Special Report Affiliate Marketing
Although it's had its share of problems over the past few years—such as incidents of click fraud and spamming issues—affiliate marketing is fast becoming a key part of many e-commerce businesses.
According to JupiterResearch's report, Affiliate Marketing Developing a Solid Affiliate Base, when asked about their affiliate programs, 78 percent of merchants with affiliate programs grew those programs in 2004, and 38 percent grew them by as much as 25 percent or more. Furthermore, last year, nearly all of these merchants had at least one dedicated, full-time employee managing their affiliate programs, and only one in 10 merchants who have an affiliate program now leave the program wholly unmanaged.
This special report tracks the trends and techniques that are shaping affiliate programs and the evolving relationships between marketers and their affiliates. In a Q&A, JupiterResearch Senior Analyst Gary Stein shares his insights on this sector, detailing pitfalls to avoid when working with affiliate partners, as well as some tips on how to spot and nurture affiliates that will be as invested in your site and products as you are.
In addition, Jeff Molander, CEO of Molander & Associates, assesses the trajectory of affiliate marketing, as it takes its place as a key component of a performance-based approach to marketing strategy.
Finally, learn how Cooking.com optimized its affiliate marketing program thanks to a more direct relationship with its affiliate partners, which has helped the retailer cut costs and understand affiliates' needs.
—Irene Cherkassky, Senior Editor
The Evolution of Affiliate Marketing
Affiliate takes its place as part of an emerging focus on integrated performance marketing
By Jeff G. Molander
Affiliate marketing quickly has become one of many online strategies—along with search, portal deals and the like—that are part of an integrated approach that allows marketers to more accurately measure success. Discussions with change-oriented direct marketing industry veterans offer an honest perspective and reveal significant tactical shifts of how and where change will occur and how you can best capitalize on the forces that already are shaping the future.
Industry Pulse Check
How big is affiliate marketing? Cambridge, Mass.-based Forrester Research rushed to answer the question in 1999, claiming that $10.5 billion in e-commerce sales would pump through affiliates by 2001. Since then, we've not heard a peep regarding size, as affiliate marketing has yet to be clearly defined. The entrance of dozens of privately held cost-per-acquisition (CPA) networks further complicates understanding of this market potential.
It's estimated that roughly $175 million in 2004 fee revenue was captured by the now-public players in the domestic market, with an additional $124 million booked by private ventures. Internet advertising solutions provider ValueClick, New York City, estimates the global affiliate marketing sector as a half-billion-dollar market.
As reflected by various studies by the likes of Forrester Research and Marketing Sherpa, affiliate marketing is alive and well, with marketers rating it the most effective of all online strategies. Yet marketers, ranging from retailers to service-based companies, admit this sentiment mostly is a hunch based on the strategy's pay-for-performance premise—one that increasingly is coming under scrutiny by marketers concerned with potential pitfalls ranging from fraudulent commissions to duplication of marketing efforts in search engines.
The Affiliate and Search Marketing Conundrum
Broadly speaking, affiliate marketing has evolved into a practice wherein marketers rely on affiliates for none, some or all of their paid and "natural" search marketing. This typically can result in an agreeable or stressed relationship between affiliates and marketers due to dueling competitive interests. In essence, affiliates always have known what works best. Brand names and trademarks stand front-and-center. Affiliates were first to master and leverage search on behalf of marketers, but now marketers are beginning to take search back.
Patrice Colancecco, long-time affiliate manager for catalogers, direct marketers and financial services companies—including Eastwood Co.—suggests affiliate marketing has become so search-centric that marketers who maintain a strong search program may not need affiliates. As consumers "surf" less randomly, she says, affiliates use search to net and/or intercept prospective customers, shuttling them on to marketers. Why? She suggests it's easy to get involved in search. "Some affiliates even do their own advertising," she says. "So why would you have them do this when you could do it yourself? Either you consider this suitable outsourcing or you don't know how to do it."
Colancecco believes marketers latched on to affiliate marketing in an era—unlike today—plagued by many expensive online advertising options. Today, things are less complex and more affordable.
Jeff Nienaber of Kirkland, Wash.-based Celebrate Express, a marketer of celebration products for children, agrees, but suggests that allowing affiliates to leverage search can create hidden costs. "We always suspected that our affiliates were costing us more than originally expected," says Nienaber. "Conducting an audit revealed serious cost inefficiencies that, once corrected, drove affiliate-related costs down, for the first time, without harming sales."
