Search Arbitrage: How it works and If it Really Makes Money?

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Nowadays, digital marketing plays an important role in the online economy, especially on platforms like Google Ads, where advertisers compete for clicks in real time through auction systems. One key idea behind this process is the difference between the cost of traffic and the value that it can generate (Feldman & Muthukrishnan, 2008).

In this blog, I will explain how search arbitrage works, its key concepts, the main strategies and risks associated with it.

What is Search Arbitrage?

Search Arbitrage is the strategy of buying online traffic cheaply and redirecting users to a page, where they generate more revenue (Lahaie et al, 2007).

In their study, Lahaie et al. (2007) also present the two main types of arbitrages: by traffic arbitrage and click arbitrage.

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Traffic arbitrage

•          Buying cheap traffic (visitors) 
•          You make money when users interact with the content or ads
•          The focus is on the volume of visitors

Click arbitrage

•          Buying cheap clicks (e.g. paid ads)
•          You make money when click on other ads
•          The focus is on generating more paid clicks within your page

 

This video provides a clear explanation of the overall concept of search arbitrage:

How it works in Practice?

Ghose & Yang (2009) explain that the money is spent to bring visitors, who are directed to a land page and monetizing. The profit only occurs when the revenue generated per visitor is higher than acquisition cost.

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The study highlights that the performance of this model is influenced by key metrics, such as:

•          cost per click (CPC) - which represents how much is paid for each visitor
•          click through rate (CTR) - which affects how many people are attracted through ads
•          conversion rate – which indicates how many of these users generate revenue through interactions or monetized actions.

Together, they determine how efficiently traffic is acquired and monetized.

 

The Myth of the first position: being at the top doesn’t always mean better results

One of the most relevant aspects of search arbitrage is that positions higher on paid advertisers are not always profitable. Although they receive more clicks, they also have a cost per click higher (Ghose & Yang, 2009).

In practise, the relation between position and profit is not direct, being on the top doesn’t mean earn more. Often, intermediate position (like between 4º and 6º) end up more profitable, because the cost dropped quickly than the conversion rate, allowing a marge of profit higher (Ghose & Yang, 2009).

For example, imagine that 100 people clicks in your advertise and 5 buy, this correspond of a tax rate of 5%. If you are at the top, you can get more clicks but will pay much more for each one. Intermediate position even with less clicks, the cost is lower making you earn more money by the and. (Ghose & Yang, 2009).

 

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Factors that Determine Success by using Search Arbitrage.

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Key word: Intension vs Cost

A choice of key-world directly influences the campaign performance. According to Ghose & Yang (2009), different types of keywords perform differently:

•          Retailer specific: Terms that includes the name of store, tend to achieve higher click tax and conversion rates, because the users already know where they want to buy.
•          Brand specific: terms focus on brand products (e.g. Nike) they are more competitive and tend to have CPC higher, what require careful management in arbitrage strategies.
•          Long key-wold (long-tail): tend to be less competitive and more specific, which can reduce acquisition cost.

Landing Page Quality

Search engines like Google and others doesn’t look only for the bid amount, Ghose & Yang (2009) explain that:

•          The quality of the landing page is vital. If the page is relevant and transparent, the mechanism of search engine may reduce the CPC and increase conversion chances.
•          Investing in a good page can be the difference between of a lucrative campaign and one that generates losses.

 

How the GSP auctions Works

Advertisers are allocated through auction system, such as the Generalized Second Price (GSP), where advertisers make bids for keyword (Edelman, Ostrovsky & Schwarz, 2007).

In this model, the advertiser doesn’t pay the total value of the bid, but yes, the necessary value to beat the competitors immediately under, which directly influences the bidding strategies and create an opportunity of arbitrage Edelman, Ostrovsky & Schwarz, 2007).

This video is an excellent option to explain the mechanics of the auction and how to maintain profitability through keyword and Landing page strategy:

 

Risks and Limitations

Despite its profit potential, search arbitrage involves several key risks, such as fluctuations in cost-per-click (CPC), unpredictable conversion rates, and sudden increases in keyword competition, all of which can significantly reduce profit margins (Lahaie et al., 2007).

In additional, the higher competition and the tendency of markets to become more efficient gradually reduce the opportunity of arbitrage, making this model dependent of continue optimisation (Lahaie et al., 2007).

 

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Conclusion

Search arbitrage represent a set of strategies, that takes advantages based on exploring mispricing in digital advertising markets. Although the success depends on capacity of analysing data, optimizing campaign and understand the mechanism of bidding (Feldman & Muthukrishnan, 2008).

It is more than a simple strategy, refer to a dynamic process where equilibrium between cost and value determine the profitability, often being on the intermediate positions often offer the best profit opportunities (Ghose & Yang, 2009).

 In my next blog I will explore how to turn visitors into customers. Ready to start attracting the right people to your business? Stay with WeMarketing.

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