Web marketing: affiliate to accumulate

Stuart Lauchlan looks at how to set up online partnerships to bring more trade to your Web site

Stuart Lauchlan looks at how to set up online partnerships to bring more trade to your Web site

How can you ensure that customers will find your Web site? Traditional 'above-the-line' advertising in print and television may be your marketing department's campaign of choice, but an online affiliate network may offer a more effective strategy than old-media advertising.

In the UK, TV and non-trade-press advertising for dot-com companies is only just kicking off, so it's early days to jump to any conclusions about the effectiveness of these media. But in the US, advertising slots during January's Superbowl football match - representing the most expensive advertising time in the US TV calendar - were almost wall-to-wall dot-coms.

According to research firm PC Data, most of the companies that advertised experienced a surge in hits immediately following the ads, but then saw the interest rapidly fall away. Money well spent?

Old habits die hard it seems, but advertising and marketing in the online world is not as straightforward as in the real world. In the rush to the Internet, dot-coms and bricks-and-clicks companies alike are realising that the marketing rules are being rewritten.

Increasingly, online retailers are examining the use of 'affiliate' marketing programmes to improve their ability to generate revenue. Affiliate programmes theoretically increase the effectiveness of every marketing pound spent and offer transparent and quantifiable results.

In a study of established online retailers' marketing methods, US analyst firm Forrester Research concluded that affiliate marketing was the most effective technique - and the least used. By contrast, banner advertising was the 12th most effective method, but by far the most common.

"The network-based selling model is becoming an increasingly popular means of generating sales online and is central to doing business on the Web," says Heidi Messer, president and co-founder of affiliate marketing specialist LinkShare.

"Merchants are realising that customer acquisition costs associated with this model are generally lower than with more traditional methods, such as paying straight CPM [cost per thousand of audience delivered] prices for banner ads, and can be determined with exact precision," she adds.

"As the cost of acquiring a customer continues to decrease, merchants are experiencing a significant return on investment because there is a growing propensity for that customer to buy from that merchant again." There are two sides to an affiliate programme: the affiliates and the merchants. An affiliate is any site which has traffic that can be converted to sales by providing links to suitable sites where products and services can be bought. A merchant is a site which offers a product or service.

An affiliate programme allows affiliates to increase their revenues by linking up with online retailers that sell relevant products or services in return for a commission based on sales, registrations or page views. And it allows a merchant to increase sales by creating distribution channels consisting of other Web sites with natural affinities. The new distribution channels agree to publicise merchants' products and steer customers who visit their sites to the merchants' online catalogue.

The distribution channel partnerships between affiliates and merchants are known as an affiliate network. An example would be an online wine merchant partnering with affiliate sites dedicated to (but not selling) wine - the site of a wine tasting club perhaps. Affiliate sites effectively form a network for the wine merchant, promoting its products in return for a cut of any online revenue generated as a result.

"From the merchant's perspective, the issue is how to attract traffic to their site," explains Jonty Kelt, business development manager of affiliate marketing firm MagicButton. "People go on the Internet for entertainment and information. Affiliate programmes help take those people and drive them to the merchant sites.

"It's also highly cost-effective for merchants because it's pay-for-performance marketing. The banner ad spend has increased exponentially. Merchants pay commission only when a sale is made, so that reduces the cost. They pay when they get results, not before."

All of which sounds irresistible, but to date few online firms have put affiliate schemes in place. Perhaps the best-known example is online bookseller Amazon.com, which effectively pioneered the concept in 1996 by partnering with related sites to sell on other sites.

An estimated 400 affiliate Web sites now carry the Amazon buttons. The company has set up a special section of its home page for its associate programme to make it easy for new affiliates to complete online registration. While the company does not offer detailed financial information, anecdotal evidence suggests that as much as 40% of Amazon's business comes from its affiliate network.

Others are now following this example, most recently Dell Computer, which set up its own affiliate programme last year.

Instead of trying to manage the programme itself, Dell has signed up with LinkShare, which automates the affiliate process using its own network of contacts.

LinkShare, which claims to have 65,000 member sites, will help Dell target sites with technology, home and family, and small-business content, among others. Shortly after launching its US programme, Dell expanded its relationship with LinkShare to manage an affiliate programme for Gigabuys.com, Dell's online superstore for software, accessories and peripherals.

Members who generate leads for Dell are paid through LinkShare. Affiliates are either paid per ad 'impression' or click-throughs, as they are commonly called, or receive a percentage of each sale. That percentage is determined by Dell and can vary according to the amount and quality of leads generated.