Colancecco suggests affiliates "have a knowledge and expertise that is only obtained by being out there every day, tweaking and testing and analyzing. If you really want to have a great search program, those are the people you should be headhunting. They are doing the job that you should be doing yourself."
Know Thy Affiliates
Increasingly, affiliate managers are wringing their hands over a variety of problems that revolve around transparency—knowing who one's affiliates actually are. In a world fraught with trickery ranging from downloaded adware on unsuspecting consumers' computers to affiliates eagerly loading browsers with cookies without legitimate referrals being made (also known as "cookie stuffing"), affiliate managers are always on the lookout.
As stated by Colancecco, when affiliates buy ads, they often use pop-ups via adware. When consumers receive unwanted, obtrusive and sometimes destructive ads, they become rightly angry at the marketer who funds adware infections on their computers.
According to leading adware expert Ben Edelman, marketers make a mistake when failing to supervise or investigate their affiliates' use of adware. "Plausible deniability isn't good enough," says Edelman. "Marketers should focus on the risks to their brands when involved with these shady practices."
Edelman warns managers not to look the other way when it comes to adware. Working with affiliates that use adware may create the illusion of booming sales and/or leads that, when eventually removed from the equation, will be difficult to replace with legitimate sales and/or leads.
Similarly, Peter Figueredo, CEO of New York City-based online performance marketing agency NETexponent, warns that so-called "CPA networks" can be a breeding ground for fraudulent orders or bogus leads. A haven for anonymity, these affiliate network spin-offs operate similar to better-known affiliate networks, yet typically consist of overly aggressive e-mail, adware and/or search marketing affiliates.
"Networks and agencies that add value are the only ones that will survive long term," says Figueredo, whose company manages affiliate programs. "Networks that add value based on optimization technology, strong publisher relationships, quality marketers and transparent operations, right now may not be raking in the cash and handing out Porsche Boxters, but in the end marketers will recognize fly-by-night networks for what they are."
Time for New Rules
Like many direct marketers, Lisa Papageras invested in affiliate marketing strictly to acquire new customers on the cheap for the properties she manages, the Hudson, Ohio-based catalogs Wind and Weather, Art & Artifact, Signals and What on Earth. At the beginning, Papageras found affiliates to be time-consuming and difficult to manage because they need to be monitored and nurtured.
"Once we discovered that our goal of new customer acquisition wasn't being met under our desired terms, we attempted to adjust the agreements under which our partnerships worked," Papageras explains. "Unfortunately, our proposed solutions fell on deaf ears with our affiliate network, and we completely withdrew from affiliate marketing."
Despite shuttering the program, to her surprise online sales—against total sales—increased by 6 percent versus the same timeframe the year prior. Sales across all channels increased by 7 percent in that time frame as well—all without an affiliate program in place.
Papageras wants terms and conditions that restrict affiliates in search. Still a fan of affiliate marketing, she explains, "I would like to continue with a redefined affiliate program, one that could be conducted under our new rules. Unless our terms can be met in this marketing medium, it is my responsibility to look for other opportunities to find new prospects and customers."
The Future: Integrated Performance Marketing
Affiliate marketing increasingly is being viewed as a cog in a multifaceted performance-marketing wheel. While marketers first placed affiliate marketing at the center of online marketing, today most view it as a good starting point to test for potential. If affiliation works, more serious relationships involving other performance compensation structures may be in order, such as cost-per-click.
In fact, performance-based "hybrid" arrangements are becoming popular, and might include any number of elements rather than just pure "commission" or a "bounty" on a new customer. For example, in cases where affiliates send more existing customers than new customers, the spend becomes retention oriented and, therefore, requires a new financial arrangement. Hybrid payment arrangements provide this flexibility. Most popular examples include paying for "featured merchant" status during a holiday or season. These involve a commission plus a "slotting" fee to be placed into the special location.
And as marketers' needs diversify, the companies serving them diversify their offerings. Innovative solutions that assist marketers in this process stand to reap the rewards. While affiliate solutions providers scramble to partner with Web analytics tools, companies such as auction and marketplace management software and services provider ChannelAdvisor and online retail merchandising solution provider Mercent are entering the fray, promising to help marketers bring product data feeds together to streamline multichannel performance marketing partnerships. Further, these companies aim to connect the dots between all marketing initiatives ranging from eBay and Yahoo! stores to affiliate marketing programs.
Dollar for dollar, does your affiliate marketing program truly generate more cost-effective sales than your comparison shopping partners or e-mail programs? Do your print mailings influence affiliate sales? To what degree, and how might this knowledge be used to work more cost-consciously with affiliates? New solutions aim to provide answers to these questions in real time, and they're catching on.
