Affiliate Marketing New Customers New Profit
Traditional retailers and surviving dot-corns are increasingly reliant upon affiliate marketing to drive their Web sites’ traffic and sales. Pay-for-performance is the norm as companies use affiliate marketing to generate new business in the tough economy.
Affiliate marketing is the performance-based process by which content Web sites are compensated for sending customers to merchant Web sites. A merchant’s banner, product information, or text link to its site Is posted on an affiliate site. The affiliate is typically paid a commission for each visitor who clicks through to the merchant site and fulfills an action. The performance-based cost-per-action (CPA) model rewards affiliate sites based on a percentage of sales or other criteria. Software, either on the merchant’s system or at an affiliate solutions service provider, keeps track of the traffic, sales, and sign-ups directed to the merchant’s Web site. While some merchants use this process purely to drive sales, others use it as a way to gain new customers, or build their mailing lists.
How It Works
The system works best when the affiliates are happy, meaning motivated and compensated. To have happy affiliates, you must put forth a solid offer and back that up with the people and tools to make it work. Merchants typically pay an affiliate between 5 and 15 percent of each resulting sale. These payments are most often made on a monthly or quarterly basis. If you want a functional system, you’ll be mailing out a bunch of checks each month, and you’ll be doing it with a smile. Affiliate marketing falls when either the merchant or the affiliate tries to take advantage of the situation. To start, you must not view it as free advertising. Wannabe branders beware, affiliate marketing is no substitute for conventional cost-per-thousand (CPM) advertising. With CPM advertising rates at an all-time low, you should be out looking for deals on premium space, rather than looking to ride on an affiliate base. Some of the biggest firms are guilty of this, and they unfairly offer affiliates a 1 percent commission on a pro duct that isn’t likely to convert to an Immediate sale.
On the other side of the equation, unscrupulous operators have dealt a serious blow to CPC (cost-per-click) advertising, Click-through fraud (when dishonorable operators reload a page multiple times) has put a damper on the low end of that market unfortunately, and merchant options are now far more limited. While careful affiliate selection might have helped stem the tide, some of the biggest marketplaces have closed. ValueClick (www.valueclick.com) and Fastclick (www.fastclick.com) are notable exceptions to this trend.
It isn’t protectionism to note that a huge amount of click-through fraud is generated overseas. The networks know this, and limit their exposure to it.
Affiliate marketing has huge potential, but you must use it appropriately to gain its full benefit. David Feng, Vice President of Corporate and Product Marketing at Be Free, encourages marketers to find a good fit.
“There are so many ways to use the affiliate marketing dynamic to increase revenue–from private programs made up of specific reseller partners to using different compensation models for different segments of partners,” he says. “Merchants need to develop the right program for their own unique business needs and goals. And it’s equally important to have the right tools and technologies to efficiently support the channel you choose to build.”
Affiliate marketing works for a wide range of businesses. Retailers most often use a cost-per-sale model to drive product sales. For Instance, Global Sports (www.globalsports.com) an operator of e-commerce sporting goods businesses, uses a commission-based schedule for the affiliate programs it administers for retailers such as Dick’s Sporting Goods, Fogdog, and the Sports Authority.
Paying a fixed bounty to acquire new customers is also common. eBay is just one example of a bounty-based program; the online auction house pays affiliates four dollars for each new referred member. (Merchants sometimes offer a combination of commission and new customer bounty.) Financial institutions, such as NextCard, pay a substantial fee for each completed credit application.
The return on investment (ROI) generated by an affiliate marketing campaign is governed by the amount you invest. Not surprisingly, if you start a program and fail to adequately staff it, your results will suffer.
While affiliate commissions will consume a portion of your ROI, these figures are largely performance based. The type of campaign, its level of success, and the commission schedule all play into this. Merchant programs surveyed in the 2001 Affiliate Metrix Report show that just 23 percent cost more than $5000 per month to operate (not including salaries).
