There are 2 main incentives for click fraud: attacking advertisers and inflating affiliates.
Google manages Click Fraud, which include: Manual clicking, Click farms, Pay-to-click sites, Click bots and Botnets.
Firstly, Google raises auditing issues with PPC to figure out what went wrong and ways google adwords networks protect you by doing:
Invalid/discounted clicks
Real time behavior analysis
Proactive filtering
Over-time analysis
Mathematical models
Honeynet projects- open proxy
Google adwords network don't see what happened after the click left their network, which is why it is important for you to audit your campaign.
Secondly, Google uses a three-part system for invalid click detection:
1. Filters- automated algorithms filter out invalid clicks in real time, analyzes all clicks, and account for the vast majority of invalid click detection.
2. Offline analysis- automated algorithms and manual analysis
3. Investigations- rare
When google marks clicks as invalid, they're not charging the advertisers for those clicks.
Nearly all invalid clicks are detected proactively. Reactively detected invalid clicks are a negligible proportion (less than 0.02%). "The impact of invalid clicks at Google is minimal."
Besides auditing and using a three-part system, google has several other features help and protect advertisers:
SmartPricing
AdWords Auto-Tagging
Site Targeting
Site exclusion
Invalid clicks reports
Placement reports
IP exclusion
AdSense click area change
As an online money maker, the thing You can do to make adwords networks better is by using the parameters they have to tighten your campaign and actively control your results. Not everything that goes wrong is fraud.
When you have an issue, file a claim - it's the only way you will receive help.