Similarly, Chris Sanderson, general manager of British firm AMWSO, a provider of affiliate marketing management, development and creative support solutions, reports that forward-thinking affiliate managers are using tools such as RSS (real simple syndication) to solve "data freshness" problems.
"Marketers often receive calls from customers due to shipping and item price differences that occur when affiliates rely on manual data updates rather than automated ones," according to Sanderson. "Presenting affiliates with data that needs manual updates—be it prices, shipping policies or coupons—is just asking for trouble." RSS offers a means to streamline the distribution process. In improving the accuracy of offers and product descriptors (price, color, images, etc.), affiliates send more visitors that convert to sales. Increasingly, behind the scenes, marketers are demanding more of their affiliate programs. They're pushing the limits of their technology partners and program managers. In the end, growing pains will be overcome and more efficient marketing strategies will emerge. Performance-focused marketing isn't going away any time soon.
Jeff Molander is CEO of Molander & Associates Inc. His analysis and recommendations serve to bring online performance marketing programs toward more integrated strategies that are congruent with multichannel customer acquisition and retention objectives. He can be reached at firstname.lastname@example.org.
The Recipe for a Closer Relationship
Cooking.com changes tactics to forge a more effective affiliate marketing program
By Irene Cherkassky
Making the most of any relationship takes hard work and hands-on involvement. In today's competitive e-commerce environment, this holds especially true for the relationship between marketers and their affiliate marketing program partners. It's a lesson that online and catalog cooking products retailer Cooking.com has taken to heart as it has rethought and revamped its approach to its affiliate marketing initiatives over the past six months.
A Critical Assessment
The Santa Monica, Calif.-based retailer currently has some 3,000 affiliates subscribed to its program and always has valued its affiliate partners for driving traffic to the site. When it initially established its affiliate marketing program in 1999, Cooking.com brought on a provider who managed its affiliate marketing efforts for a fee through one of the affiliate networks. Larry Sales, vice president, general manager, Cooking.com, says, "At that time we found that [arrangement] very attractive because we … had a lot going on and it made sense to outsource." Eventually, however, the retailer saw affiliate marketing go from being one of its cheapest and best acquisition programs to one of its most expensive.
Cooking.com understood it was time to revamp its approach. The retailer set two goals as part of that process: 1) Create a closer relationship with its affiliate partners; and 2) Improve the cost side of the program. "We [realized we] probably could be in a structure that was going to allow us to be more responsive, rather than be three layers removed," says Sales. "In some cases, we went through the management group, through the network to the affiliate." The extra management layer also had increased costs.
A Change of Plan
To implement its new affiliate strategy, in April of this year Cooking.com removed the third-party affiliate management layer and switched from network provider LinkShare to marketing solutions provider Commission Junction (CJ).
The revamp has brought its own set of challenges, as well as rewards. "It takes a lot of work by the affiliates themselves to set everything up and change links," says Sales. "It's taken longer to go through the transition than we expected, but now we're happy with the results. We're on forecast," says Sales. "Our costs have been pretty good too, and we've been able to take some of that extra spend that was going to the management group and either provide better offers or more incentives to certain groups to try to see if we can drive sales within a category."
The New Direction
Because Commission Junction works both with advertisers (marketers) and publishers (affiliates), Cooking.com also has been able to forge more effective relationships with its affiliate marketing partners. Dave Gaeta, director of marketing for Cooking.com says, "Commission Junction has been very significant in bridging the disconnect between the two relationships."
Additionally, the retailer has benefited from CJ's measurement and reporting capabilities. Being able to pull up information quickly and efficiently by date, provider, affiliate or sales, and to do so consistently, has made an impact. Now the retailer is able to evaluate how an offer performed, whether it got incremental sales and if the company got pay back for its spend.
Sales adds, "We feel we [now] understand the affiliates better, understand what they want, and based on the economics and our understanding of our business, we try to come to a good middle ground where we're both going to be happy."
Making the Most of Your Affiliate Partnership
Marketers and their affiliate partners have weathered their ups and downs over the past few years. Affiliate marketing has gone from being the magic money-maker of a few years ago, to having its image besmirched by incidents of click fraud and spamming. But, as Gary Stein, senior analyst with New York-based JupiterResearch, notes, affiliate programs are on the rebound. Here, Stein offers his insights on the common concerns and best practices marketers should keep in mind as they look to optimize their relationships with affiliate marketing partners.
