Affiliate marketing – What is it?

Affiliate marketing can be simply defined as:

‘A commission based arrangement where referring sites (publishers) receive a commission on sales or leads by merchants (retailers)’.

Every article on affiliate marketing refers to how Amazon was one of the earliest adopters of affiliate marketing and now has hundreds of thousands of affiliates who drive visitors to Amazon through links in return for commission on products sold.

Less widely known is what prompted Amazon to adopt this technique. Internet legend records that Jeff Bezos, the creator of Amazon was chatting to someone at a cocktail party who wanted to sell books about divorce via her web site. Subsequently, Amazon.com launched its Associates Program in July 1996 and it is still going strong. Googling http://www.google.com/search?q=www.amazon.com+-site%3Awww.amazon.com for sites that reference the US site, shows over 4 million pages, many of which will be affiliates.

Such affiliate marketing is often thought to apply solely to e-retailers where the affiliate is paid if there is a purchase on the merchant site. In fact, payment can occur for any action which is recorded on the destination site through a ‘thank you’ post-transaction page. This could be a quote for insurance or a registration for download of a paper.

Figure 1 summarises the arrangement where a visit to an affiliate site results in a click through to the merchant or destination site which is managed and tracked by tracking software. If a purchase, or other agreed action occurs on the destination site, a commission fee is paid to the affiliate site from the merchant. The tracking software places a cookie file on the visitors’ PC to prove they visited the site and this is set to expire after a period such as 30 days. Payment then occurs for any period after 30 days.

Figure 1. Affiliate payment and tracking mechanism

Affiliate marketing benefits

Affiliate marketing has proved so popular since it offers great benefits for both the affiliate and the merchant.

Benefits for the merchant

The most obvious benefit, which is unique to affiliate marketing, is that the advertiser does not pay until the product has been purchased or a lead generated. It is sometimes referred to as ‘zero risk advertising’. Contrast this with all forms of offline promotion where there is not a direct link between the cost of promotion and the revenue gained. The approach is also in contrast to Pay Per Click search engine marketing, where the retailer has to pay for the visitor irrespective of whether they purchase anything. As a result it is relatively easy to control affiliate expenditure and a company can readily ensure that spend is below the allowable cost of customer acquisition.

A further benefit for the advertiser is that the nature of affiliate sites enables them to expand their reach to a wider audience than is possible through larger portals such as news and magazine sites.

For the affiliate, similar direct benefits are achieved. Every visitor is a potential revenue source, although they are dependent on how effectively the destination merchant site can convert the traffic.

We will look at some of the challenges of affiliate marketing later.

Case study – ASOS.com

ASOS.com is a fashion Internet store specialising in designer brands worn by celebrities (Think the Beckhams). Since it is (not yet a high street brand), affiliate marketing is responsible for a significant proportion of its business.

According to E-consultancy (2004), the ASOS affiliate program drives between twenty-five and thirty percent of ASOS online sales. Affiliates are offered between seven and ten percent commission and there are also many hybrid deals in place. ASOS say that their affiliate programme is popular with affiliates since conversion rates are good and they offer affiliate incentives.

The article emphasises the importance of super affiliates who may number fewer than 20 publishers, but account for 80% or more of the revenue. Below are figures for one super affiliate from ASOS.com (1^st to 30^th Nov 03)

Source: E-consultancy (2004)

Approaches to finding affiliates

In theory, e-tailers can follow the successful model of Amazon who has partly built its sales volume by setting up its own programme to develop and manage the links from the hundreds of thousands of affiliate sites linking directly to it.

In practice, it is often more practical to work with an affiliate network provider to both find relevant affiliates and to manage tracking, payment and the provision of banner and text creative. Although a commission has to be paid to the affiliate network, this will often be more cost effective than developing an in-house affiliate marketing team.

Affiliate networks

To manage the process of finding affiliates, updating product information, tracking clicks and making payments, many companies use an affiliate network such as Commission Junction (www.cj.com) or Trade Doubler (www.tradedoubler.com). Since the affiliate network takes a cut on each sale, merchants may also try to setup separate relationships with preferred affiliates, although this will not be possible if this is excluded in a pre-existing contract signed with an affiliate network.

E-retailers tend to partner with one affiliate network, since may affiliates will belong to several networks. However, incremental sales are possible through belonging to several networks.

Improving results from affiliates

Both E-consultancy (2004) and Revolution (2004) give many do’s and don’ts of running an affiliate programme. These are the most important factors in making an affiliate programme successful. You will see that many of them involve really understanding what appeals to the affiliates.

1. Pay a competitive commission.

The affiliate will position you more prominently, leading to more clicks if your commission is favourable.

The key metric for the value of each merchant for the affiliate is Average Earnings Per Click (EPC). This will depend on the conversion rate to action on the merchant site and the average order value for retail products.

It is worthwhile for merchants to calculate their average order value and lifetime value for referrers from affiliates to see whether they can boost the EPC for their affiliates, if needed.

You can get an idea of commissions paid by searching on the client part of the Commission Junction site (http://members.cj.com/member/offers/nonmember/advertiser_search.jsp). For example, a search on ‘Lingerie’ shows commission rates varying between 3 and 8%. Clearly affiliates will favour retailers offering 8% with more prominent placements (unless the merchant site has a significantly lower conversion rate). A search on credit card shows a fixed amount varying by lead or sale. Again, larger amounts will be more favourable to affiliates, dependent on conversion rates.

