I.
Introduction
In recent years, the discussions on the future of Internet usually involved advertising. The majority of dotcoms started with a business model dependent on advertising, to guarantee traffic and generate revenues. In the frantic search for more and more viewers, they gave away freebies such as information, services and prizes, and they counted on the volume of visitors to attract advertising dollars.
As described in a recent article in The Guardian: “In a viciously circular motion, the advertising sector has cut off the main source of revenue for most e-commerce ventures, while failing to generate the level of publicity needed to ensure significant traffic and sales, which in turn has meant less cash available to spend on advertising.” [1]
In search for better solutions to a decadent advertising flow, some companies developed the concept of “Affiliate Marketing.” One of the first companies to start using affiliate marketing was Amazon.com. The idea was to concentrate their efforts on the target segments of the Internet that attract you. If you are selling fishing equipment, you may want to place an ad in a website that has content on fishing, camping or similar interests. Instead of having to go to very diverse websites, affiliate marketing gives you a more focused audience, with improved chances of trial and click-rates.
As defined by Declan Dunn, “An affiliate marketing program is a technique to build traffic, and e-commerce revenue. The system works by creating a sales force network rather than an expensive media or advertising campaign. The affiliate either shares in the revenue generated by sales, or earns revenue for providing sales leads.”[2]
Affiliate marketing works both ways. For the merchants, who want to sell their products, they reduce the advertising expense, by focusing on more targeted sites. The commission is generally in a higher range, between 5 to 15%, but the return is in long-term, as customers will come back directly to the site for additional purchases. For the affiliate hosts, it gives them an immediate advantage in the web, as they can go after certain merchants within similar interests, and have better payouts from more effective advertising.
In a recent article in The Financial Times, it was stated that, “It's especially good for smaller sites, which wouldn't be able to sell to big advertisers otherwise, and it's good for advertisers, because they would find it too time-consuming to go out and find these smaller sites, and to manage their relationship with them.”[3]
In this paper, we will analyze the types of affiliate marketing programs, reward mechanisms, advantages and disadvantages, how to attract affiliates and monitor an affiliate program. We will also describe the major players in affiliate advertising and show an example of an Affiliate Marketing Program.
II.
Affiliate
Program Structure
There are several types of affiliate programs used to reward affiliates[4] [5] [6] [7] :
Pay-per-sale
In this method, affiliates receive a payment every time that they send a customer that purchases a product at the merchant’s site. Payments could be done as a percentage of the sale or as a fixed amount per sale. Companies that implement pay-per-sale programs are Amazon.com [8] and DVD.com [9].
Pay-per-click
In this case, the affiliate receives a reward for each click that sends a user to the merchant’s site. For the affiliate it does not matter if the user will buy a product or what the user will do in the merchant’s site. One problem with this method is that affiliates can generate “dishonest clicks.” Normally search engines, like Google[10], use pay-per-click method, as advertisers pay more to have there banners on sites with high traffic.
Pay-per-lead
Affiliates receive a payment every time that they send a user that fills out some useful information to the merchant’s site, like customer registration with a valid email account. For example, MailSweeps.com [11] affiliate program pays for every person that enters their sweeps program with a valid email address. Pay-per-email is a variation of the pay-per-lead model. Here affiliates receive a reward for each email account they refer. We can mention Mailbits.com[12] as a pay-per-email program.
Pay-per-Impression - CPM (Cost-per-thousand Model)
CPM is more used in traditional advertising. Pay-per-impression is usually measured in CPM’s. At this method affiliates receive a payment after 1000 visitors view a merchant’s banner on the affiliate site. Only the exposure to the banner counts for the affiliate. No action is necessary from the user. That’s why merchants prefer other methods. Google offers CPM [13] for premium accounts.
Pay-per-Download
In this program, the affiliate receives a payment every time that a download is generated. FlipAlbum[14] offers a pay-per-download program.