Target Marketing: What are some common issues coming up for marketers when working with affiliate partners?
Gary Stein: The most common mistake marketers can make is to set up their affiliate marketing program and then walk away from it.
When affiliate marketing emerged seven or eight years ago, it felt like easy money. All you had to do was set [affiliates] up, and they'd start sending leads to you, sending sales and you paid them some percentage. That was it. You didn't have to worry about it any more. Then marketers found out their brand was being represented in all these terrible ways. Either being put up on adult content sites or gambling sites, the affiliates were engaged in spamming or trying to spam the search engines—just a whole lot of bad practices. This was turning into two things: Their brand was being dragged through the mud, and the leads they were getting were not very valuable. There was also the potential that it was fraudulent stuff.
About three years ago there was a renaissance in affiliate marketing, thanks to a lot of work on the part of a few key merchants who started firing affiliates and bringing those [back] who they knew did good work. They tightened up their policies of where their brand could be represented and what practices they could engage in. They also worked with the third-party managers, such as Commission Junction, ValueClick and Performics, to implement these practices.
TM: Are there other pitfalls to look out for?
GS: Probably the other biggest thing [marketers] need to worry about is how affiliates are using search engine marketing. Search engine marketing is really the most popular way for affiliates to get customers, so a couple of things could happen that marketers need to worry about. Probably the one that hits them the hardest is competition for their own brand name. It's OK if multiple affiliates are bidding for the same keyword, and they're competing among themselves, but you don't want your affiliates competing against you to try to get clicks. That's a negative economic situation in general, and it's also confusing for consumers, because they don't make the distinction between the affiliate link and the actual advertiser itself.
The other concern is that a sizable number of affiliates use search engine spamming techniques that ultimately clog up the system and drag down the over-all consumer experience, because when [consumers] do a search for your products and your brand name, they wind up getting a whole bunch of garbage and nonsense that's been filled up by affiliates who are just trying to get clicks.
TM: What are the technical trends affecting affiliate marketing today?
GS: Most marketers that have an affiliate program are working with one of the third-party providers, such as Performics or Commission Junction. Amazon has always been the very notable exception to run its own affiliate program.
Now there's been an increased interest among marketers to begin running their own affiliate programs, and potentially to bring the management of the affiliate marketing program in-house. But that requires some pretty specific software. There has to be a lot of monitoring of the use of the brand and where the site is, as well as click fraud issues, which is probably the number one biggest economic concern.
In general, working with a third party is good, because they are invested in the bullet-proof and seamless management of an affiliate marketing program, so if there's some new trick in click fraud, they're going to be aware of it right away.
TM: Can you offer some best practices for marketers to follow when establishing a relationship with affiliate partners?
GS: Probably the best one is to know that of all the affiliates you have, 10 percent are going to be generating good value for you. A best practice, therefore, is to try to put together an affiliate marketing strategy that tries to identify that 10 percent and reward them. Potentially that could be a higher commission rate, or giving them advance notice of upcoming products, features, announcements, news and releases that somehow solidifies the relationship.
In fact, the best thing that marketers can do is to provide some sort of product feed. For example, if you're an electronics store and you have 10,000 items, provide a data feed of those items. Update the ones in stock, what the prices are, or if something has just gone on special.
TM: How do you identify those valuable affiliate partners?
GS: The best thing to look for are people who will stick with your program for a while. A lot of people get into affiliate marketing and they cycle right through it. Therefore, look for the people who are generating returns for you. Also look at the sites themselves. Are they doing something more than sending clicks your way? Are they providing some added value, such as writing reviews or offering additional content on how to use the product? Look for the people who are really invested in the products that you're selling.
TM: How much should a marketer be relying on affiliate programs to drive its traffic and boost sales?
GS: We did a survey, and it's somewhere around 10 percent.
TM: Are there any legal issues currently shaping the relationship between marketers and the affiliates?
GS: There are some copyright questions coming up regarding the use of brand names and trademarked names, when you get down to the search issue. The question is essentially who is allowed to use a brand name to generate traffic. There's a really big economic incentive on the part of the search engines to make sure that anybody can bid on any term.
I believe what's going to happen is that it's going to be wide open and anybody is going to be able to bid on a trademark term.
TM: Are there any other trends on the horizon when it comes to the relationship between marketers and affiliate partners?
GS: A lot of the innovation is happening around measurement and reporting. That's an area marketers have been focusing more and more on—providing the ability to optimize your affiliate marketing campaign based on multiple data that's coming in.