If you’ve spent any time on Pay Per Click (PPC) forums or in the blogosphere, you’ve probably heard about PPC arbitrage — the ill-reputed practice that drives bid prices up and makes life more difficult for advertisers. It’s an advanced topic, though, and it takes a bit of basic understanding of both PPC and Arbitrage to grasp. So, what exactly is it, and how can it affect you as an advertiser?
What is PPC?
PPC is a particular type of web advertising, standing for Pay Per Click. It has two sides; on one side, you have people running websites where they host ads that are given to them. When a user clicks one of those ads, the owner of the site is paid. The other side is the person at the other end of the ad; they pay to have those ads run. In the middle is a network, and there are thousands of them out there, ranging from Google and Facebook to tiny companies you’ve never heard of.
PPC is an entire industry in and of itself, and a lot has been written about finding the right networks, making high-converting ads, getting low cost clicks and making as much money as you can from the entire process. Very rarely, however, do guides like these mention arbitrage.
What is Arbitrage?
Arbitrage, in a broad financial sense, is a simple concept. You become a middleman. You talk to person A who has a resource, and you say “I want to buy that resource for $1.” At the same time, you talk to person B, who wants that resource. You say to them “I will sell you this resource for $2.” When both sides agree, you transfer the resource and make $1 out of it.
This is sort of a middleman prospect, taking a commission for taking the effort to connect the buyer and seller. In a sense, even eBay does this; they hook up buyers and sellers, and they take a commission off the final price.
What is PPC Arbitrage?
In a nutshell, Pay Per Click arbitrage is the practice of bidding on low-cost keywords, purchasing clicks from Google, Yahoo! and other search engines and then redirecting the visitors to dummy, one-page websites created solely for the purpose of hosting expensive AdSense ads.
In normal PPC, there’s a network middleman already. Arbitrage works by inserting yourself as another middleman. Rather than the deal going between Site A – Network – Site B, it now goes Site A – Arbitrage – Network – Site B.
The idea behind arbitrage in PPC is to take advantage of the ability to insert yourself and resell ad space for a higher price than what they would normally pay.
Why PPC Arbitrage Can be Great?
PPC Arbitrage is ideal as a moneymaking scheme that takes very little effort, particularly when you have resources linked to numerous networks. It takes a lot of setup time and energy, however. A good arbitrage user will have ties to numerous networks, so that they can find the best price to then put their commission on top. It’s a harder sell when the base price is higher, and finding a lower base price means you can charge more of a commission without the actual ad buyer knowing.
Once you have it set up, arbitrage can be a quick and easy way to make quite a bit of money. Of course, you’re essentially making yourself a PPC network of your own, so you have to provide all of the traffic quality and analytics guarantees that normal traffic networks do.
Reasons to Avoid Arbitrage
Let’s take a step back and look at arbitrage from other perspectives. I mean, from your perspective, it’s an easy way to make money. But what about from the other sides?
From the perspective of the network, you’re a needless complication. They could be building relationships with sites, but instead they’re forced to deal with you. The sites also have to deal with you, so any relationship benefit comes to you.
From the perspective of the site on which ads are placed, it typically lowers their rates. If an advertiser pays $5 for a click, and the network takes $1, you need to also take $1 to make a profit. The site then gets $3, where if they dealt with the network directly, they would get $4. So for the site, it’s a hassle and an obstruction.
From the perspective of the advertiser, you’re devaluing their ads on one end while simultaneously making them pay more for them. By inserting yourself into the equation, you’re trying to get the prices jacked up so you can make more money. This money isn’t passed to the site, so they have no tangible incentive to improve. The advertiser then ends up paying more for ads through a network that’s not giving them better performance, and that leads to dissatisfied users.
All around, PPC Arbitrage is a negative influence on web advertising. Then again, in some ways, so is the PPC network to begin with. Any direct deal is going to be more lucrative than dealing through a middleman.
The problem with arbitrage is that you insert yourself as a needless second middleman. One middleman can provide tools and communications access that direct sales can’t. It streamlines the process and makes it better for everyone involved. Arbitrage doesn’t do that; it just skims money off the top like a parasite.
What is Google’s Stance on Arbitrage?
The biggest hassle with PPC arbitrage, if you want to do it, is dealing with Google. Google has one of the widest and most influential PPC networks in the world, and they hate arbitrage. They recognize that it inherently has no value to users, so they work to demote it and the sites that use it. They also carefully monitor their ad placement, so if you try to use Google ads with your arbitrage, you’re likely to find yourself blocked from the program. This can be a huge detriment, because you then have to issue refunds and shut down, until you can find a replacement network.
Arbitrage can be valuable, but in order to make it worthwhile, you need to add value to the process. What can you give to the advertiser or to the advertising site that they can’t get on their own from the network you’re linked to? Answer that question, and your arbitrage success is all but guaranteed.
In PPC arbitrage, the arbitrageur makes money because he/she buys the first click at a cost much lower than the fee received as an affiliate when visitors click on the dummy site’s ads. Enough clicks through the affiliate ad and the arbitrageur collects plenty of money to offset the cost of the initial PPC ad.
However, there are two major problems with the practice of PPC arbitrage:
- It senselessly inflates click prices for legitimate advertisers. By adding an extra step to the process, it generates unnecessary clicks and higher bid prices for everybody else.
- PPC arbitrage has a highly negative effect on the user experience. Since arbitrage sites provide virtually nothing of value to users, arbitrageurs have to trick people into visiting and using the site. These dummy sites generally confuse users and coerce them into clicking more ads. This has the potential to scare a prospect away or just ruin the user’s confidence in the quality of the search results.
Taking a look at the whole picture, it’s bad for the advertiser, bad for the user, and bad for the search engine.