Making Money With Arbitrage

When I first heard about arbitrage I thought someone was getting a divorce. I’d never heard of arbitrage to describe a market condition. The basic idea of arbitrage is simple: take advantage of a disparity between the cost of one item and selling it a higher price in another market where it fetches a higher price. A very contemporary example of arbitrage is when the XBOX 360 hit stores at retail price and were selling for 3-6 times that on eBay.

But that’s not what people mean when they talk arbitrage on the web. The most common example is Contextual Ad (CPC) Arbitrage in which you buy traffic at a low price and direct it to a page with contextual ads, optimized to convert, where the ads pay a higher price per click. Lets run through an example:

You do some digging on the popular Contextual Ad networks like Google Adsense, Yahoo, MSN etc. and find that “Firstime Home Loan” is paying pretty well. Say around $0.75 per click. Lets say you found this through Google Adsense. Looking on Yahoo or MSN you find that they are going for $0.55 per click. While most examples may not be this obvious or dramatic, I think you can see why this would work. You buy CPC traffic from the lower priced source and direct the traffic to your site with Google Adsense ads that are fetching the higher price. It doesn’t have to be the exact same keyword either. They key is to make sure you are buying targeted traffic to your page and that your page is optimized to convert that traffic.

Most people who engage in arbitrage tend to do it on a bigger scale. While not every keyword they find will end up making money, the real magic is in watching your campaigns closely and lots of small transactions adding up to big money in aggregate.

I’ve not yet stepped into this area of making money online. Some people consider the practice shady. I can see why they might, but I don’t know of any laws being broken. People are taking advantage of how the systems works, not breaking the system. For me the only draw back is that this method requires money to make money. Still, arbitrage is worth looking into if you haven’t. Even on a small scale you may find a way to get more traffic to a site and make a few bucks while gaining new visitors.

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  • pixiechic

    I don’t think arbitrage is shady either, however, as with anything that can make large sums of money, there is also great risk involved. Besides, in order for arbitrage to work, large capital is needed.

  • calinder

    The thing I don’t like about that, is some people may find it shady, and I personally don’t want people doing a WHOIS and seeing that I run a bunch of shady sites (in their opinion) alongside my “legit” sites that people enjoy using.

    I have thought about doing this numerous times, and if I did I’d have to make the domain private (for my own peice of mind). But I’m not sure I want any of my domains to be private.
    What if someone needs to tell me something important? I’ll have to see what private domains cost and how it all works.

    Nice Article and a very interesting topic.

  • NateOne

    I agree with Calinder,
    I would be concerned of being related with this potentially “shady” activity in my other respectable online ventures.

  • Drey

    Hey listen folks, Arbitrage is business and there’s nothing shady about it. Where there is demand, there is supply and until advertisers can do it themselves (which is never) there will always be a need for arbitrage. Arbitrageur’s answer the basic question of many small business and deliver a product. No different than a design company, construction company or any other company that is delivering a product. It’s just business and if businesses could write their own CSS, they would. If homeowner’s could frame their own house, they wood (pun). And if small business could attract and convert leads, they would.

    Arbitrage get’s a bad wrap because of its similarity to the word arbitration. Nothing good and holy comes from arbitration. Image if Arbitrage was called deathitrage, or divorcitrage, or vesectitrage. It could be worse…

  • http://www.www.chrispian.com Chrispian

    Drey, I agree. The main problem with Arbitrage is image. It seems to get lumped into the black hat category for some reason. It’s not like any rules are being broken anywhere. Hopefully as more people learn what it is the stigma will die down.

  • Evert

    although it might be perfectly legit.. I prefer making products that actually add value.. (and not just for myself)

    Thats just a matter of taste though

  • Mike

    Evert right into the point. To make money and be profitable arbitrage is not adding unique content, i.e. not adding value.

  • adamdrake

    I personally disagree with arbitrage sites, and agree that it adds no real value to the developers network. Spend time developing good content based sites. As when the time comes, a large company may wish to buy your site. If the site has good content and a good following, then this will surley be worth alot more to the buyer ( and you in the long run ) than no content keyword sites that take advantage of CPC. Anyone can do arbitrage sites, spend time making fresh new things!

  • Anonymous

    The challenge is making it really work. In the example, $0.75 and $0.55, you’d need a very high CTR for this to work. A larger price disparity is helpful because it means that at a lower CTR, you can still make money. If every visitor to your site converted that would be one thing, but assuming that say only 10% convert (and that would be high) you’d need a 10:1 price difference to break even.

    You can also make this work by creating a sticky web site rather than a pure transactional one. If you can get one-time visitors to come back 2-3 times, you greatly increase your odds of them clicking on an ad, filling out a lead form, etc.

    Arbitrage may not be respected, but it’s a natural outcome of inefficient markets.

  • http://www.vinove.com simran

    With the ever increasing CPCs for various verticals, arbitrage seems like more of a “trick” rather than a shady tactic (that is my personal opinion, btw).

    Having said that, it is the beginning of creating a vicious circle where in the CPCs for the relatively low priced keywords would end up increasing by the virtue of arbitrage.

