Those in the direct response space see the world differently. They get paid when something happens and only when something happens. Those in the direct response space come in many shapes and sizes. They include companies that number in the hundreds to those that number less than 5. Some focus on email, others on search, while even others on display ads. They include the ad network providing a dating offer to the affiliate that promotes it. Throughout it all, a term once used almost exclusively in financial markets has become almost commonplace – arbitrage. Not only direct response companies rely on arbitrage, but some of the biggest and most technologically complex have built enviable businesses by leveraging it.
Arbitrage means different things to different people. In the online space, I think it’s fair to say that arbitrage refers to business activities where profitability is not guaranteed, i.e., a company can lose more than it stands to make. If you spend $.10 per click and someone pays you 10% more than you spend, that does not count as arbitrage. If you spend poorly, you might lose the client, but that is the worst that can happen. If you spend $.10 per click but get paid only when a person who visits the page fills out a form, that definitely counts as arbitrage. No safety net or guaranteed revenue exists. Choose your words wisely and some percentage of users should fill out the form. Will enough people who click turn into conversions?
Take an offer for dating as an example. The offer from SomeDatingSite.com pays affiliates $2.00 per signup. Let’s say you set up a campaign on a search engine. You pick words they suggest or through some third party tool. You are lucky enough to be running a unique offer and URL so that you do not run into issues when trying. You know how to write good copy so your ads get clicked on and stay ranked rather highly. After about an hour of being live, you check your stats and find you have generated 200 clicks at an average of $.25 per click. You check your affiliate stats and see 10 conversions. That comes out to a cost of $50 and revenue of $20 – not great, but you press on seeing how the rest of the day goes. It turns out that it goes worse than expected. You end up spending $500 and making $100. Had you been aggressive, you could easily have wound up adding a zero to each of those. Therein lies one of the beauties and challenges of arbitrage.
With arbitrage, especially search arbitrage, you rarely can get it right the first time. And doing media buys makes it no less guaranteed. Unlike search, a person cannot test and make modifications as easily or as cheaply. You can find some sites like AdBrite where the minimum buy costs less, but for true display very few, if any, networks exist (at least those with scale) where you can spend just a few hundred dollars. Instead you end up having to commit several thousand in order to get enough impressions to provide meaningful data. And, unlike text ads, it costs money either from an internal person or an external person to create any ad. It’s hard enough to make search and/or media work, let alone systematizing it so that it can become a component of a scalable business.
In my opinion, not thinking about the technology that gets built, the real beauty of arbitrage though is the mentality, the never ending desire for exploration and testing. I had a dialogue with a company that really brought this thinking to light. The company has a piece of software. By all definitions it qualifies as adware, although they don’t seem to understand that. The principals include a once-retired business mogul and one connected media executive. They run it much like a call center, hiring and training sales people who do not, in many cases, understand the space. It makes for a frustrating conversation when trying to pitch a more out of the box idea, but a perfect opportunity for one who arbitrages.
The company, though, has found a software product with legs, one that people want to download. They do not show any pops. Instead, the only form of monetization comes from their inserting a frame on the top of the search results pages. Their sales force goes out and sells placement on a keyword basis. They do so in an unsophisticated fashion with companies paying for yearly placement. Their pitch works best for those uninitiated in search. The pitch aside, the opportunity screams for arbitrage. SEM companies won’t spend money there. Many brands won’t either. But having installed the software, I did notice one LeadPoint affiliate buying a few keywords, with so many still open. Just imagine what someone with a dating offer, debt offer, etc. could do. They sell per keyword, all manually via insertion order, so just imagine the tail one could own. An arbitrager would size it up, create a custom landing page to fit the frame, perhaps host and test, buy up more keywords, etc. That is the beauty of arbitrage – finding and acting on opportunities, looking for a way to make it fit versus a way why it can’t.
Digg 
