How to make money on the Internet, Part 1: Keyword and Adsense Arbitrage

I am regularly asked questions about online get-rich-quick schemes: how they work, why they work, and naturally, why don't I use them and then go retire in a Costa Rica villa. As this topic is a pretty sexy, I thought I'd dedicate my next few blog posts to some of the more common online money making schemes.

So, without further delay,

How to make money on the Internet
Part 1: Keyword Arbitrage

Let's start with the basics: what does "arbitrage" mean?
Arbitrage is a term used when someone exploits inequalities between markets to make profit. For example, let's say I am in the Canada, and want to go shopping in the USA. I go to my local bank, and discover the exchange rate is $00.98 CDN = $1.00 USD. So I take $98.00 CDN to the bank, and in return get $100.00 USD back.

I then take a flight into the US to go shopping, and notice that the currency trader at the Airport is paying $1 CDN for every $1 USD. So I give the currency trade my $100 USD, and get $100.00 CDN back.

I just made $2 CDN via arbitrage!

Now, Bring it online: Let's say I am advertising on Google, and they charge me $00.50 every time someone clicks my advertisement for web design services.
In order to try to find a better deal on advertising, I visit Yahoo to see their prices, and notice Yahoo charges $1.00 every time someone clicks an advertisement for web design services.

See the money making opportunity? If I buy clicks on Google for $00.50, and then send people directly to a page where I sell advertising on behalf of Yahoo for $1.00 / click, I could make $00.50! If I do this on 100,000 keywords, I could make $50,000!

That's the very basic concept between google adsense arbitrage / keyword arbitrage.

Now for a few quick question/answers:

Is it really that simple?
Nope, its not. There are a number of issues which have to be considered - for example, when you show ads on your website, you only receive a % of the click cost. Furthermore, the price you pay to buy click is not fixed, and can fluctuate based on a number of factors such as the content of your website. Therefore, if your website just contains advertisements, you may have to pay more money per click, which in return shrinks your spread. And these issues are just the beginning...

How is it possible such significant pricing discrepancies exist?
At the end of the day, even online markets aren't perfect. Some of the big issues are differences in pricing algorithms between PPC advertising providers and ignorance/laziness on the side of the advertiser.

For example, when advertising using Yahoo's Search marketing program, US & Canada traffic are lumped together as "North America". Many American online advertisers have therefore been advertising to Canada users by mistake, as they were too lazy to set their Yahoo accounts to do otherwise/unaware that they were doing so. Having US advertisers on Yahoo Canada artificially drives up the demand for advertising, and therefore the price as well.

In Google, US and Canada traffic is separate by default. Because of this, US advertisers don't generally show their ads to Canadians. Less advertisers in Canada mean less demand and therefore lower cost-per-click rates. Therefore Google Canada clicks were cheaper than Yahoo Canada clicks. Hence, you could buy a click on Google and resell it to Yahoo and make a profit.

How much money can people make from arbitrage?
I've heard stories of "friends of friends" making in the millions in profit per month, but haven't personally verified them. I have seen examples of individuals pulling in $10K + / month

Why don't the search engines / PPC ad networks stop keyword arbitrage?
Some of the big boys (i.e. Google) are now beginning to official discourage arbitrage. As to why they didn't sooner, its likely because keyword arbitrage makes them money. At the end of the day, their business is collecting a % of every ad transaction - Arbitrage artists not only increase the number of transactions, but also the price per transaction. Long term, too much arbitrage seriously harms user experience, which in return would lower revenue - hence why I believe they have recently begun to crackdown.

Why didn't/don't you do it?
Because money isn't everything. PPC arbitrage makes the Internet a worse place for everyone involved. It artificially drives up the cost of advertising for businesses (a cost which ultimately is passed onto consumers), as well as makes it harder for internet users to find what they are looking for.

I like to compare PPC arbitrage to that old scam where you remove a sign from the highway, and instead re-route everyone 2 minutes out of their way to your little gas station which sells maps. Sure, you're going to make a killing, and you're only going to be inconveniencing the drivers a little, but how are you adding any value to society? And if everyone did what you did, the highways would become useless, as no one would be able to get where they want to go on them.