If you allocate the proper amount of resources and stay the course, you’ll earn the returns you seek. The program I manage has two fulltime employees and an occasional intern dedicated to running it,” says Shawn Collins, manager of the affiliate program for ClubMom, a New York City firm that was launched with the Be Free network. “This enables us to focus on engaging a larger percentage of the affiliates with educational initiatives, and creating more tools and methods for promoting our program. Subsequently, we’ve eclipsed the ROI of our traditional media buys, and the program has typically been responsible for 70 percent or more of the daily recruitment.”
As CPM rates have tanked, merchants and publishers are considering more CPA deals, in which the affiliate is only paid when customers click through to and make purchases from the merchant site.
“At the start, we were 100 percent media buys at a CPM, and then the affiliate program launched,” says Collins. “As time went by, the affiliate program gradually took a greater share of the budget and the burden.” The focus at ClubMom continued to shift from CPM buys to the affiliate program. As Collins explains, “these days, the affiliate program is the horse that pulls the cart, and media buys are a supplement.”
“In a lot of cases, we’ve been able to work on a CPA basis with high-profile sites that previously would only accept a CPM,” says Collins. “For the most part, the shift has been predominately toward a mix of CPM/CPA, and I think this is the most reciprocal for all parties.”
Despite these positive results, some businesses still don’t believe in affiliate marketing’s effectiveness. “We believe that the biggest hurdle continues to be perceptual,” explains Wendy Salomon, Vice President of Marketing at LinkShare, an affiliate service provider. “There’s still a perception in some quarters that an affiliate channel is a marginal marketing effort, and isn’t as important or deserving of as much attention as a national advertising campaign, for example. However, as marketing budgets shrink, it becomes clearer and clearer that the affiliate channel is the channel showing the highest ROI.”
In-House or Outsource?
While most companies outsource affiliate programs, some continue to roll their own. I asked two industry veterans why each would use an affiliate solution service provider rather than run the program in-house.
“This was never a question for me,” explains Shawn Collins. “If we had built it, it would have been more expensive to start up, and it would have taken significantly longer to implement.” Familiarity with the territory is essential. “Unless your tech crew has intimate knowledge of the technical and functional needs of an affiliate program,” says Collins, “it’s bound to produce a system that’s inferior to one built by the experts who continually refine the solution providers’ technology.”
Running an affiliate network in-house takes time and technical expertise. Affiliate solution providers, on the other hand, are experienced at tracking traffic, sales, and sign-ups, and do so on their own servers, taking the pressure off your IT department. Some higher-end solution providers even recruit affiliates for you.
Start-up costs for outsourcing can run from roughly $1300 up to $10,000 up-front for the first-tier providers. Ongoing costs are typically based on a percentage of gross (say 2 to 3 percent) or total affiliate payout (more than 25 percent). While it’s possible to purchase affiliate program software for under $1000, the ultimate cost of implementing or creating a system in-house depends on individual business needs.
Brad Waller, Vice President of Affiliate and Business Development for EPage, an online auctions and classified network, helped launch one of the first affiliate programs on the Net. Waller offers a different perspective. “When you are responsible for every aspect of the program, you have full control. Along with this, you can have a program that is 100 percent tailored to your needs, as opposed to fitting into some other technology. Most of these providers are really tracking services with added bells and whistles.”
“Any company that’s capable of creating its own system can reap the rewards of having full control over their system,” says Waller. Customization is one of the biggest draws. “There is no provider out there that could power our program. I’ve challenged them to come up with some way to work with us, and haven’t had a taker.”
As EPage’s experience has shown, by rolling your own affiliate marketing solution you can tailor it to your company’s needs, maintain complete control over the network-including its costs-and make it as large or small as you deem necessary.
If you plan to outsource your affiliate marketing program, there are a wide variety of service providers (see the sidebar for more information on providers).
