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.