by Mark J. Welch (June 2007)What is "Affiliate Arbitrage"?
The term "Affiliate Arbitrage" is used to describe a variety of strategies, nearly all involving "Pay Per Click Search" and "Affiliate Programs." In this article, I attempt to explain many of these "strategies," and why they might or might not work for you. (Note that "affiliate arbitrage" is the term used by some "promoters" who are trying to persuade inexperienced internet users to buy an e-book, program, course, or plan; it is not a term widely used by traditional affiliates.)
"Direct-to-Merchant Paid Search" ("Pure" Affiliate Arbitrage)
With this strategy, you join a merchant's affiliate program (for example, you might join the world's largest affiliate program at Amazon.com, which pays 4% to 8% commissions on sales of books and other merchandise), and then you promote that merchant by buying paid advertising (for example, by advertising through Google's AdWords system). For example, you may bid 10 cents per click for traffic from searches for "book lights." Then, your ad appears (sometimes) in the right margin "Sponsored Links" section when someone does a Google Search. When someone clicks on your ad, they are redirected (using your affiliate link) to Amazon's list of book lights available for sale. You'll pay 10 cents (possibly less) each time someone searches on Google for "book lights" and then clicks on your ad. Then, if the customer actually purchases something from Amazon after clicking on your link, you'll earn a commission on that sale.Do the Math:
What's Realistic?
- If It Works Unbelievably Well: Let's assume that
Result: After 1,000 people click on your ad, you've spent $40 (1,000 x $.04). If 4% place orders, then that's 40 orders, at an average of $60, so you would have earned $180 (40 x $60 x .075). Your net profit would be $140 ($180 earned minus $40 spent). That means that for each dollar you've spent, you earn back $4.50 (representing a 350% "return on investment" [ROI]).
- you have very high sales volume, so you earn a 7.5% commission on Amazon sales;
- you pay only 4 cents per click for your Google AdWords traffic;
- 4% of the people who click place an order at Amazon; and
- the average order is $60.
- If It Works Very Well: Let's assume that
Result: After 1,000 people click on your ad, you've spent $50 (1,000 x $.05). If 3% place orders, then that's 30 orders, at an average of $50, then you would have earned $105 (30 x $50 x .07). Your net profit would be $55 ($105 earned minus $50 spent). That means that for each dollar spent, you earn back $2.10 (representing an ROI of 110%).
- you have high sales volume, so you earn a 7% commission on Amazon sales;
- you pay only 5 cents per click for your Google AdWords traffic;
- 3% of the people who click place an order at Amazon; and
- the average order is $50.
- If It Doesn't Work: Let's assume that
Result: After 1,000 people click on your ad, you've spent $80 (1,000 x $.08). If 1.5% place orders, then that's 15 orders, at an average of $30, so you would have earned $27 (15x $30 x .06). Your net loss would be $53 ($27 earned minus $80 spent). That means that for each dollar spent, you earn back only about 51 cents (for an ROI of -49%).
- you have moderate sales volume, so you earn a 6% commission on Amazon sales;
- you pay 8 cents per click for your Google AdWords traffic;
- 1.5% of the people who click place an order at Amazon; and
- the average order is $30.
- If It Really Doesn't Work: Let's assume that
Result: After 1,000 people click on your ad, you've spent $100 (1,000 x $.10). If 1% place orders, then that's 10 orders, at an average of $25, so you would have earned $12.50 (10 x $25 x .05). Your net loss would be $87.50 ($12.50 earned minus $100 spent). That means that for each dollar spent, you earn back only 12.5 cents (ROI is -87.5%).
- you have very low sales volume, so you earn a 5% commission on Amazon sales;
- you pay 10 cents per click for your Google AdWords traffic;
- 1% of the people who click place an order at Amazon; and
- the average order is $25.
- Cost-Per-Click: For some search terms, it's possible to draw a "reasonable" amount of traffic from Google searches at very low bid rates (below 10 cents per click), but for most high-traffic search terms, you'd need to pay much more than 10 cents per click to appear even on the first page of results. For some popular search terms, you'd need to pay $1 or more for each click, in order for your ad to appear on the first page of results. (For example, "mortgage refinance" or "web hosting.") It's important to recognize that since Google implemented it "Quality Score" system for ads, you'll generally pay less if your ad text and landing page closely match the search phrase.