The affiliate solutions market has been through much of the same turmoil as the rest of the e-commerce world. Over the last year, the big three–Be Free, LinkShare, and Commission Junction–each endured some belt-tightening. Affinia and Nexchange, two notable start-ups, closed shop. ePod, a rich media marketer with an affiliate hook (and funding from Macromedia) died out earlier this year. And even Microsoft isn’t immune to the marketplace currents. Its ClickTrade service, acquired with LinkExchange in 1998, just shut down after a long run.
A bevy of additional firms operate in the affiliate services arena; a few notables are listed in the sidebar. While there have been several closures among affiliate marketing firms, mergers and acquisitions have been sparse. Look for consolidation over the next 6 to 12 months.
Managing an Affiliate Base
Effective affiliate base management is crucial to your success. You can’t just start up an affiliate program and hope to have it run on auto-pilot, it must be actively managed. Affiliate service providers often leave it up to the client to manage the program. Quite frequently, however, clients don’t have the expertise to optimize revenues or results. Ongoing management and recruitment are also key issues. If you would prefer to use an affiliate providers network, but want someone else to recruit your affiliates, some providers offer program management for an additional fee. Performics even includes management in its fee, which is purely performance based. Having a small number of affiliates helps make this approach practical.
However, if you still plan to roll your own, the following tips from the experts can help you find and maintain a successful affiliate base.
Shawn Collins has used several methods to recruit potentially high-performance affiliates for ClubMom. He has spent plenty of research time with the search engines, checking keywords and contacting the most relevant sites. He regularly consults the Media Metrix Top 500 list and he recently started using the Internet Success Spider (www.affiliatemanager.net/spider.htm).
EPage uses a low-key approach to affiliate recruitment. “At the moment, they are finding us,” says Brad Waller. “We haven’t done any paid advertising for over six months and we still have about the same number of affiliates coming to us.” EPage puts a “Powered by EPage” link at the bottom of each affiliate site it hosts, and it has discovered that satisfied affiliates will refer others.
To be sure, there’s a movement afoot to end the reliance upon mass affiliation. Many affiliate program managers are trimming the fat. Managers are dropping Inactive or non-performing affiliates so they can apply more resources to affiliates that are carrying their own weight. Collins says that he’s in the process of reducing ClubMom’s 8500-member affiliate program down to 5000 members. He’s dropping the inactive affiliates-those folks who joined and never bothered to put up links.
Conversely, Brad Waller is wary of eliminating low performance affiliates. He has found that it’s often more work to find and remove these affiliates (and tell them they’re gone), than it is to let them stay. “You never know when one of these affiliates will turn into a top performer,” he says. “We had one affiliate who did nothing for months. All of a sudden, she had a $6o check. It kept growing from there. What happened? She graduated from college and decided to start promoting her Web site. She has been a consistent top-performer since then.”
But low performing affiliates can also provide you with an opportunity to learn and refine your approach. “These affiliates will teach you what affiliates are looking for In a program. Learn from them, as well as from your top performers, and you can keep your program one of the most attractive in this crowded market,” says Waller.
The Lines are B1urring
There was a time, not so long ago, where CPM sat on one side of the fence and CPA sat on the other. The CPM model was embraced at the dawn of Internet advertising because it was easy to compare to other media. Those days are over. As you mull over the options in this crazy new world, here are a few developments you must consider:
Hybrid Model. The affiliate marketing field is quickly moving toward a hybrid model for the best properties. Blended deals, where affiliate revenues are added to a guaranteed CPM rate are becoming more common. As Collins notes, publishers have come around to accepting CPA, at least in part, due to the precipitous decline in CPM rates.
Dynamic Performance Targeting. Fastclick uses this method to place merchant ads on the highest producing affiliate sites. “We will price a campaign based on whether it meets the objectives of the advertiser” explains Jeff Hirsch, Chief Sales and Marketing Officer for Fastclick.
