The arbitrage loop
The whole business in one circle: buy a visitor cheaply in one place, earn more from that visitor’s click on a search ad, keep the difference.
The arbitrage loop
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Two prices for the same person
A click on a social app might cost $0.20. A click from the same person on a search ad might be worth $1.00 to an advertiser. Search arbitrage lives in that gap, like a trader who buys fruit at the farm gate and sells it in the city (all figures here are illustrative).
- Two prices for the same person: A click on a social app might cost $0.20. A click from the same person on a search ad might be worth $1.00 to an advertiser. Search arbitrage lives in that gap, like a trader who buys fruit at the farm gate and sells it in the city (all figures here are illustrative).
- Buy a visitor: The arbitrageur runs an ad on a traffic source and pays for each click. Say the cost per click is $0.20. That money is spent whether or not the visitor ever earns anything back.
- The visitor lands on a page: The person who clicked arrives on the arbitrageur’s landing page: usually a short article with a block of related search topics underneath.
- A search shows sponsored results: If a topic interests them, the visitor taps it and sees a results page. The ads on it come from a search feed: the same advertisers who bid on a big search engine, shown on this smaller site.
- The advertiser pays for a click: The visitor clicks one sponsored listing and goes to the advertiser’s site. The advertiser is charged, say, $1.00. This is the only moment in the loop when new money enters.
- A share comes back: The search engine and the feed provider keep their cuts and the arbitrageur receives, say, $0.56 for that ad click: the RPC. But only about half of visitors click an ad, so the average visitor earns $0.28 (RPV).
- What is left is the spread: $0.28 earned minus $0.20 paid leaves $0.08 per visitor: the spread, a 40% ROI. Across 10,000 visitors a day that is $800. If the ad price rises to $0.30 or fewer people click, the same loop loses money just as fast.
Step by step
- Two prices for the same person (The gap)A click on a social app might cost $0.20. A click from the same person on a search ad might be worth $1.00 to an advertiser. Search arbitrage lives in that gap, like a trader who buys fruit at the farm gate and sells it in the city (all figures here are illustrative).
- Buy a visitor (−$0.20)The arbitrageur runs an ad on a traffic source and pays for each click. Say the cost per click is $0.20. That money is spent whether or not the visitor ever earns anything back.
- The visitor lands on a page (Visit)The person who clicked arrives on the arbitrageur’s landing page: usually a short article with a block of related search topics underneath.
- A search shows sponsored results (Search)If a topic interests them, the visitor taps it and sees a results page. The ads on it come from a search feed: the same advertisers who bid on a big search engine, shown on this smaller site.
- The advertiser pays for a click ($1.00)The visitor clicks one sponsored listing and goes to the advertiser’s site. The advertiser is charged, say, $1.00. This is the only moment in the loop when new money enters.
- A share comes back (+$0.56)The search engine and the feed provider keep their cuts and the arbitrageur receives, say, $0.56 for that ad click: the RPC. But only about half of visitors click an ad, so the average visitor earns $0.28 (RPV).
- What is left is the spread (+$0.08)$0.28 earned minus $0.20 paid leaves $0.08 per visitor: the spread, a 40% ROI. Across 10,000 visitors a day that is $800. If the ad price rises to $0.30 or fewer people click, the same loop loses money just as fast.