AFFILIATE INSITE
With the continuing rise in postage and paper costs eating away at the bottom line along with the migration of customers to the Internet, affiliate marketing is widespread among merchants as a means to generate new customers. In 2003, Jupiter Media claimed that close to 50% of all merchants had an affiliate marketing program. Today it is estimated that over 70% of all merchants participate.
While affiliate marketing is in a sense, like hiring thousands of commission-only sales people to market your product on the Internet, it is important to know the specific costs involved with the program. Affiliate marketing generally costs about 25-30% of the gross sale amount. The specific costs include: set up fees for access to a viable affiliate network, monthly fees for managing an affiliate program, creative costs for banner advertising, and a commission on each sale to the affiliate and generally the program manager as well.
Compensation may be based on sales, clicks, registrations, or a hybrid model, depending on the agreement with the hosting website. Over 75% of merchants opt for a cost per sale model so they will not have to pay for those clicks which do not convert.
Depending upon response rate and average order, the total of these costs can be competitive with other prospecting media. Therefore, it is important to run the numbers to make sure that it is working for you and that you are not giving away more than you benefit. If your profit margin is not at least 30%, affiliate marketing may not be cost effective.
Hundreds of networks now exist with various combinations of affiliates. The top three networks are Commission Junction, Linkshare, and Performics, claiming over one million affiliate partners each. Overlap of affiliates is very common, estimated to being very high especially in the case of the more successful affiliates which are in constant search of the best performing and highest paid merchant offers. Fees for the largest networks may be too rich for smaller merchants. Don’t be afraid to walk away.
There are also secondary affiliate networks. Companies such as Shareasale and Kowabunga work on the same principle and cost less, but do not provide the same reach. And there are independent outside providers who will manage a program for a company.
Managing an affiliate program in-house can be very time consuming; since there are hundreds of potential affiliate sites, each with its own business rules and fee structure. When setting up a program, either through in-house management or an outside provider, it is important to define the offer(s) that will be made on an affiliate site, the business rules which govern the arrangement, such as no branded keyword advertising (a merchant does not want to be bidding against himself in paid search), and assess what the competition is doing.
Irrespective of who manages the program, it is critical that the merchant do his/her own analysis of performance through both web analytics and matchback results. Web analytics will tell you where customers and non-converters come from. You can then determine whether your search programs, both paid and organic, are working at odds with your affiliate program. Affiliate sites may be bidding on or optimizing their sites for the same key words you are. Are visitors who come to your site through affiliates more likely to convert than those who come directly to you through search? The answer to this question has implications for your search programs and for your continued participation on affiliate sites.
Matchbacks show you if, in fact, affiliate sites are helping to build your housefile or if your current customers are coming to you through affiliate sites. Even if affiliate marketing appears to be delivering additional dollars to your bottom line, it may actually be costing you more than you realize or are allocating to it.
When determining if affiliate marketing is a reasonable prospecting strategy, make sure you understand all of the costs. As mentioned above, if you do not have at least a 30% profit margin, you will probably lose money on the sales. To gain the greatest insight into whether affiliate customers deliver long term value to your brand, it is necessary to test performance over time and calculate the lifetime value, that is, determine if the customer repurchases over the 12 to 18 months subsequent to the initial purchase, and what was the contribution to your bottom line from that customer, particularly in comparison to customers generated from other sources.
The better affiliate marketing management companies are able to identify the right combination of commission and conversion rates. They are able to simplify your program so affiliates will respond aggressively to your program. They ensure that seasonal promotions are provided in a timely manner; commissions are paid on time, and sales discrepancies are resolved quickly. Further, they offer keen insight as how to reduce commissions, keep affiliates engaged, and improve profit ratios. And, if the managers are not associated with one of the existing affiliate networks they will also work to find additional affiliate websites/networks to promote your product. But you still need to make sure that it is cost effective.
Affiliate marketing is not for everyone. Understanding your customers’ paths to purchase combined with evaluating your cost structure will let you know if such a program will supplement your prospecting efforts, cannibalize them, or overall increase your bottom line.
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