July 30, 2003, 12:00 AM

Affiliate Marketing

Affiliate marketing partnerships are a major source of new customers—but retailers are taking a close look at the size of their networks.

Affiliate marketing has arrived, now driving an annual $14 billion in online sales, according to Forrester Research Inc. Overall, online conversions through affiliate programs rose 120% between Q4 2001 and Q4 2002, according to AffTrack, a company that tracks affiliate marketing results for its clients.

Online retailers have in the past boasted about the number of affiliates signed up to host links back to their sites. Except for the 44% of those polled recently by affiliate marketing resource Affiliatemanager.net that reported having fewer than 500 affiliates, the largest segment of online marketers surveyed, 13%, reported affiliate networks of 5,000 to 10,000. "There’s always value in adding top quality affiliates to a program," says Chris Henger, vice president of sales and marketing at affiliate and search marketing services provider Performics Inc. "But you can’t just put up this exchange and expect that they will come. You have go out and look for them."

Indeed, some e-retailers are now finding they can drive incremental gains from their existing affiliate marketing programs by being more selective about which affiliates they sign up. Some marketers are going narrow and deep rather than casting the net wide, believing that a smaller number of the right affiliates can deliver more results than a roster of hundreds or thousands of less qualified ones. In fact, 25% of marketers in the Affiliatemanager.net survey reported that they’d downsized their number of affiliates in the past year.

But being choosier can take different forms. Steve
Messer, CEO of affiliate marketing services provider LinkShare Corp., sees two concurrent trends in that arena. Some web site operators, seeking tighter control over their affiliate programs and protective of their brands, are focusing only on a smaller group of top-producing affiliates. Others are maintaining broader programs and adding more affiliates: still selective, but around a different strategy.

Arguments can be made for both approaches, but the right strategy for any retailer is one that links closely to individual business objectives, according to Messer. "An affiliate program should match overall corporate goals," he says. "A Buy.com, with its mass value proposition, for example, wants a lot of affiliates because it sells so many different things." Buy.com actually increased the number of online affiliate partners by 16% in last year`s last quarter, but with a specific strategy: it pursued affiliates defined by LinkShare, its affiliate services provider, as "core producers," that is, smaller affiliates with lower commission rates that could be depended on to produce a few sales each month. As a result, Buy.com saw a 37% sales lift in the quarter over a year earlier, while reducing its average cost per order by 22% over the previous year.

But Buy.com’s approach isn’t necessarily for everyone, notes Messer, adding that the number of outlets a retailer such as Buy.com wants to reach is much broader than, for instance, an American Express, which has a narrower value proposition and seeks a certain type of customer. Messer adds that some of the top-producing affiliates are top producers precisely because they have broad market propositions, such as coupons, rebates and points, which may be a consideration for brand marketers.

“There are reasons-such as transaction volume, reaching new customers and doing customer retention in a way that may be less expensive-to have superaffiliates that reach such a mass audience. But if you’re concerned about brand building, some may not be the place to do it. If I’m a big cataloger, for instance, I probably don’t want my brand to mean discount coupons," says Messer.

It’s an evolution from earlier thinking about affiliate marketing, when retailers’ initial drive was to get as many affiliates as possible. The rationale was that the affiliate model, in which affiliates link back to retailer sites and take a commission on any sale that results, was based on pay for performance, and was therefore a more cost-effective and accountable way of marketing online than simply tracking traffic or hits to a site. Since the marketer paid nothing unless a sale or other predetermined action occurred following click-through, why not let as many affiliates as possible host links?

“Affiliate marketing was presented as a relatively risk-free customer acquisition and marketing model,” but it’s not risk¯free, Rick McGrath, director of e-commerce partner development for auto parts manufacturer J.C. Whitney, recently told attendees at the Direct Marketing Association’s annual Catalog Conference. Affiliates are more-or less-effective marketing partners for e-retailers depending in part on how they present the retailer’s brand on their site and whether they are actually generating new customers or simply causing the retailer to pay for traffic it might already be getting.

Henger adds that huge affiliate programs may harbor buried costs not immediately apparent to marketers. “There are hidden costs associated with mass affiliation, not only loss of brand control and the possibility of your messaging being on properties you don’t want to be associated with, but customer service issues in trying to support such a large number of affiliates, even an increased risk of fraud," says Henger. "The less you know about partners and the less direct contact you have with them, the more susceptible you might be."

To find its clients the right partners, Performics has an active distributor recruitment program that brings new affiliate opportunities to retailers’ attention and then works to match those opportunities to the right retailers. “It’s very rare today that a web site will come into a network, sign up for a program and immediately start producing exorbitant sales,” Henger says. Performics tackles that challenge by matching its clients with affiliates in much the same way media plans are formed, using market research tools and demographic and psychographic information to gauge the client site’s characteristics and those of its users. Having determined a profile of the marketer, it then looks for affiliates that match the profile, both large and small.

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