoke Star had become a victim of click fraud. Keyword bidding wars ensued between the two rivals until the competitor no longer bid anymore. As Steele notes, “Then I got slammed. The next day the number of clicks went from four a day to 95, then 91”.
Evidence supplied by Yahoo! in the form of an internal investigation that pointed to the competitor, was inadvertently e-mailed to Karaoke Star. The competitor was singled out as the source of illegitimate clicks in a February 19, 2004 e-mail to Karaoke Star. Several e-mails from Karaoke Star to Yahoo! went unreturned, and Karaoke Star’s platinum status was revoked without explanation.
Former Employee of Competitor Provides Video Evidence
A former employee of the competitor e-mailed Frerick and Steele supplying evidence of a video showing the competitor’s hitbot or “bot” software in use to perpetrate the click fraud against Karaoke Star. Since then, other former employees of the competitor have come forward and provided evidence to corroborate Clickrisk findings in support of Karaoke Star’s allegations.
The Outcome: Debt Soared, Litigation Ensued
With the negative ROI that resulted from online advertising spend exceeding online sales, Karaoke Star’s debt load soared and damaged its favorable credit rating. Karaoke Star was left with no choice but to pay the networks for total clicks generated, rather than for legitimate clicks, via credit card billing. This severely impacted their ability to compete in a highly competitive industry.
The case is currently pending litigation with Google and Yahoo! as search engine defendants, and the competitor as another named defendant.
The Lessons Learned: Campaign Monitoring
Although the case is pending litigation, there are a few preliminary lessons to be learned:
- Competitors can be unethical and ruthless in trying to deplete online ad budgets of rivals through various means. Constant vigilance about campaign monitoring can mitigate this risk.
- A strong forensic audit trail from qualified online security experts will go a long way in providing credible proof to search engines, and in successfully recovering refunds.
- Had the anomaly gone undetected, the click fraud may have cost Karaoke Star significantly more than the estimated $500,000 US that Frerick claims they were damaged.
- Although ROI may be one way of measuring ad campaign effectiveness, ROI can suddenly disappear and the filtering of bogus traffic can improve ROI through time.
* The name of the competitor in question cannot be released due to pending litigation *