Despite being shrouded in mystery for those who aren't au fait with search algorithms and tiered commission structures, affiliate marketing has emerged from the shadows to become a mainstay of the online media mix. You can read more here
It's currently one of the fastest growing forms of online marketing. Research firm E-consultancy estimates that sales generated from UK affiliate networks topped #1.35bn during 2005, up from just #600m the previous year. Successful online companies like Amazon and Ebay have been running affiliate schemes for years, but the current boom is being driven by an increasing number of big-name advertisers.
How affiliate marketing works
Even for the uninitiated, the basics of affiliate marketing are less daunting than they first appear. Advertisers wishing to drive online sales supply banners or links to a network of Web publishers. These publishers display the links on their sites in an attempt to drive traffic back to the advertiser. They are then paid a pre-arranged commission based on the number of sales or leads they generate. The idea is for advertisers to use thousands of Web sites as a virtual extension to their sales force.
"Affiliate marketing is a way of building an online sales team that operates on a performance basis," says Jonathan Forster, European development director at affiliate marketing specialist Commission Junction. "As with any other salesforce, you have to have the right product and the right economic offering to attract the best people to come and work with you."
Benefits of affiliate marketing
Affiliate schemes are regarded as a relatively risk-free form of marketing. This is because the brand-owner doesn't pay publishers to advertise on their Web sites but only has to pay out for the sales they help to deliver. In the face of concern over online advertising inflation, more and more companies are turning to affiliate marketing to get more bang for their buck.
"Affiliate marketing is far more cost-effective than other forms of online activity because it works purely on a pay-per-performance basis," says Oli Matthews, client services director at digital marketing firm Online Media Group. "We're also finding that clients are switching money out of offline media because they know the kind of results they can get."
Who uses affiliate marketing?
Financial services firms, travel brands and consumer electronics retailers tend to be the heaviest users of affiliate marketing, along with gambling firms, telecoms operators and entertainment companies. The ability of affiliate marketing to help build revenues also continues to be exploited by a range of pure-play online retailers.
Affiliate marketing forms a key part of Thomas Cook's marketing strategy, accounting for between 18% and 20% of all online sales last year. It's currently expanding its offering, with new staff being brought on board to help it invest up to #2m in the sector during 2006.
Difficulties with affiliate marketing
Launching an affiliate scheme isn't always plain sailing, however, as travel agent Thomas Cook found out in April 2004 when it was forced to close its first affiliate programme after just four months. One of the main reasons for the problems was the fact that Thomas Cook had set a fixed budget for paying commission to its affiliates. When the money ran out, the affiliate programme was in trouble.
"Having a set budget was absolutely the wrong way to go about it," says Danny Barrasso, head of online partnerships at Thomas Cook. "Once your programme is up and running, you can't just switch it off without annoying all of your affiliates."
Another problem was that the Thomas Cook Web site wasn't ready when the affiliate programme launched in the key post-Christmas booking period. This meant that the company's affiliates were spending time and money driving traffic to a site that wasn't earning them any commission. "If your Web site is weak and your conversion rates are weak, you're just going to alienate your affiliates by cutting off their income," says Barrasso.
Using an affiliate network The majority of advertisers turn to an affiliate network to prevent things like this from happening. The key players include Commission Junction, DGM, Online Media Group and TradeDoubler, as well as smaller setups like Affiliate Window, Affiliate Future and Perfiliate Technologies. Acting as a middleman between the advertiser and often thousands of affiliates, these companies can monitor traffic, handle commissions and resolve any other issues that might arise. More importantly, they can help their clients get the most out of their affiliate marketing schemes.
"I'd estimate the majority of big brands with a well-rounded emarketing strategy will generate around 25% of all their online sales through affiliate activity," says Matthews. "In exceptional cases this figure can grow to 30% or more."
While affiliate marketing has proved its success in generating revenue for advertisers, the affiliates themselves are also reaping the rewards. E-consultancy estimates that fees paid to affiliate networks amounted to #83m last year. The potentially huge profits from taking a commission on clicks have given birth to some of the Web's biggest brands. Companies including Kelkoo, Shopping.com and Cheapflights have all emerged as so-called 'super affiliates' that specialise in redirecting traffic for advertisers.
Types of affiliate
Affiliates generally fall into one of two categories. The first comprises companies that set up Web sites and use search engines to drive traffic to them. The second is made up of 'keyword bidders' that specialise in expanding the number of paid-for listings on which an advertiser's brand name will appear. "It's not just about getting as many affiliates as possible signed up to your programme," says Forster. "It's about getting a select few that truly understand your brand values."
Problems with affiliates
The growth of affiliates specialising in search has given rise to the problem of brands bidding against their own affiliates for sponsored listings. While this doesn't happen often, it's prompting advertisers to call for strict guidelines covering what their affiliates can and can't bid on.
"As an advertiser it's crucial to ensure that your affiliates aren't pushing up the price of your key search terms," says William Cooper, chief marketing officer at TradeDoubler. "There has to be very good communication with your publishers to prevent this happening."
Some renegade companies have also been accused of employing click-fraud techniques (see page 10), where software is used to generate automatic clicks, or creating false Web sites that allow them to collect their commission without actually sending any real traffic to an advertiser's site. Affiliate networks argue that brands must keep in close contact with their most important affiliates to prevent this from happening.
"Advertisers need to keep in constant communication with their bigger affiliates to make sure everything is running smoothly," says Peter Dickinson, affiliate manager at Affiliate Future. "Brands need to make sure their publishers are happy and aren't going to switch to a rival company."
Conclusion
The benefits of carefully nurturing an affiliate network can be sizable, with the most successful advertisers generating millions of pounds for a relatively small initial outlay. The ongoing growth of ecommerce means the rewards of setting up a virtual sales network spanning the Web only look set to increase.
Gareth Jones
Glossary of terms
Advertiser/merchant
Any site that sells a product or service, accepts payments and fulfils orders.
Affiliate/publisher
An independent party that promotes the products or services of an advertiser in exchange for a commission on leads or sales. The publisher displays ads, text links or product links on its Web site, in email campaigns, or in search listings.
Commission
A commission payout is income received by a publisher for a quantifiable action, such as selling an advertiser's product or service on its Web site, or delivering traffic to that advertiser's site.
Click-through
A click-through refers to the action a consumer takes when they're referred from one Web site through a link or ad and taken to another. A click-through ratio is the percentage of clicks for the number of ad impressions displayed.
Conversion rate
The conversion rate is the percentage of visitors who take a desired action, which then leads to a commission payment from the advertisers to the affiliate partner or publisher. The action is determined by the advertiser and could be a sale on the advertiser's Web site, a completed lead form, or another action.
Cost per action (CPA)
A metric for online advertising where a rate is set for every action taken by a user.
Cost per thousand (CPM)
A metric for online advertising where a rate is set for every thousand impressions (the M comes from the Roman numeral for thousand).
Performance-based marketing
Paying for actions taken by a consumer as they occur on the Internet, rather than paying upfront for ad space. This can include any type of revenue sharing program where a publisher receives a commission for generating a lead or sale for an advertiser.
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