In its second-largest acquisition, Amazon buys the company for $970 million.
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Pay for performance has grown in tandem with growing pressure on e-retailers to perform financially. “The rise of affiliate or pay-for-performance marketing is a function of what the marketplace was asking for,” says Jupiter’s Grahn. “When retailers came online a few years ago, the key was growth and growth was measured primarily by quantitative volume-we need X number of registered users by this date to get the next round of funding. So there was a time when programs were very focused on the acquisition of customers more than profitability. But now the market is asking for something else.”
And that’s sales and profits, not just traffic. As a result, the most common online marketing deal now is a hybrid that combines a front-loaded payment with performance incentives. For example, a retailer would pay a set amount on the assumption that the publishing site would deliver a certain number of visitors, with additional payment if they delivered more click-throughs. Additionally, retailers are making shorter-term deals and putting escape clauses that give them an easy exit if campaigns don’t perform.
Pure pay-for-performance advertising costs retailers even less: except for some integration costs, zero. So the shifting marketplace has been a boon for affiliate networks already using the pay-for-performance model, and they’re drawing in both pure-plays who advertise only online and need to do it inexpensively as well as multi-channel players seeking to expand online while keeping costs down. But today, the most effective affiliate or pay-for-performance programs go beyond simply blasting ads across the entire network to see what sticks.
“Affiliate networks need management,” says Forrester’s Nail. “Retailers need to know which affiliate sites and which offers are performing well and they need to figure out how to use the customer data they get to target customers. Most companies don’t really have the skill set or the technology in house to do that. The affiliate network providers do a lot of that analysis. It adds value, because you get more performance out of the campaigns when you know what you’re doing.”
Multi-channel retailers can up their online presence offline with such low-cost ploys as printing their URLs on bags, store receipts, or catalog pages. But as a largely pure-play e-retailer without those options, San Francisco-based Zappos.com must depend on online advertising to get out the word about its shoe and accessory site. At the same time, the 2-year old start-up has little on hand to pay for ad campaigns - and zero for campaigns that don’t work.
“We did a lot of different portal and CPM deals in the past, and we still do some of that,” says Zappos.com’s affiliate manager Brook Schaaf. “But a lot of them ended up having a very high customer acquisition cost. Not enough people saw the ads. So we’re pretty cautious with our advertising dollars these days.” A pay-for-performance campaign Zappos launched on affiliate network provider Commission Junction in February 2000 drove sales up by nearly 2,000% in its first eight months. Revenues driven through the program passed the six-figure mark in January, about a year after implementation. Zappos’ banner and text links have been posted by about 8,500 of Commission Junction’s 500,000-member affiliate network, with the text links driving sales four times as high as sales from click-throughs on banners, Schaaf notes. Zappos pays affiliates 15% of each sale, which is on the high end of the commissions scale.
Keep affiliate satisfied
Schaaf, who manages the Commission Junction program full-time, says that besides the sales commissions, Zappos’s only other cost has been a $1,000 set-up fee for integration. Schaaf acknowledges that 15% commission is high-the more typical rate is 4% to 7%. Zappos chooses to pay a higher commission, he says, “because we’re worried about the happiness of good affiliates.” Zappos is more dependent on the success of its online ad spending as it does limited spending offline. Keeping the affiliates happy is also why it chose to work with Commission Junction - the company lets affiliates check their compensation status online and gets the commission checks out monthly. “It’s been a good return on investment for us,” says Schaaf. “It gets us in places we want to be, at a price we can afford.”
That’s music to the ears of Commission Junction CEO and Founder Lex Sisney, who says the company has its roots in the frustration he experienced in a former career working for an online retailer of health and nutrition products. “I was frustrated trying to figure out how to get customers to the site cost effectively,” he says. “Buying banner ads and paying upfront wasn’t a very effective use of our marketing dollars, but there weren’t a lot of alternatives.”
And it wasn’t easy. When pay-for-performance marketing was just emerging, retailers were on their own-they had to build or buy the tracking technology, locate and recruit affiliates to take their ads, track the results, set up and administer an affiliate payment system, and provide customer service. Today, Commission Junction has a roster that includes some 500,000 affiliates. Online advertising services like Avenue A Inc. and DoubleClick Inc. also provide many of the same services surrounding pay-for-performance ad deals. And then there are other affiliate networks such as LinkShare Corp., Be Free Inc. and Performics.
Performics’ Bergin says the company has built onto its affiliate marketing base to help retailers and other customers target their outreach. In the same vein, Bergin notes that Performics has now branched out into search engine optimization. It’s one of the few affiliate networks to offer that service on a performance basis that triggers payments to affiliates when someone clicks through to complete a purchase or other predetermined action.
Women’s apparel retailer Chadwick’s of Boston has been in the catalog business since 1983, but online only more recently. With annual sales estimated at $500 million, the privately held company nevertheless keeps a tight watch on its ad spending to make sure it can stick with the 20% to 50% off store pricing that’s been a key driver of its success over the years. The company selected Performics as an affiliate marketing partner for the program it launched in December. Within the first six months, says Chadwick’s e-commerce manager Neal Patrick, Performics affiliates were delivering nearly 10% of the company’s online sales. Affiliates collect 7% of each sale.