- Commission Rates: Some affiliate programs pay commissions as low as 1% on low-profit items (such as computers and electronics, or deeply-discounted DVDs), but typical rates are between 5% and 8%. There are affiliate programs paying higher commission rates, from 15% to 25% for tangible products and often 20% to 40% for "downloadable" products. However, it's sometimes much harder to convince customers to buy products that have high commission rates.
- Conversion Rates: This is the percentage of "visitors" who become "buyers" -- for example, if an online store draws 1,000 visitors per day, and 20 of them place orders, this represents a 2% "conversion rate." Unfortunately, conversion rates are hard to predict, and often vary significantly depending on "how the visitor arrived." For example, if someone searches for "Acme book light replacement bulb" and clicks to Amazon, it might be reasonable to expect that 5% of these highly-focused consumers will actually place orders, if Amazon offers this product. However, if someone searches for "book light," they aren't as focused and it's likely that fewer than 1% of these visitors would place orders. It's really quite rare for "pay-per-click" search marketing to push a conversion rate higher than 2%, and I operate many campaigns with conversion rates far below 1%.
- Average Order Size: Some merchants are much more effective at "up-selling" customers to buy additional items. For example, Amazon's long-running promotion of "free shipping for orders over $25" persuades many customers to buy an extra book (or two) in order to avoid the shipping fee. Of course, the search phrase also is a huge factor: someone searching for "Intel Core 2 Duo computer" is quite likely to spend $600 to $1,500 on a transaction, while someone searching for "Acme book light replacement bulb" is quite likely to place an order for $10 or less.
- Click-Through Rates (CTR): In all of the examples above, I've simply assumed that campaigns are run until 1,000 clicks are received. However, CTR is a huge factor in online marketing. If you bid high enough so that your ad appears in the first position in the right margin or in the shaded zone at the top of the page, and if your ad text is "compelling," you might be able to persuade 10% of searchers to click on your ad. However, if your ad isn't in first place, or if the ad text is not very compelling, you may expect a much lower clickthrough rate. It is quite common to have a clickthrough rate of 1% to 2%, meaning that only 1 or 2 out of every 100 searches results in a click on your ad. It's important to realize that Google determines ad position by combining several factors, including the maximum-bid amount and the CTR, so a low CTR can result in lower ad position, which usually means that your ad will be seen much less frequently. However, many strategies used to increase CTR will also reduce the conversion rate, and conversely some strategies to reduce CTR will increase your conversion rate. (Another explanation: if you can find ways to "focus" your ad text, you may discourage "browsers" while encouraging serious "buyers," resulting in an increased conversion rate; if you broaden the appeal of your ad text to draw a higher CTR, you'll often bring in a few more buyers but many more browsers.)
A Note on "Arbitrage": Among many definitions, I like Wikipedia's definition best: "Arbitrage is the practice of taking advantage of a state of imbalance between two (or possibly more) markets: a combination of matching deals are struck that capitalize upon the imbalance...."The key element of "arbitrage" is the imbalance, but the very act of "trading" alters the balance by changing the supply or demand in each market. Since tens of thousands of people are searching for profit from "affiliate arbitrage" and "Adsense arbitrage" each day, the "imbalance" is constantly in flux. And Google is also constantly trying to "balance" its own markets (AdSense and AdWords). So, be careful!What Other Types of "Affiliate Arbitrage" Exist?
"Thin Affiliate" Arbitrage (banned)
Many merchants prohibit "direct to merchant" PPC advertising; even if a merchant permits that strategy, Google will only display one ad per "destination domain," so the merchant and other affiliates may outbid you for position.The alternative, of course, is for the affiliate to create their own web site, so that traffic is drawn from Google to the affiliate's web site, which then encourages visitors to click to visit a merchant web site. The simplest of these sites are called "Thin Affiliates" or "Affiliate Bridges," which often include only one link to a single merchant (some "thin affiliate" sites include a separate web page for every product offered by a merchant, and others may include many products on a single page; the "real issue" here is the combination of "links to a single merchant" with "no original content." Google now prohibits these sites from advertising through Google AdWords.
