Marketing Arbitrage theory is based on the ability to pay a price for a given unit of successful traffic which then returns revenue which is higher then what was paid to bring it in. On the surface the idea is very straightforward. The tricky part is doing the proper research and analysis to “match up” winning combinations. In this chapter I will review many options for revenue and expense streams and discuss how each of them works in practice. Then we will look at examples of successful matches and discuss the analysis needed to find the best match. The commoditization of the online advertising market, which was introduced earlier, will be discussed in more detail here. It is important to note that traffic monitoring software is necessary to be able to track where traffic comes from and what the individual users do when they get to your site. Doing a simple web search on “web traffic tracking” or a similar phrase will result in many choices in a wide range of prices. All you really need is the ability to track the origin of the traffic and what the traffic did when they got to your site. Some software programs have specific “campaign monitoring” features, which help to isolate individual ad campaigns and may make the analysis a bit easier. It is also critical that you can download the traffic data to do your own custom analysis. Affiliate-specific software to help manage payments due and security around affiliate relationships is also readily available. This software creates the secure links and data so that your affiliates know what their sales leads did and how much they should get paid. Again, a simple web search will result in many options.

We will first begin with Pay Per Click (PPC) operations and explore what the choices are, what they’re all about, and how to implement them. For the most part the PPC will be an option for the expense side of the equation so the idea here is to keep the payment as low as possible. Keep in mind that I’m not talking about the actual click price itself, but the modified click price based on the revenue it brings in. First we need a little review of how PPC works. A website promoter will pay a third party (other website or search engine) for each click a web surfer executes which brings him to the web promoter’s website. The click could be an advertisement or part of search results. The promoter would typically choose key words that he is willing to pay for through the PPC process. For example, the owner/promoter of JoesJewlery.com, a site specializing in junk jewelry, may, may bid $.20 per click to a search engine that displays a link to his site when people search for the term “junk jewelry.” Joe is paying for the whole search phrase to return his link to the web surfer. If the web surfer clicks, Joe’s PPC account balance (you typical hold a balance which is drawn down as surfers click on your link) will be reduced by $.20. The profit ratio is what you should be concerned with, and it is determined by dividing the per click profit by the revenue per click (or the bid price you pay to the PPC organization.) Here a simple example for determining the true value of the PPC expense stream. i.e., what is it worth? If JoesJewlery.com was paying .2 per click for the phrase “junk jewelry” and he received 5482 visitors from those clicks in a given time period, the site owner paid $1,096 for his traffic. Let’s say that the owner had a contextual ad system running on his site. Contextual ads are dynamic advertisements one places on his site that will display ads based on the content of the site. For Joe, the owner of JoesJewlery.com, the ads that popped up by the contextual ad provider would probably relate to jewelry. Let’s say that Joe received, over the same time period, 3,500 clicks on the contextual ads on his site and the average payout for those ads was $.39. Joe then made a profit of $268.6 for the PPC vs. Contextual portion of his site (.39 x 3500 – 1,096) and had a profit ratio of (.39 - .2)/.2 = 49%. Here are the numbers summarized:

If Joe viewed all of his site’s revenue, which would include jewelry product sales, the results would look like this:

Now keep in mind that the profit ratio is a PER CLICK ratio based on the dollars that the PPC program brought in, not the overall business’ profit margin, which can be found by dividing revenue by profit and in Joe’s case is 26%. It is important to look at the per click analysis since the whole idea is to determine the best combinations of expense and revenue streams. The proper analysis for Joe to do is to test out every PPC program available to him and see what the profit per click ratio is, and choose the best of the pack. Each combination of revenue and expense streams that brings in a positive profit should be employed. The next decision is to determine how much to spend where. Ad dollars should go to the highest converting campaigns first, as discussed earlier in the Click-Thru Value Chain section. However, it is important not to commit long term dollars because market forces can change the economics overnight. Analysis should be continuous, switching campaign dollars as the list of most profitable combinations moves around.

For the sake of this discussion lets just say there are 5 PPC programs available (many more are available and discussed later in this chapter) and 1 contextual ad program (again, there are more available). Joe also participates in an affiliate program with a related (but not directly competing!) website where he pays a fixed monthly fee for ad space that draws surfers to his site. Joe also decides to participate in an affiliate marketing campaign where other website owner’s direct traffic to Joe’s site and Joe pays them a commission on jewelry sales of 20%. Here is the analysis of Joe’s results for a given time period:

OK, let’s look at what’s going on here by program.

The Affiliate Driven program (second row) brought in 7,107 clicks for this time period. That means that the website hosting a link ad to Joe’s site had a total of 7,107 surfers click on the ad that brought them to Joe’s site. Joe paid a flat commission of $1,000 for the ad (“Cost of Traffic” column) so backing into a per click cost, he paid $.14 (PPC column). Notice that in this case, the flat rate did better on the expense side than the other two columns. However, remember that the name of the game in arbitrage is not what you pay, not what revenue comes in, but the net effect on a per click basis. Let’s keep going. Of the 7,107 visitors driven by the flat-fee ad, 1,008 of them clicked on one of Joe’s contextual ads hosted on JoesJewelry.com. As discussed earlier, the average per click revenue from his contextual ad program was $.39, so he brought in $393 from the ad revenue produced by the 7,107 clicks he paid for. This is a paltry $.06 per click, but that was not the end of his revenue stream he paid $1,000 for. These visitors were highly targeted to buy jewelry. The affiliate ad was on a site dedicated to people shopping for jewelry and that shows by the $4,500 in product sales produced by these visitors. This creates a product sales per click of 4,500/7107= $.63 per paid click. When you combine the product sales with the contextual ad revenue you see that this program produced a profit of .55 per click for each click his flat $1000 brought in. Let’s jump back to the contextual ad’s performance for a moment to clarify an important point. The Ad Revenue per paid click is just that, PER PAID CLICK. This means that the measly $.06 was derived by dividing the $393 by 7,107, NOT the 1,008 contextual ad clicks. This is very important since the ad click revenue by itself is meaningless. Joe paid to bring in 7,107 visitors in this particular affiliate program, if he had no other revenue stream, he still would have paid for 7,107 visitors and would have lost money in the end ($.06 per click revenue minus $.14 per click expense equals $ -.08). So remember, we commoditize the market by breaking it down to identical per click cash flows, then fairly net the revenue and expenses to get the true results. Let’s move on to the PPC Driven program (row 3).

The PPC program is more expensive on a per click basis than the flat-fee affiliate ad program, costing $.20 per click. These surfers, however, were more of a general searching type and clicked on a lot more of Joe’s contextual ads (3,500) than those from the affiliate program. You can see in the end that the PPC program produced a profit of $.34 per click based on a PER PAID CLICK analysis. Now the most expensive program was the Affiliate Sales Commission Program, costing a whopping $.81 per click. This program was designed to pay on a per sale basis, not per click. Joe paid the affiliate website owner 25% of sales driven by their site ($6,500 x .25 = $1,625). It is no wonder these people bought more jewelry since the motivation behind the affiliate partner was to drive traffic of people who were ready to buy jewelry since that is how the partner is paid. In the PPC column we backed into the per click cost of this traffic by dividing the total sales commissions paid by the number of visitors driven by the program ((6,500 x .25))/2,000 = .81). The revenue from the program was $6,500 in sales divided by the 2,000 visitors, producing $3.25 in product sales per paid click. You can see now that the most expensive per click program produced the largest per click profit of $3.25 + $.05 (contextual ad revenue per click from these visitors) minus $.81 equals $2.49 per click!

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