    Just my 2c worth…

  • http://buy.Azam.biz 1Lit_com

    There is nothing shady about arbitrage. It requires real skill. The people I know who engage in PPC arbitrage are among the smartest and hardest working people on the net.

  • eldelgado

    When I read the title I expected it to have been written by someone who actually has made money with arbitrage. No offence meant, but unless you walk the talk . . .

  • adsmacker

    good arbitrage sites get CTR in at least the 80-90% range. if your CTR is below 80%, you need to tweak the design and remove content and other distractions. and no i’m not kidding either

    it’s a tough business and fast paced. akin to on-the-floor stock trading – the stress is high, the play is risky, and the rewards are proportionally enormous

  • Anon123

    Someone please enlighten me what is the difference between an ordinary domain and a private domain.
    Are there any advantages?Do pardon my ignorance I am new to all this.

  • xposed

    This has been incredibly fun for me to play around with.

    I have had to keep at it, and try something a little different EVERY time I try a new niche.

    I never risk more than $5.00 when I try a new niche. This is not risky at all.

    The only risk is to be uneducated imho.

    I’d be happy to help you start safely, send me a PM!

  • Rick

    I think that you can participate in arbitrage and still hold your head high! I have dozens of sites that have targeted content (created by me either because I have specific knowledge in that area or I have researched the topic for at least a few hours) and also links to outside sites (trade groups etc.) related to the specific topic. I am certain that value is added by a visit to our sites. There are no dead ends and we even provide contact information! Even with all of this valid content we are able to get clickthrough of up to 150%! The learning curve was steep but we clear about $200 per day with less than one hour spent daily. Don’t get me wrong- the sites have been created to make money from arbitrage but the visitor finds a tidy site that might just give them all of the info they want or may be a starting place to research a topic further.

    There is a range of sites on any topic that you search on the internet: from “made-for-adsense” sites which is what most people think of when they talk about arbitrage to the most detailed site with dozens of pages and the most detailed information available. Is there a point in this progression where you can say that the bad guys end and value suddenly begins to be added? People click on our ads, find a site that is to the point (with a number of well researched external links) and at some point in their visit many will click on our Adsense supplied ads. There are no losers in the process…I firmly believe that we are delivering added value equal to the difference in ads prices. I am not sure where the fast paced comment comes from- this is not currency arbitrage, we simply have a formula that works and seems to be able to fit any topic. We certainly have had a few sites that ran at a loss so we stop buying ads (traffic) for the site but leave them up for any organic traffic that develops and also because we are proud of them and their content!

  • siteinvestor1

    Hi

    I am very interested in learning more about arbitrage and I was wondering if someone with some experience in this field could PM me their sites so I can have a look.
    Also if someone can tell me about a decent information site in regards to arbitrage that would be great.

    thx

  • http://www.sitepoint.com Matthew Magain
  • agentforte

    This is a greasy business. VERY shady. I think it is smart on a certain level, yet I loathe the idea.

    As a person trying to start an online business, everything about it is bad. It makes it much more expensive and less cost effective to use pay-per-click. Here are some major things to consider:

    Point 1
    It dilutes advertising and increases competition for keywords. It also increases the chance that my advertising will get lost on one of these arbitrage pages among other advertisements (rather than being placed on quality sites that would give me more click throughs). This means less click throughs and higher price per click.

    Point 2
    This is especially expensive if businesses advertise with more than one pay per click advertiser. There is a good chance of the following occurance:

    Let’s say I pay $0.25 per click with Yahoo and $0.30 per click with Google.
    A user will likely click an arbitrage ad instead of mine (because for people conducting arbitrage, it is their job to be better and know how to hog the clicks) That same user may end up clicking my $0.30 link on their page instead of the $0.25 link on the first page that the user was on. multiply that by a few thousand and a start-up company starts to feel the pinch. This means I may as well just find the highest priced (rather than loest price) pay per click provider.

    Point 3
    It is annoying for the end user to make extra decisions on which link to click, and go through more pages to find what they are looking for.

    Just like the article said:

    the only draw back is that this method requires money to make money.

    In this case it is the businesses that end up paying the required money. For larger, successful businesses I don’t mind, even if it was my business. Spread the wealth, other people have to make a living. (greed will only do bad things). As for the start-ups. I guess we have to be more creative since all the useful business tools lose their benefits quickly.

    -Frank Forte

  • http://www.mag-corp.com magstudios

    Arbitrageur’s answer the basic question of many small business and deliver a product. No different than a design company, construction company or any other company that is delivering a product. It’s just business and if businesses could write their own CSS, they would. If homeowner’s could frame their own house, they wood (pun). And if small business could attract and convert leads, they would.That same user may end up clicking my $0.30 link on their page instead of the $0.25 link on the first page that the user was on. multiply that by a few thousand and a start-up company starts to feel the pinch. This means I may as well just find the highest priced (rather than loest price) pay per click provider.

  • Bill End User

    Online marketers complaining about shady practices is sort like …

    A heroin junkie bitching about drunks.