Arbitrage
The term arbitrage comes from economics, and it refers to stock exchanges that generate profit by utilizing differences in prices, exchange rates, and interest rates between different markets. Through arbitrage, price differences between submarkets can be offset and, in some cases, used to make profits.
In affiliate marketing, the term arbitrage has a different meaning. Arbitrage tactics consist of placing advertisements on one’s own affiliate links to increase the chance of a conversion and thus a commission. This is often referred to as “affiliate arbitrage.” The price difference of clicks or conversions between user markets and the marketers is exploited to generate commissions.
Types of affiliate arbitrage strategies
Similar to the banking sector, it is possible to distinguish between foreign currency bonds, differential bonds, and other types. Different forms of arbitrage can also be found in marketing. The path to the commission can take place over several websites and networks.
- Arbitrage on affiliate sites: This method was used for a long time in combination with the placement of ads via Google AdWords. An affiliate would place ads across an ad network as high as possible on the page. Visitors would then arrive on the affiliate landing page and can click a link to a product, such as on amazon.com. Today, this tactic is no longer workable with Google AdWords because Google forbids such methods in its Terms of Use and has been taking action against arbitrage since 2007.
- Arbitrage with websites using Google AdSense: In this case, affiliates directed traffic to their websites with Google advertising, where ads were integrated with Google AdSense. If the Google AdWords click prices were lower than Google AdSense revenue, an affiliate could make a profit with this form of arbitrage. This tactic is now excluded by Google AdWords program guidelines and prevented by the Google system.
- Arbitrage of price search engine: Price comparisons also often work with the arbitrage method. In this case, no attempts are made to get organic hits, instead the operators use ad links, for example through Google AdWords, on their price comparisons, and receive commissions for sales or clicks. Such search ads usually work with many placeholders in order to utilize as broad a range of keywords as possible. Affiliates in turn often also advertise on price search engines, on which their own ads get placed and for which they will get a commission. This model is relatively prevalent and some price search engines generate high profits. A distinction should be made between the benefits for the user, which are close to zero for the other models.[2]
Example
An affiliate advertises on search engines through affiliate marketing (usually cost-per-click transactions) to generate traffic for their blogs. At the same time, their blogs, which they market via the cost-per-click campaigns, also show ads from a Google AdSense program. The advertising campaign usually costs the blogger more than they earn with the advertising on the blog. The price difference is the real price paid by the publisher for traffic to the blogger.
Trademark infringement in affiliate arbitrage
Similar to brand bidding, affiliate arbitrage can result in certain trademark infringements because keywords to which ads are shown may not contain any explicit brand names. If this is the case, the aforementioned company or trademark may register a trademark infringement with Google and initiate legal proceedings against it. Brand protection tools can be used to find such infringements, for example, BestBrandProtection, NetBooster, AdPolice, MarkMonitor, or Xamine, just to name a few.
Relevance to online marketing
In principle, arbitrage can additionally increase the profit of an affiliate campaign. However, affiliates should first consider if such activities would benefit consumers and whether the investment in advertising for their own affiliate links would not be better spent on other marketing measures such as better content.
If you still wish to profit through arbitrage, you have to continuously review all important KPIs such as cost per click or cost per action. The different forms of arbitration can often become confusing for affiliate advertisers and it will be difficult to determine the ROI. This is not only dependent on the billing model, but also on the experience of the marketer. He would have to know the system very well in order to manipulate it legally.
In the worst case, arbitrage is only used to artificially increase the number of click on affiliate actions in order to simulate a successful affiliate campaign to advertising customers. In addition, search engines such as Google are taking action against such strategies as soon as their system is exploited in favor of profit and without real user benefit. Strategies such as affiliate arbitrage are usually just a short-term business. If the rules and terms of use are changed, the business model will be worthless.