"AdSense Arbitrage" (banned)
One strategy that many affiliates have used for several years (and which some "scam artists" promote via expensive e-books and online courses; some ads promote this as "Free AdWords Advertising" because the cost of advertising is theoretically offset by AdSense revenue) is to combine Google's AdWords program and its separate "AdSense" affiliate program (which pays publishers when visitors click on ads that appear on content sites). Often, these sites consist of a short snippet of text and/or a list of keywords, together with one, two, or three blocks of Google AdSense ads. You've probably stumbled onto some of these sites when you're searching for information on Google or other search engines, and you probably wondered how these "garbage sites" could get high search-engine placement.This strategy counts on the affiliate's ability to convert "low-cost" traffic into "high-value" traffic, by arbitraging the relative cost of certain keywords. For example, the affiliate might bid 5 cents per click for their ad to appear when consumers search for "church software," and direct that traffic to a site that's about "church database software" or "church membership software." If the "destination site" appears to be more specific than the general search term -- or conversely, if the destination site has a broader theme than the original search -- it's likely that different bid rates may apply to the different keywords. If so, the site can profit by drawing in traffic at 5 cents per click, and then earning money when visitors click on the AdSense ads. In addition, sometimes the jumble of keywords included on the page can trick Google into thinking that the page is relevant to searches, so that the page may also be displayed in the "natural" search results for free.
However, it's crucial to understand that the "AdSense affiliate" earns only a portion of the clickthrough fees that Google charges to advertisers, and not all visitors to the site will click on a paid ad, so "AdSense arbitrage" only works when the affiliate is able to redirect traffic from very-low-cost keywords to very-high-cost keywords, or when the trashy site can trick Google into sending free "organic" or "natural" traffic. As you might expect, with tens of thousands of people trying this strategy, it's not very easy to identify these "arbitrage opportunities," so most affiliates who try this strategy lose money, and Google constantly identifies and excludes tens of thousands of these garbage sites every hour.
In mid-2007, Google announced a new policy that prohibits "AdSense Arbitrage" -- just as Google prohibits PPC ads from "thin affiliate" or "affiliate bridge" pages for other merchants, it now prohibits PPC advertising to promote pages where the site's "content" consists merely of a few keywords and AdSense ads.
"Shopping Site" Arbitrage
Some affiliates seek to avoid the "thin affiliate" label by combining information about several merchants or several products on a single page. Sometimes, these are genuine "price-comparison" web sites, but quite often they are just a collection of links that may include descriptions that are exactly the same as the descriptions on merchant sites. (Some merchants offer "datafeeds" so their affiliates can download and re-publish their entire product catalogs with images and descriptions.) Again, the affiliate's strategy is to draw traffic from search engines and re-direct it to the merchant's site. In general, these "shopping sites" don't earn strong placement in "natural search" because they don't contain any original content, but they can sometimes be effectively used for "affiliate arbitrage" when "direct-to-merchant PPC" doesn't work."Traditional Affiliate" or "Genuine Affiliate" Sites
The original "affiliate program" business model assumed that the affiliates would operate separate web sites with original content, and affiliate links would merely be one form of advertising at the site. Thus, if somebody creates a web site about "mystery writers and books," they might have pages devoted to specific authors and series, and they might profit by adding affiliate links so that their visitors can buy the books that are mentioned. These web sites contain original content, in the form of reviews or articles; these can be traditional web sites or blogs, or even discussion forums or community sites. Some "genuine" affiliate sites are directories, which may contain little "original text" but provide a useful organization of information (usually including both paid and non-paid links to other sites). A key benefit of operating a "genuine" content site is that over time, Google may include your site in the "natural" search results, for free. In addition to the cost of PPC keyword bidding, the main "drawback" of such sites is the high investment in time to write original content and to maintain and update the sites.
Can I Make Money from "Affiliate Arbitrage"?
I can, but you probably cannot. I've been working in "online marketing" for more than 11 years. I've actually designed several merchants' affiliate programs, and I've worked as "interim affiliate manager" for several companies during startup. I also have managed some huge "pay-per-click" campaigns, with tens of thousands of keywords in thousands of ad groups (sometimes acting as a consultant for a specific merchant, and sometimes working for myself on "affiliate arbitrage"). I've run campaigns that were fabulously profitable; I have also run campaigns that were dismal failures, losing many hundreds or even thousands of dollars before I could pull the plug. Sometimes, I can automate the creation of thousands of ad campaigns in just a few hours; for some mechants and products, it takes many dozens of hours to choose keywords, write ad texts, and create landing pages.I've created several "genuine" web sites with useful information and/or carefully-built directories; some of these sites have drawn substantial revenue from advertising (including traditional CPM advertising as well as AdSense and affiliate programs). It usually takes hundreds of hours to create a web site that is useful and effective, and then it takes many more hours to promote the web site and get inbound links, gradually achieving moderate amounts of "focused" traffic.
I have also created a number of "thin affiliate" web sites, and I also run "direct-to-merchant" PPC campaigns which are profitable. Some of my most profitable efforts consisted of a few dozen hours' of effort combined with strategy founded on years of experience -- but even the most successful of these strategies usually work for only a few months, and then my ROI begins to drop.
