A friend of mine was telling me how he’s making a ton of money doing what he called “adwords arbitrage”, but was very coy when I asked him what it was all about and how it worked. Can you explain it please?
Arbitrage is the classic “middle man” business, really, where I buy something for $1 and sell it for $2. Net result is that I make $1 per sale and if I can sell thousands, or even millions, then I can make some serious money. If my costs increase or my selling price drops, though, then my business can vanish overnight.
Moving into the online world, AdWords is Google’s pay per click advertising network and it lets you bid how much you’d pay for an individual click or lead to your site from either the Google search engine or so-called content network. Now the situation is more complicated, because we have to determine how much a visitor is worth even though we’ll never be able to convert every one into a buyer.
In the earlier scenario, making a $1 profit per sale might not work out so well if I pay $0.20 per click and only one out of ten buys. Do the math and that’d be a $2.00 cost for a $2.00 sale and zero profit. Not so good.
AdWords arbitrage has a lot of risk because of the tenuousness of these equations.
Let me show you another, more typical example…
This time, let’s say that we have a landing page that has a 5% conversion rate. That means that for every 100 people who end up on the page, five will click on the link that’ll generate revenue for us. The other 95 will be wasted traffic and an expense without income.
Now let’s assume that we’re paying $1.00 for each AdWords ad click and earn a pretty healthy $10 commission for each person who, say, registers as a new eBay seller, or signs up for the AdWords program itself, or purchases a particularly splendid DVD series through Amazon.com.
Still with me?
This is not a good business. 100 visitors are going to cost us $100, but only five of those people will click through, earning us $50 in revenue.
Net result? We’re $50 in the hole after a quick $100 campaign. Ugh.
You can see where this can be darn hard to get right. Even if we can double the conversion rate on the landing page, to 10%, we’re still just breaking even, and a 10% conversion rate is pretty darn good, all in all.
The real danger here, however, is more subtle. You’ve figured out how to make $200 for each $100 you spend because you figured out how to both double your conversion and earn $20 per customer, not $10, because you’re promoting something different.
Suddenly and without warning, though, Google jumps your AdWords campaign from $1/click to $5 click. And you don’t notice for a few days because you have a day job and a life.
Instead of making a cool few thousand over the weekend, you end up far further in the hole. Definitely not a good scene and, yes, this is exactly how it works with AdWords arbitrage from the people I know who are dancing in that precarious space.
Your friend is doing well, which is great, but it’s a whole ‘nother issue of whether it’s replicable and/or an approach that will work in the long term.
Good luck if you do try it. Dabble for at least the first few months!