Monday, October 17, 2011

AdWords AdSense Arbitrage

 I've heard about people doing AdWords/AdSense Arbitrage but I question if it's even possible.

First of all, what is arbitrage? The classic definition of arbitrage has someone, usually a trader in the stock markets, buy and sell a financial instrument at exactly the same time such that there is zero risk and an instant profit. Essentially you are the middle-man who has a buyer and seller lined up and you pass the item being sold from one to the other and pull in the difference.

With AdWords/AdSense arbitrage it's a little different because it is by no means risk free and it does not take place at the same time. The idea is that you buy traffic using AdWords and then you sell it on to another site using AdSense and the rate that you buy it at is lower than the rate that you sell it at.

Let's look at the math involved.

Google keeps 32% of the revenue earned from a click on an advert on your site (assumes AdSense-for-Content). So if you pay $1 through AdWords to bring a visitor to your site you need to earn $1.47 from AdSense from that visitor in order to break-even. So far this is not impossible but there's a lot of competition out there and you have to assume that your visitors are looking for the same type of item so advertising rates should be similar. It also assumes that 100% of visitors arriving through your AdWords campaigns click on an AdSense advert.

Now let's imagine that only 10% of your visitors that arrive from your AdWords campaigns click on one of your AdSense adverts. At our example rate of $1/visitor you have spent $10 to get someone to click on your AdSense advert and you need to make sure that you earn $14.71 from that click to break-even. That's a huge jump from a $1 Adwords campaign to an AdSense advert.

This table shows you how much you have to earn per AdSense click in order to break-even based on the click-through-rate based on $1/AdWords click:

CTR AdSense
1 147.06
5 29.41
10 14.71
20 7.35
50 2.94
75 1.96
100 1.47

This is why I think that AdWords/AdSense Arbitrage is almost impossible.