September 30, 2003, 12:00 AM

The balancing act in affiliate management

As affiliate networks have grown--some to tens of thousands of sites—retailers find that managing their burgeoning relationships requires either in-house staffing or outside expertise—or both.

It’s been a banner year for Hempstead, Md.-based Jos. A Bank Clothiers Inc., direct marketer of classic men’s apparel. In August, the company reported earnings for the first half of fiscal 2003 rose 50% over last year on net income that jumped 56% to $4.2 million. Helping to support that healthy growth is an organization that runs lean. A $200 million-plus multi-channel retailer, Bank operates with a marketing staff of only four people.

That doesn’t leave a lot of extra time for Pete Zophy, divisional vice president of e-commerce, to personally manage Bank’s online affiliate program, so he’s set up a working relationship with Performics Inc. in which the affiliate service provider does what Bank doesn’t have staff to do. The provider identifies, recruits, and manages Bank’s affiliates, including performance tracking and payment processing, and sends weekly or even daily performance reports when needed to Zophy. Zophy also has periodic longer strategy sessions with Performics including a monthly session that looks at performance on sales goals and future opportunities.

As is frequently the case with affiliate programs, about 10% of the affiliates produce 90% of the program’s sales. The affiliate provider works on program opportunities with top affiliates on Bank’s behalf. Finding, recruiting and fostering relationships with the affiliates that most fit Bank’s needs has helped affiliate sales grow steadily as a percentage of online sales at Bank, Zophy says.

“I spend a couple of hours every day on the affiliate program,” he says. Bank’s affiliate program thrives under the arrangement. At 10% to 20% of total online sales and growing, it’s a key part of the engine that’s driving growth.

A different approach

Meanwhile, across the country in Salt Lake City, Overstock.com Inc. gets similar results, but under a very different strategy. Affiliate sales at the online-only Overstock are between 15% and 18% of total sales. Overstock looks to affiliate services provider LinkShare Corp. for access to a large pool of affiliates and for tracking, reports, and support on demand, but it otherwise maintains tight control of its affiliate program in-house, with a dedicated full-time staff of four.

Such in-house, hands-on management of the affiliate program works best for Overstock given the specific nature of its business, says CTO and vice president of sales and marketing Shawn Schwegman. “Our inventory changes very dynamically,” Schwegman says. “We add about 2,500 products every week or two and half the inventory purchases we make are one-shot deals. Because our product basis changes so quickly, we have to be very careful in our communication to our affiliates. It’s a lot easier to manage that in-house than train an outsourced affiliate manager to do it.” Under this system, Overstock’s affiliate program thrives, too: revenue has increased fivefold in the past year, Schwegman says.

Affiliate programs are one of online marketing’s most popular tactics. This year’s National Retail Federation’s Shop.org State of Online Retailing study with Forrester Research reports that 55% of online marketers have affiliate programs, a number topped only by the 71% who use e-mail marketing and 62% who use paid search. 99% of those affiliate programs rate them as effective.

Yet as affiliate programs have become larger and more complex, running programs becomes increasingly challenging. As online merchants sift through the choices offered up in the various pitches of service providers, they’re seeking the most effective way to staff and manage their affiliate programs. They’re evaluating whether the biggest affiliate program will necessarily be the most successful for them, weighing the benefits of keeping management of the program in-house with the cost of staffing up internally to do so, and balancing the trade-off between outsourcing a bigger chunk of program management to affiliate network providers to lessen demand on in-house staff and accepting some loss of program control as a result. They’re struggling with issues such as how to screen affiliates who want to sign on, how to compensate program managers to get the best performance and how to conserve program spending by not paying to acquire the same customers multiple times.

Finding the resources

The approaches taken by Jos. A. Bank and Overstock.com represent very different answers to some of those questions. In the end, it’s often a matter of internal resources that most drives a company’s choice, and success has produced strong adherents to different models of program management.

“We’d be able to have a little more control if we brought management in-house, but the only way I’d ever consider doing that is if we had additional staff,” Zophy says. “Working with Performics in this way is the best choice for us.” Schwegman is just as adamant about Overstock’s different experience. “Because our inventory is growing so fast and so dynamically, we’ve decided to manage it all in-house. And we’ve done so successfully,” he says. “We have increased our affiliate program revenue fivefold in the past year, and from what I understand, that’s pretty unheard of.”

Overstock.com did $92 million in sales last year, showing you don’t have to be one of the biggest to successfully manage an affiliate program in-house. Even smaller organizations willing to put in the time can manage affiliate programs in-house, as evidenced by ClubMom.com, an online membership program that offers special deals targeting mothers’ interests. It expects its 3 million members to grow to 10 million by the end of this year. Affiliate manager Shawn Collins manages the program internally with the help of an intern, using an affiliate management software program, My Affiliate Program, from KowaBunga Technologies rather than an affiliate network solutions provider such as LinkShare, Peformics or Valuclick Inc.’s BeFree.

To make it work, Collins puts in up to 60 hours a week at the office in addition to providing affiliates with contact information for e-mail and instant messaging, which he regularly checks and responds to via wireless on evenings and weekends. To keep the program manageable, Collins and ClubMom keep affiliates to fewer than 1,000.

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