1. Ad arbitrage
In this lesson, we will explain market arbitrage and apply it within the digital ad space. Ads represent the "promotion" component of the marketing 4Ps. The goal of an ad is to create more revenue from selling goods or services.
2. What is arbitrage?
Arbitrage is the practice of identifying price differences between two or more markets, buying at one price in one market and immediately selling in the other market. Your opportunity to profit is based on the difference between the purchase and sales prices.
3. Arbitrage example
An example of arbitrage would be buying something locally like a lamp at a garage sale. You know the lamp will sell for more online than you paid at the sale. When you sell the lamp online you are performing market arbitrage between the garage sale market and the online marketplace.
4. Digital ads is a growing market
Worldwide advertising is over $490B so it's a legitimate market with lots of arbitrage potential. A common practice in web content is to identify arbitrage opportunities across sites.
5. How does ad arbitrage work?
When you have a website, you can place ads on it to generate revenue. For example, every 1000 visitors may give you $1 in ad revenue. You can also pay other sites like search engines to bring traffic to your website. So you could pay $1 for an ad on a search engine so 1000 people come to your site.
One common form of ad arbitrage is when an online content creator can pay for traffic cheaper than it can charge for ad impressions on its site. In the previous example, if your site generated $1 per 1000 visitors, you would be happy to pay a search engine, 0.50 per 1000 visitors to drive traffic to your site, where you end up making more money.
6. Pay for incoming traffic
Suppose you worked for an online e-sports gaming site containing articles with new content each day. One day content may cover the Call of Duty League teams and the next, profiles of players from League of Legends, another game.
Your company has a limited budget to purchase traffic from ads on social media. You may create an ad that says "Learn how to play like a pro" to attract site visitors.
7. Get paid for your traffic
Now that your site has extra viewers, your own site's ads will get attention, which you charge for. For example, sponsors may place an ad saying "Buy the newest gaming controller".
8. It's not that easy
So there you have it, arbitrage! Your website sits between two markets. One market is to drive traffic to your site using paid advertisements. Another market is when your sponsors pay you to place ads on your site.
It's complicated though. Sometimes your ads on social media aren't as interesting so you pay to advertise but don't get much additional traffic. Each day your website content changes and with it the price your sponsors are willing to pay for views and clicks. In fact, ad pricing is a continually changing market on both sides of the arbitrage.
9. Machine learning to the rescue
Luckily your site has DataCamp graduates that can create accurate models to predict the amount of new site traffic based on your articles and price on social media. And another model can predict what your advertisers are willing to pay at specific amounts of traffic and on specific content topics. These models have to work across multiple social media sites driving traffic with multiple changing articles on your site and among various advertisers and sponsors paying your site.
10. Ultimately, it's a human decision
When lots of money is at stake, companies often want a human to interpret model outputs and determine the action. In the following exercises, you'll need to identify the articles, channels, and sponsors that are most profitable from the modeling outputs shown in tables.
11. Human interpretation
To spot ad arbitrage, look at this table of costs for traffic, number of expected visitors and the price you charge advertisers. Buying traffic from social site B to your webpage A on row 2 is profitable. It's the only option where the Cost Per Impression column is less than the Sponsorship column. You can buy 200 impressions for $16, 200*8 cents. The sponsor is willing to pay 9 cents times 200 impressions or $18. Thus your arbitrage profit is $2.
12. Let's practice!
Let's find some arbitrage opportunities!