Pay-per-search
In this case, the affiliate just inserts a search box inside their site. The affiliate receives a fix value for each search done. ProfitsToGo[15] offers such a program.
As the Internet is very dynamic new programs are created to satisfy market needs. Other variations of the basic types of affiliate programs are possible. The most popular are:
Multi-Level Model
The most common configuration is a two-tiered model. In this case we have an affiliate and a sub-affiliate, which was recruited by the affiliate. If a purchase is generated by the sub-affiliate, the affiliate receives a percentage of the sale together with the sub-affiliate. For the multi-level model, we can expand the same idea. ValueClick.com[16], a provider of Internet advertising, implement two-tiered model.
Residual Model
In this model, merchants continue paying affiliates if users continue doing business with the merchant. The first purchase was generated through the affiliate site. The affiliate continue receiving if the customer continue buying even without going through the affiliate site. AWeber.com Systems[17] is an example of such program.
Hybrid Model
Some companies combine models in order to reward affiliates. This structure can make an affiliate program more interesting but also can increase costs to the merchant. Lease2Purchase.com[18] offers to affiliates pay-per-click and also pay-per-sale.
III.
Why do an
Affiliate Marketing program?
“Industry observers suggest that some 34% of Amazon's sales now come through its 600,000-plus network of associates globally.”[19] This is an example of what Affiliate programs can do to the bottom line of a company. Affiliate Programs can clearly define their product or service and introduce it to a highly targeted group of prospects. They can help online merchants expand their presence on the web and raise awareness by association with the leading brands apart from generating more revenues.
"Affiliate marketing allows a company to get free branding and very low-cost customer acquisition," says Shawn Collins, the affiliate manager for Club-Mom Inc., an on-line membership organization catering to mothers. "But poor management can make a program ineffective.”[20] This comment underlines the importance of selecting Affiliates. So just getting affiliates is only half job done, choosing the appropriate affiliates and managing the partnership is equally important. There's more to selecting an affiliate merchant than simply picking the one that pays the most commission or that would generate revenue. Thorough examination of potential affiliates should be done to choose those best suited to the business model of the company.
There are several effective ways to attract and recruit affiliates to your businesses. One of the most popular and cost effective ways is to outsource the whole system to a third party. Lots of companies are popping up every day to help attract and manage affiliates for online merchants, companies like Nexchange.com, Iconomy.com, and eSaler.com. These companies offer services that pick up the burdens and costs of rounding up sites where your customers are most likely to be found. These companies develop and maintain stores that are placed directly on each affiliate’s site. “For smaller companies that want to build a Web commerce presence, this is a cost-effective way to get in,'' says Alan Alper, an analyst with E-commerce market research firm Gomez Advisors Inc. “There are no upfront costs to the merchant. The service company splits a commission with the affiliate Web site on every sale.”[21]
The other method is to follow the traditional route by advertising the program on the company website, by posting announcements on message boards that target an audience the company would like to have as affiliates; mentioning an affiliate program in newsgroups and discussion boards to attract interested people. Companies can also post information about their affiliate programs in various online directories.
IV.
Monitoring
Affiliate Programs
To analyze effectiveness of their affiliate programs companies can use affiliate program tracking information. This can also help them improve their programs and identify the best affiliates. The two most effective ways of monitoring affiliate programs are:
Companies with adequate internal resources can develop in-house tracking solutions to track every affiliate’s contribution. Mirror sites can be developed for each affiliate allowing companies to record visits separately.
Companies, which don’t have enough resources to develop an in-house tracking solution can buy off the shelf software packages to track their affiliate’s program. A company like Affiliate Zone.com offers software called Affiliate Link to track affiliate programs. This allows companies to track their affiliates and related purchases. Companies can also access commission information at the same time[22]. Another company, My Affiliate Program.com offers a similar product called My Affiliate Program. This software also keeps track of commissions and provides administrative capabilities such as registering affiliates.[23]
V.