Consolidated Reporting. Affiliates love the consolidated reporting they receive from affiliate solution providers. Seeing all of their network results in one place is an efficient way to monitor the program’s success. AffTrack, a fourth-party facilitator, even provides power affiliates with consolidated reports across networks.
Do What Works
It’s time to shed outdated, unprofitable models. “Performance marketing used to mean driving traffic. Performance marketing now means driving business, says Hirsch.
As marketers focus increasingly on top performing partners, it’s a safe bet that commission tiers will become more prevalent. “Top affiliates will be in a better position to command higher commissions, because of the audience and conversions that they bring to marketers,” says Bergin. “You could argue that ultimately, the strong will get stronger and the weak will get weaker.”
You want success? Never mind that old business plan. Do what works.
Daniel (www.geekbooks.com) is the author of The Complete Guide to Associate and Affiliate Programs on the Net (McGraw-Hill), as well as a host of other books on graphics- and Internet-related topics.
Dan is a designer who has been writing about graphics since 1990. He paid his dues in print graphic design before migrating to the Web in 1995. His 1999 book, The Complete Guide to Associate and Affiliate Programs on the Net (McGraw-Hill), brought legitimacy to the oft-misunderstood world of affiliate marketing. Currently, Dan is learning the cartoon animation ropes as co-author of The Art of Cartooning with Flash (Sybex). You can contact Dan at email@example.com
a scorecard of affiliate providers networks
Be Free, the only affiliate service provider to achieve an IPO (not to mention a follow-on offering) opened the doors to the barnesandnoble.com program in the summer of 1997. White Be Free has shed a good number of dot-bomb clients since the start of the downturn (as has the competition), it replaced these with big name companies like America Online, the Gap, Gateway, and Hewlett-Packard.
LinkShare lays claim to one of the longest running networks, and generates a whopping level of traffic and sales. The company was founded in 1996 and quickly jumped to the forefront of the affiliate service provider market with its consolidated reporting functions. LinkShare clients include AT&T, 1800Flowers.com, OfficeMax, JCPenney. and Priceline.
Commission Junction sprang to life in 1998, with a distinctly mom-and-pop client base. Over the years, the company has expanded rapidly, acquiring sizeable clients in both the online and offline space. Commission Junction clients now include eBay, Yahoo. USA Today, and The New York Times. This firm scores points with both affiliates and merchants for its innovative features–such as consolidated payment and open reporting of metrics. The company has recently drawn heat, however, for raising rates and eliminating all CPC programs.
Performics strode quietly onto the scene in 1998 as Dynamic Trade, targeting a distinctly non-dot-com clientele (with the exception of notables like online grocer Peapod and florist Proflowers.com). Performics clients are largely well-known catalog and direct marketers, which include Bose, Eddie Bauer, Hammacher Schlemmer, JC Whitney, Orvis, and Spiegel.
Performics runs tightly managed programs on a purely performance basis and offers a unique, full-service account management component that’s included in the standard performance fee.
Performics provides all of the affiliate management services in-house. removing the burden from the merchant. The company selects and manages each affiliate. While affiliates can initiate contact, Performics is very choosy. Recruitment typically happens at the request of the client, and Performics often scouts out potential affiliates, as well.
Fastclick, an up and coming ad serving network, feeds banner and popunder, advertising to 4500 hand-approved sites. The company lets advertisers create blended campaigns, basing payments against sliding scales that use both CPM and CPC rates. The potential for click-through fraud is avoided through careful selection.
Fastclick started small, and has run largely under the radar. Its revenue stream is largely performance-based. Clearly, with just eight employees, the start-small logic has paid off.
A few more affiliate services that are worth investigating are: AffiliateShop (www.affiliateshop.com), ClickBank (www.clickbank.com). ClickXchange (www.clickochange.com], My Affiliate Program (www.myaffiliateprogram.com), PlugInGo (www.plugingo.com), and QuinStreet (www.quinstreet.com).