2. Keep commission flexible

Merchants can change commission at any time, so it follows that it is important to monitor how competitive your commission is and change it in line with marketplace and seasonal changes. Revolution (2004) reports that John Lewis Direct meet with affiliate provider Tradedoubler once a month and discuss weekly by phone to ensure commission and strategies are effective.

Since affiliates can readily switch, it is important they are paid on-time. This is another ‘hygiene factor’ to get right.

3. Increase cookie expiry period.

An affiliate will favour a merchant who has a cookie expiry period of 20 days compared to 5 days since they will be credited with more sales. Note though, that when using an affiliate network, only the most recent affiliate is credited.

4. Offer coupon voucher deals or other differentiators

For e-retailers and in some cases, financial services providers, integration coupon codes for purchases over a threshold or for first purchase will be effective since they are likely to yield more clicks, convert better and may give larger commissions on higher sales.

This is an example of a generic affiliate offering these types of deal:

http://www.consumerdeals.co.uk/offers.html.

Such deals are only one example of a differentiator. If a merchant has a strong proposition that will appeal to consumers, then they will be more attracted to this merchant and can emphasise this proposition.

5. Optimise creative.

As with any online creative, small changes to the message, offer, copy and imagery can increase effectiveness of your campaign.

Furthermore, creative formats are important. E-consultancy (2004) suggests that traditional banners and buttons and even rich media ads linking through to the home page are relatively poor performers. As you would expect from search marketing, much better conversion occurs from text links or product feeds that take the visitor straight through to the relevant product page.

5. Work with the super-affiliates.

To understand what is effective in terms of the incentives and changes to creative mentioned above, it is best to work more closely with the super-affiliates who will refer the majority of your traffic. As Jessica Luthi points out in E-consultancy (2004) this will need specific resource within a company to manage this relationship, or at least to discuss the management with an external programme manager.

Problems of working with affiliates

With the affiliate networks providing potentially thousands of affiliates there is reputational damage possible from less ethical affiliates. Some may have salacious content that a merchant does not want associated with their brand. Some may use spyware, adware or scumware software applications to get their links. Typically affiliate networks will exclude these practices in their terms of agreement, but it may be impractical to monitor some exceptions.

However, the single biggest problem of working with affiliates is competition on Pay Per Click networks (PPC).

Affiliates can use sponsored links to the PPC networks such as Overture, Espotting or Google Adwords to gain visitors to their sites and then onto merchant sites. These may inflate the advertising cost of the retailer, even to advertise their own name. Worse still, they may place ads which offer to compare your deals to competitors. Fortunately, the PPC networks will usually stop what is effectively trade mark infringement as long as the merchant is aware of it and asks it to stop.

Affiliates also use search engine optimisation which may make it difficult for merchants to appear in the natural or organic listings of a search engine since they are more constrained on how their site is designed to present a credible look to their brand and cannot risk using any optimisation techniques which may get them barred from the search engines.

It’s going to get tougher

So, that’s affiliate marketing. Its growth in importance is indicated by the success of the affiliate networks. Trade Doubler had European wide revenues of €28 million in 2003 with a forecast increase of 75% for 2004. Meanwhile UKaffiliates who are part of dealgroupmedia facilitated £150 million of revenue for its clients in 2003.

While this is good news for the affiliate networks, it means that for the merchants, it’s going to lead to a more competitive environment with the spoils going to those whose business models can justify the highest commission and get the hygiene factors of managing the super-affiliates right.

References and links

Affiliates 4 You Forum (http://www.a4uforum.co.uk). An active forum about running affiliate campaigns useful for anyone actively involved in managing affiliate programmes since it shows what parts of the merchant’s programme appeals and doesn’t appeal to the affiliates. For example, a recent post suggested that affiliates should not work with any merchant who has a phone number on their landing page unless those sales can be tracked. Imagine if a third of sales occur over the phone rather than on the site, then that is a third of the potential revenue lost to an affiliate.

E-consultancy (2004) Affiliate Marketing: A Buyer’s Guide, April 2004.

http://www.e-consultancy.com/publications/affiliate-marketing-buyers-guide

Revolution (2004) The Revolution Masteclass on E-tail affiliate marketing.

Revolution Magazine, October 2004. Author Emma Rigby.

The main UK affiliate networks are:

·         Commission Junction, part of Valueclick. (www.cj.com)

·         Tradedoubler.com (www.tradedoubler.com)

·         UK affiliates, part of Deal Group Media (www.ukaffiliates.com)

Many other UK affiliate networks are listed by E-consultancy (2004).

Another interesting player is Perfiliate Technology Limited which offers affilates as a means of fund-raising for charities (http://users.buy.at).

About the author

Dr Dave Chaffey is workshop leader for a range of one-day e-marketing training workshops from the CIM:

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• E-mail Marketing (www.cim.co.uk/0766)
• E-CRM Planning (www.cim.co.uk/1137)
• Marketing Research Using the Internet (www.cim.co.uk/1135)
• Running Effective E-marketing Campaigns (www.cim.co.uk/0767)
• Improving E-marketing Performance (www.cim.co.uk/1138)

Go to www.cimtraining.com for course details and online booking.

Dave Chaffey is trainer and consultant for Marketing Insights Limited (www.marketing-insights.co.uk) and E-marketing Director at Ripe (www.ripe.co.uk). He is a prolific e-business author whose books include ‘Total E-mail Marketing’, ‘Internet marketing: Strategy, Implementation and Practice’ and E-business and E-commerce Management.