However, Internet venture capitalist Thomas Hoegh - backer of Lastminute.com among others - cautions Internet ventures about over-enthusiasm for click-throughs as business and revenue generators. Hoegh urges businesses to establish partnerships that will offer users content rather than adverts.

Jupiter Communications, a New York-based new-media consultancy, predicts that the number of online retailers considering investing in affiliate networks will soar as the current trend for using portals to grab the attention of online consumers is seen as ineffective.

Although 92% of commerce players surveyed believed that portal tenancy deals helped them drive sales or transactions, over two-thirds attributed less than 30% of their online sales directly to portal deals. As the online purchasing population reaches 50% in 2001, portals also need to work out how to keep customers. Jupiter conducted a recent study of e-commerce players. This forecast that, while the majority already had a portal partnership or were considering entering into one, online commerce driven directly by the primary portals would grow only slightly from 18% in 1999 to 20% in 2002.

Accordingly, Jupiter recommends online retailers develop a diversified distribution strategy that leans less on portals and more on affinity sites and affiliate programmes. This will let them target fewer but more qualified customers.

MagicButton's Kelt endorsed the Jupiter recommendations. "I would certainly agree that sites will become much more specialised," he said. "People go to Web sites for specific information. By their very nature, portals are full of lots and lots of generic information.

"No portal will ever have the specialised information of a Web site. That said, there's nothing to stop us working with portals to drive traffic through them to commerce sites."

But for those companies with affiliate programmes in place, the returns on investment appear to be significant. Forrester Research interviewed 50 retailers running programmes for at least three months. The retailers had an average of 10,270 affiliates generating 13% of their total online revenues.

According to the study, outbound e-mail was the only marketing tool that retailers considered more profitable than affiliate schemes.

But outbound e-mail takes companies into the dreaded area of spamming, whereby potential purchasers' mail boxes get clogged up with unsolicited e-mails.

Advocates of the e-mail approach argue it is an effective tool because adverts can be personalised and a customer's preferences tracked. It is also clearly more cost-effective than having to snail-mail out catalogues or other paper-based marketing material. By 2004, Forrester estimates that online marketers will be sending over 200 billion e-mails.

There are, however, a number of issues that may cause online retailers to hesitate before embarking on an affiliate programme - most notably the 80/20 rule.

Companies polled by Forrester reported that 80% of their sales were coming from 20% of their affiliate sites. This in turn can lead to serious management problems. Retailers know they need partnerships with as many affiliates as possible, but the majority assign at most two people to work on setting these relationships up. Jupiter comes up with similar figures. According to one of its surveys, 15% of affiliates drive 85% of affiliate sales.

It recommends that commerce players reserve most of their affiliate programme staff for top-performing affiliates and automate rather than cut the vast bulk of affiliates that produce little of a firm's total sales revenue. Several companies, including BeFree and LinkShare, provide turnkey solutions to make the process even simpler.

MagicButton is the latest of these firms and the first to set up in Europe in partnership with iMediation. Since its launch earlier this year, the company has signed up a number of companies to affiliate programmes, including MoonPig.com, CarSource.co.uk, Bluesquare.com, Fatface.co.uk and GetMapping.com.

iMediation's iChannel technology gives MagicButton merchant partners complete control over e-commerce pricing, branding, commissions, payment terms and performance.

These merchants will experience a growth in traffic, sales and profits as a result of improved promotion of their products by affiliates. MagicButton affiliates benefit because they can provide their customers with links to relevant, captivating products and earn commissions for doing so.

One of the earliest merchants to sign up for the joint offering was UK online clothing store Fatface. It offers a 'significant level of commission' to relevant online affiliates, such as skiing sites and general online shopping portals, in return for directing customers to the Fatface site.

Fatface can choose whether to pay percentage commissions on purchases or per-unit commissions on registrations or page views.

Fatface follows the traditional - if such a term can be used in this area - approach to affiliate marketing. It is an online retailer selling a product and typically passing on a cut to MagicButton or its affiliates when sales are made.

But Kelt reports that another group is emerging which is making use of affiliate marketing but not paying each time an easily identifiable transaction takes place. These are companies looking for leads - organisations such as banks, building societies and estate agents. Such companies will pay their commission when the visitor to their site registers with them.

Kelt cites the www.Foxtons.co.uk site as an early example of this in practice: "While we expect about 80% of our business to come from companies selling things, there will be others interested in affiliate programmes in order to generate leads for new business. We expect to see this area grow."

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