As I mentioned above, there are tens of thousands of people trying to profit from "affiliate arbitrage." One result is that for some search phrases, there is a constant flow of inexperienced "opportunity seekers" who bid on search terms, in the mistaken belief that they can profit from bidding on those search terms. They often argue that if the bid rate is 50 cents (for example), and they see other ads for merchants that appear to be paying the same rate, then "there must be a way" to earn a profit, because otherwise all those other smart people wouldn't do so. This logic is flawed in two ways: first, they are often only bidding against each other, and not against profitable merchants, who routinely abandon unaffordable keyword phrases when bid rates rise to absurd levels; and second, the position of ads is based on a combination of several factors, including CTR and Quality Score, so clever merchants and affiliates may be paying much lower rates "per click" to appear adjacent to the less-experienced person's ad with a much higher bid cost.
Google's AdWords system is extremely complex and powerful, and clever folks (like me and thousands of others) can combine the benefits of many of its features (including negative keywords, position preference, Google vs. Search Network vs. Content Network, site exclusion, time-of-day bid management, and keyword-insertion) to draw much better results from a campaign than neophytes who are just learning how to use the system.
I think I'm pretty smart, and I still lose money on most of the new campaigns that I launch. In fact, I probably earn 90% of my affiliate income from only a handful of successful campaigns at any one time -- and 80% of the income from campaigns I launched a year ago has "dried up," while 80% of the income I earn today probably comes from campaigns I started in the past six months.
I'm a Consultant, but I Don't Advise Other Affiliates
After 11 years, I earn my income from two sources: consulting for merchants (usually retailers of tangible goods), and working as an affiliate. I am often called by other webmasters, affiliates, or "wannabees" seeking my advice on how to make money from affiliate programs and web advertising. I tell them all the same thing: if I learn tricks to make money, I use them myself; and if I charged a reasonable rate for my advice, few affiliates would ever pay that rate, and 90% of those who paid me would probably never actually make money. I have ethics, so I don't try to persuade people that I have a "system" that they can follow to make money fast with little effort. In fact, I don't make money fast with little effort -- and neither do the con artists who are trying to sell you a "system" or an "ebook" or a "program" or a "course" on how to make money online.
Resources
Here are some free resources that I recommend you use to learn more about affiliate marketing and online advertising. Please note that some of these sites get paid to "promote" some of the "systems" that I consider to be scams -- don't pay any money, just use the free content you'll find.Miscellaneous Affiliate Program Directories (Many of these are really awful)
- ABestWeb.com - a huge discussion forum with many thousands of posts from experienced, honest affiliate marketers. Spend 10 to 20 hours reading through the discussions before you post any questions or comments here; do not ever post your own "affiliate links" on ABestWeb!
- AssociatePrograms.com - Allan Gardyne's site has been around for almost 10 years, and contains a vast amount of useful information (unfortunately, it's mixed with some over-hyped promotional materials, so read carefully but try not to buy anything).
- Adbility.com Web Publishers' Advertising Guide - I created this site in 1996 and it grew rapidly (the site was earning more than $10,000 per month in advertising revenue in 1999), and I finally sold out in late 1999, because I saw the "dot-bomb" collapse coming. Unfortunately, the new owner has not updated the site very often, and it's not nearly as useful as it once was. However, it's probably still better than any other affiliate-program directory, apart from Associate-Programs.com.
- 100 Best Affiliate Programs
- 5 Star Affiliate Programs
- Affiliate Seeking
- Affiliates Directory
- Clamins Affiliate Directory
- eSponsors.ws
- MyAffiliateShop.info
- Refer Me Affiliate Directory
- StartEarning.com
- Super Affiliate Directory
- Top-Affiliate.com
- 2-Tier.com
- Adbility.com
- Affiliate First
- Affiliate Guide Directory
- Affiliate Program Directory @ Directorica.com
- Affiliate Options
- AffiliatePrograms.com
- AssociatePrograms.com
- Best Affiliate Programs
- ClickAffiliate
- EarnFind.com
- Global Affiliate Programs
- GR1 Innovations
- Home Business Search
- HostAffiliates.net
- Internet Affiliate Programs
- Key to Success
- Lifetime Commissions
- Refer-It.com (Internet.com)
- RevBoard.com
- Sponsor Directory
- UK Affiliate Programmes Directory
- We Are Affiliates
- Webmaster-Affiliates.net
Affiliate Forums