Major
Players in Affiliate Marketing
Affiliate solution providers are companies that recruit merchants and affiliates to participate in affiliate programs. The solution providers are third party companies that connect merchants and affiliates by setting up the ground rules of the affiliate relationship. Once the affiliates begin to refer customers to the merchant the solution provider conducts accurate tracking of referrals, provides detailed reporting on the sales from referrals and then distributes commissions to the affiliates. Affiliate solution providers also charge fees, such as a percentage of commissions or a monthly service fee, for their affiliate solution services.[24]
One of the current major affiliate solution providers is Be Free, Inc. Their clients include companies such as ebates.com, GiveAnything.com, Nicorette/ NicoDerm CQ, and Proflowers. Be Free offers an affiliate solution called Bfast that is designed to build highly targeted sales channels. Bfast provides over 75 types of reports on the performance of these sales channels. Bfast also enables merchants to communicate with their affiliates individually so that they can provide the proper information on how to promote their products in each affiliate’s industry. Be Free also provides a solution called BeFlex that allows companies to make changes to their sites without changing their affiliate program’s associated links. Be Free plays a third party role as an intermediary for merchants and affiliates by tracking customer’s sales. Be Free also allows its merchants to decide upon the compensation scale that they will pay to their affiliates based upon the sales that those affiliates generate.[25]
One of the largest affiliate
solution providers is Commission Junction who develops business-to-business
affiliation relationships by offering design, implementation and management
services. Commission Junction’s clients include such companies as eBay,
KB Toys, Motherwear, and The New York Times.
Commission Junction does not charge
any fees in order to become one of their affiliates. Commission Junction’s has a web based
application service which includes real time tracking and reporting. A bonus to
using Commission Junction’s web based application service is that you do not
have to download any software.
Commission junction provides a variety of services to its merchants:
· SmartMatch connects products and services to the appropriate content sites.
· SmartTrack provides tracking and reporting to users instantly.
· SmartStats update the advertisements and links on the sites
· SmartServe is a scalable technology that develops advertisements.
· SmartPay combines the payments from all of the programs that affiliates belong to into a monthly payment.
Commission junction charges an annual renewal fee, a network access fee, and transaction fees based upon the predetermined actions taken by customers on the affiliate sites. Commission Junction’s merchants are required to keep a minimum balance in a special account that can be used to pay their affiliates. Commission Junction makes the monthly payments to its affiliates for the merchants.[26]
LinkShare offers affiliate programs for both business-to-business and business-to-customer companies. LinkShare’s clients include companies such as art.com, JCPenney.com, Just My Size, and Spa Finder. LinkShare enables affiliates to join their network based upon a pay-per-click, pay-per-lead or pay-per-sale system. LinkShare allows its affiliates to join as many programs as they desire. A username and password are created to access affiliate information, including programming and tracking statistics.
The LinkShare Network allows merchants to have access to all the companies that have become affiliates through LinkShare. LinkShare also provides its merchants with, Synergy, a web based software that merchants can use to launch their programs quickly. Tools provided through LinkShare’s Synergy include:
· CustomComp, which allows merchants to customize compensation methods among different affiliates.
· One Click Updates, which allows merchants to update links, graphics and product offerings with one click.
· SmartChat, which is an online chatting option that allows merchants and affiliates to arrange for a chat session.
· SmartReports, a function that provides merchants with detailed reports that can be sent to their e-mail automatically. [27]
Performics is an
online marketing company that works on a performance basis in order to optimize
affiliate development for merchants. Performics clients include
companies such as GreatBuyUSA, Linens 'n Things, Perfumania, and Spiegel.
