Google has entered an arena which comes as no surprise but still a slight shock. The company has made billions of dollars off click based advertising, literally billions. In fact, they make more than a billion dollars each month from advertisers paying pennies per click to tens of dollars. Google’s methodology for generating revenue, though, runs counter to the majority of their advertisers’. Google makes money, billions (did we say that already?) from users clicking on links. Except for a relatively small number of advertisers, i.e. the pure click based arbitragers (see our articles on PPC vs. Affiliate Arbitrage – Part 1 and Part 2) which to some degree includes comparison engines, the rest of the advertisers don’t. Many of Google’s advertisers still make their money through some form of arbitrage, encompassing the traditional mortgage lead generation sites to the less common but more recent trend among newspapers to buy clicks and earn money from their CPM advertisers.
When it comes to arbitrage, we can think of it in the aforementioned PPC vs. Affiliate as well as direct response vs. branding. We can also think of it not in the type of arbitrage, i.e. clicks to clicks or clicks to actions or clicks to impressions, but the duration – short versus long. In all of the types mentioned thus far, they fall into the short category. An advertiser who buys a click on Google will generally know not in days but hours or minutes whether that click made them any money. Some users might convert the second or third time after clicking on the same ad, but the vast majority of converters do so then. The long scenario works in reverse. A small percent might convert right away, but the vast majority who do, will do so later. The difference usually comes down to the complexity of the transaction. Think of eBay or Circuit City. For some items – when someone finds exactly what they want and/or for lower priced goods, etc., they might purchase that second, but for more transactions than not, users visiting the site fall along a spectrum that is much less binary than the yes/no of the short form of arbitrage. The long form still buys traffic to make money later; they just have to do more work/science/guesswork to do so profitably.
The long form of arbitrage includes some incredibly well known brands and large spenders. The short form of arbitrage does as well, but it has more spenders than big brands. Outside of duration of conversion, the real distinction comes down to the likelihood of being able to assign a value to a transaction. Score one here for the short arbitragers, especially those in some form of lead generation. They spend hundreds of millions monthly trying to find the clicks that will lead to profitable actions. In the process, they waste a lot of money which leads to Google making more money. Some like it this way – the smart ones can use technology along with marketing savvy (sometimes just the latter) to make a decent margin on the spread between clicks and actions. The majority that we know, though, continue doing this but at a lower margin than before. Competition along with Google’s being Google have made it more challenging. Those that do not have the sophistication have it even worse. Overwhelmed by the complexity of a relatively easy concept – bidding on keywords – many won’t reach their potential.