If you've spent any time on pay-per-click (PPC) forums or in the blogosphere, you've probably heard about PPC arbitrage — the ill-reputed practice that drives bid prices up and makes life more difficult for advertisers. So, what exactly is it, and how can it affect you as an advertiser?
In a nutshell, pay-per-click arbitrage is the practice of bidding on low-cost keywords, purchasing clicks from Google, Yahoo! and other search engines and then redirecting the visitors to dummy, one-page websites created solely for the purpose of hosting expensive AdSense ads.
The arbitrageur makes money because he/she buys the first click at a cost much lower than the fee received as an affiliate when visitors click on the dummy site's ads. Enough clicks through the affiliate ad and the arbitrageur collects plenty of money to offset the cost of the initial PPC ad.
Still, why is this even an issue for discussion when it could be argued that someone is simply taking advantage of market inefficiencies?
There are two major problems with this practice of PPC arbitrage.
First, it senselessly inflates click prices for legitimate advertisers. By adding an extra step to the process, it generates unnecessary clicks and higher bid prices for everybody else.
Secondly, and more important in the long run, PPC arbitrage has a highly negative effect on the user experience. Since arbitrage sites provide virtually nothing of value to users, arbitrageurs have to trick people into visiting and using the site. These dummy sites generally confuse users and coerce them into clicking more ads. This has the potential to scare a prospect away or just ruin the user's confidence in the quality of the search results.
Taking a look at the whole picture, it's bad for the advertiser, bad for the user, and bad for the search engine. In mid-2006 Google promised changes in algorithms to help deal with PPC arbitrage. Diatribes on quality content — or lack thereof — at Google, Yahoo!, MSN and other search engines are common. The effect so far has been less than optimal, but at least the problem has been acknowledged and efforts have begun to limit its spread.
As competition increases, search engines will need to find better ways to combat PPC arbitrage if they hope to compete more effectively for advertiser dollars and user visits. What can you do? If you want to fight the problem, and you've come across a "dummy" site, resist the impulse to click on an ad, which will only help the arbitrageur increase his hoard of ill-gotten gains. Vote with your mouse and insist on quality content.