Bridging the Gap: Arbitrage, Online and Off

The Tower Bridge … bridging the gap

I’ve been playing around with some online arbitrage lately. It’s something that you can do online and off, and although the margins can be very tight, arbitrage is scalable and relatively low risk as long as you stay on top of it.

Online Arbitrage

Despite what you might have heard, it’s a perfectly legitimate business model, provided you’re not creating MFA or made for AdSense sites that offer no value to users. I don’t like them. I certainly don’t condone them. But good arbitrage helps bridge the gap between two different markets.

Legitimate arbitrage is tricky because your goal is to make money. That means you want to get traffic in and get it back out again as efficiently as possible. But if your site doesn’t add any value to the user experience, your quality score will go way down and it’ll be tough to turn a buck no matter how well you can turn over your traffic.

The real key to arbitrage is to add value to the user experience. Your primary goal has to be creating a quality site. You’re trading efficiency for quality, and even though the amount of traffic to your ads will go down, the cost per click will go up significantly and it’ll be much easier to turn a healthy profit.

The sites I’m working on right now are making a return of about 15%. In other words, I’m making about $15 for every hundred I spend on traffic. They should do much better, but I’ve just started developing them and the quality score is not on my side yet and won’t be until the sites are more fully developed.

On the one hand, 15% means I have to spend about $35k a month to get $40k for a profit of $5000 a month. Seems risky and capital intensive. But on the other hand, this is a monthly turnover, and simply annualizing this rate shows a return of 180%. Still about 20 times better than your average mutual fund. So it depends on how you look at it.

It is a scalable business, and the key is to start small and keep at it and keep scaling it upwards.

Offline Arbitrage

In the real world, many businesses practice arbitrage. And not just in the financial markets. Brokers that practice drop-shipping are doing a form of arbitrage. Basically they’re buying a good from the manufacturer and selling it to the customer but they don’t take possession of it themselves in between.

This means they don’t have the liability of inventory that might not sell. They don’t buy an item until the customer has bought it from them first. Relatively low risk.

Just like online arbitrage, the margins can be very slim if your service quality is lacking. Especially if you’re competing with another manufacturer who will sell directly to your customer. This is especially true in business-to-business transactions. There’s not a lot of margin there for you to be competitively priced as a middle-man and still take a profit.

But you can increase your profit with quality. By being a single-source specialist in your industry or by offering a wide array of goods that are used in a variety of industries, you can do very well. Focusing on a niche market allows you to cut volume-discount deals with manufacturers and ramp up your profits on every sale.

Arbitrage … online or offline, business is business.

7 thoughts on “Bridging the Gap: Arbitrage, Online and Off”

  1. Hey Shane.

    This article has come at a great time – when I too have been experimenting with Arbitrage and Affiliate Marketing through Adwords. At the moment, my return is at around 20% – but it fluctuates hugely with some days recording a loss and others returning a normal profit.

    The quality page is definitely a good piece of advice. I’m not particularly proud of my Arbitrage campaign at the moment, and am going to work on improving my site, as all the keywords that I’m bidding on are going up in CPC price – I’m guessing that’s the Quality Score kicking in.

    If you can create a good site with an About page, Terms and Conditions, a few pages (all Adsensified of course), then I’m sure CTR and profits will increase.

    Great article again,

  2. Hey Adnan,

    There are different strategies. I keep my Adwords CPC fixed and don’t raise it no matter what (gotta control costs). That means some keywords aren’t eligible for “Search” and only find customers on the content network. To make them eligible for search, it’s a matter of increasing the quality of your landing page for those keywords. Or realizing they’re not really suitable for your campaign.

    I’ve found the best strategy is to work with Google’s algorithm, quality score, etc. They really do know how to target and assess the quality of keywords to a landing page well. “Listen” to the feedback you get from them via CTR and CPC costs. You might not get as much traffic, but you’ll get more people who are genuinely interested in what you’re advertising and a much steadier return.

  3. Catch post 😀 I want to learn more about CPC campaigns. It seems interesting and is definitely great way to invest your money – if you know what you’re doing.

    It looks like you’re doing great so far…I wouldn’t mind making an extra 5k a month :D. Keep up the great work!

  4. Hey Gregg,

    Those numbers are “in theory”. I just started this campaign to play around with it (always need to keep learning). Unfortunately, I had to put it on hold for now. The Google quality score was sending me some very ugly signals … basically it was saying “don’t even try it buddy!” haha

    I’ve played around with CPC to affiliate deals a bit. I think I might venture back into that arena when I find an interesting opportunity.

  5. Hi Sue,

    A quick Google search will tell you what others think of it.

    Personally, I don’t buy stuff like that. I do my own testing and I pay attention to what well known internet marketers talk about (and they give good advice away for free just by talking about it on their blogs).

    There’s just no substitute for trying things out yourself and taking the time to really learn how the internet works and how to best make money online. It takes a little bit of money to test different things yourself … think of it as a hobby, or an investment in “tuition fees” to give yourself a self-taught education.

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