Let's talk about PPC arbitrage (Overture, Adwords or any other)

[Nacho]

First, what is "PPC arbitrage"?

This refers to mainly affiliates bidding on your keywords on the PPC engines (ie. Overture, Adwords, Knoodle, etc.) and sending that traffic to your website via your affilaite program, therefore making money if result in a sale on the traffic that could have gone to your commercial website direct if you or your competitors never had an affiliate program.

I hope to have defined it correctly, if not please let me know.

This is a very common practice now of days with affiliates, specially if they can make an ROI on the click measured as:

Average Profit x Conversion Rate = ROI

for example:

$10 x 0.02 (or 2%) = $0.20

So, if your keywords are costing both you and your affiliates $0.10, then there is PPC arbitrage to make some money.

Will PPC arbitrage ever end someday? Please respond using the poll and comments below.

[Nacho]

Just wanted to point out a very good example of this. Try searching for "Overture" in Google:

http://www.google.com/search?q=overture

So, who is who here???

[tomslick]

There will be less arbitrage as advertisers get more sophisticated but it will never go away entirely. Reasons being:

1) Many affiliate programs are used by merchants as a low-cost sales channel. If the merchant is paying affiliates $10 (per your example) they are probably making $15-$20. This spread limits the affiliates from bidding higher than the merchant.

2) Affiliates can help push competitor listings down. A merchant would much rather have their listing on top followed by several affiliates rather than the listings of their competitors. Think of it as a way for a merchant to indirectly occupy more than one position.

3) Affiliates can sniff out additional keywords or phrases. Their incentive is to drive traffic to the merchant at the lowest possible cost. They will seek out niche or low-volume areas that might be low priority for the merchant.

4) There is some level of risk-mitigation in that the merchant's ad budget is spread over fewer terms and ads. If the affiliates ads starting have lower ROI or if there is some kind of click-fraund, the merchant sees fewer sales or leads, but does not lose any of its ad budget.

My opinion is that arbitrage is good as long as it is managed properly. Affiliate programs need to be structured carefully so that affiliates can never out-bid the merchant. Bidding on brand terms should not be tolerated, etc.

[Chris Boggs]

Someone at CJ contacted me a couple weeks ago about a wonderful opportunity to create PPC campaigns for Fortune 500 clients and gather affiliate money for doing-so.

Thought it was an interesting idea, but certainly didn't feel we had the time to create PPC campaigns simply for affiliate cash. Little did I know they were talking about this exact concept.

I guess this is one of the main ways that affiliate providers make money...slightly surprising to me.