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IP address exclusion is a tool when you want some particular IP addresses to be excluded and prevent your ad from seeing to those set of people. You can use this only if you can access the web logs and have the IP address information from your web server people. Google doesn't disclose that.
However, in case if you are already aware of some of the categories and websites that are simply not meant for your business, you can simply exclude them without any hesitation.
In my opinion, IP address exclusion is not recommended until and unless you are 100% sure that you are getting repeated invalid clicks from the same IP.
Another good reason mentioned in help center states that
Some large Internet Service Providers (ISPs) assign the same IP address to a large number of computers. If you exclude such an IP address, you could block many legitimate customers from seeing your ads.
Hope that helps somewhere!
I like the site and category exclusion tool. Many advertisers can easily identify where they do not belong (parked domains, sites with violent content, etc). Here is a video on excluding parked domains. http://www.youtube.com/watch?v=6CBKaIK3b5k
Another convenient way to do it is to visit the networks tab and where you see the options of auto or managed placements you can show details and there you will see the URL's that your ads are being served on. If you see poor performance or sites you do not belong on then you can select and exclude there. You can also take a deeper dive into the individual url by selecting a URL (checkbox on left of url) and using the "see Details" button. If you see an interior page that is not working for you it can be excluded there.
Kim Clink, AdWords Top Contributor | Community Profile | Twitter | Philly Marketing Labs
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