Performics uses a full service approach
that offers a large range of products from Web site advertising to opt-in email
prospecting. Performics
develops personalized programs with their knowledge in personal account
management and the technology that makes it work. Performics provides
software called ConnectCommerce that tracks and
reports results in real time which allows merchants to focus on their marketing strategies
quickly. ConnectCommmerce
tracks and reports millions of transactions by hundreds of companies every
year.[28]
Affiliate Solution Provider Comparisons
|
|
Be Free |
CJ |
LinkShare |
Performics |
|
Set up |
$5,000 |
$2250 +$3000 in escrow |
$10,000 |
$5,000 |
|
Renewal Fee |
$0 |
$250 |
$2,000 |
$0 |
|
Commission Rate |
2% to 3% of sales
|
30% of $paid to affiliates |
2% to 3% of sales |
Negotiated
|
|
Minimum Commission |
$3000 month
|
$500 month
|
$2000 month
|
$0 |
|
Software Installation |
Yes |
No |
No |
No |
|
Free Check Writing |
No |
Yes |
No |
Yes |
|
Private Label Option |
Yes |
No |
Yes |
No |
|
Time to Implement |
2 to 4 weeks
|
1 to 2 days
|
2 to 3 days |
2 weeks |
|
Contract Length |
12 months |
12 months |
12 months to 3 years |
12 months |
|
Exclusivity Agreement |
Yes |
No |
Yes |
No |
VI.
Amazon.com: Example of an Affiliate Marketing program
Company Background
Amazon.com launched its online business in July 1995. The Fortune 500 company, located in Seattle, started as an online bookstore. The company has grown at tremendous speed in search of building a place where customers could buy anything. Now, over seven years later, it’s possible to find millions of items on Amazon.com in categories such as electronics, music, apparel, house-wares, magazine subscriptions, tools, video games, toys and much more.
Amazon.com Associate Program
In 1996, Amazon.com started the Amazon.com Associates program. Amazon.com Associates is an affiliate program that offers companies the ability to place links on their Web sites to Amazon.com and pays a referral fee when visitors click from their site to Amazon.com and make a purchase. Amazon.com was the first company to start and program like this and is considered one of the most successful affiliate programs around. As a result, Affiliate programs have become an extremely popular online marketing tool that most E-tailers use to drive incremental sales. Since Amazon.com was the first to start this type of program, they were able to get a lot of small sites to join the program. As of September 2002, there are currently more than 800,000 web sites active in the Amazon.com Associates program. This program fits nicely into the Amazon.com marketing strategy. The Amazon.com marketing strategy focuses on building and strengthening the Amazon.com brand name, increasing the amount of traffic to the Web site, and building customer loyalty and customer repeat purchases.[29] This program allows Amazon.com to build brand awareness by having their logo on thousands of web sites and generate additional traffic to their online store, two of their key marketing strategies.
How the Associates Program Works
The Associates is a free program to join, requiring only a brief online registration form. Amazon.com approves the sites that qualify for the program within one to two business days. Amazon.com reviews the Web sites to ensure they do not contain any material that could be considered inappropriate. The majority of Web sites qualify, some examples that would not include sites that promote sexually explicit material, promote discrimination based on race, sex religion, promote illegal activities, and so on. Amazon.com provides its Associate partners access to a members only area called Associates Central. This area provides the Web sites a tool to begin setting up the links on their site to Amazon.com. Once the links are set up on the site, the Web site is eligible to begin earning referral fees for sales driven from their site. Amazon.com offers two types of compensation structures. The first is the Classic Fee Structure. This fixed-referral fee rate structure offers 5% of the sale price on retail items sold. The second is a Tiered Compensation Structure. This plan offers higher referral fees as you sell more retail items. The fee ranges from 4.5% to 8%. Members can choose which compensation plan is right for their business. Members can receive their referral fees via direct deposit, Amazon.com gift certificates or check. In addition, the program offers reports including earning and traffic information for all members.[30]
Summary
Overall, the Amazon.com Associates program was an innovative idea that allowed Amazon.com to leverage small web sites to help them further build the Amazon.com brand name and increase sales. The program has been successful and set an example that many other online retailers have since followed.