Direct marketing on steroids

Now a surprising answer to where to spend that budget is emerging: online.

When selling on the web was taking off in 1998 and 1999, many believed that the best way to market was online. But because the web was a new medium with a limited number of users, such marketing failed to drive sales. And so many took to offline marketing in what became the well documented burning of cash on Super Bowl and other network TV ads. Many retailers who went that route are no longer in business. And their experience spooked enough other retailers that they’ve been spending marketing money cautiously since then—and demanding results.

But today, many are finding that what marketers thought was true a few years ago, finally is true today: A great way to drive sales to e-retailing sites and obtain new customers is through online marketing. Cataloger and web merchant Coldwater Creek, for instance, reports that a third of buyers coming through its extensive affiliate marketing program are new to Coldwater Creek. The affiliate program is so successful the company says it no longer relies on catalogs to drive web sales.

And Boston-based SmartBargains.com, an outgrowth of Gordon Brothers LLC, one of the largest and oldest retail liquidation companies in the country, attributes its tenfold growth in site visitors in just three months in large measure to affiliate marketing. “Our affiliate marketing program has provided the company with a substantial foundation of traffic and sales,” says President and CEO Carl Rosendorf. “In July 2001, one month before we launched the program, we had 400,000 unique visitors to our site. By October, we had 4 million visitors.”

Getting the URL out

Smart Bargains has a steady supply of high-end, brand-name merchandise at up to 80% off. At prices like that, the goods sell themselves; the only challenge is getting the retailer’s name and URL in front of the right online consumers. 18-month-old Smart Bargains, a pure-play, has no catalog or brick-and-mortar presence and does no offline marketing or advertising. Yet Rosendorf says the company expects to reach profitability in this, its second, year of operation, on a marketing budget that is 100% devoted to online efforts.

A number of factors have come together to make online marketing effective. Among them: the rise of a broader base of users who are becoming ever more sophisticated, a deeper understanding of how marketing works on the web and the measurability of results so marketing dollars can be targeted. And all of that has been distilled into the concept of pay-for-performance marketing.

“Our growth happened because of affiliate marketing and an aggressive e-mail program,” Rosendorf says. SmartBargains has contracted with Be Free Inc. to build and manage an online marketing program. “We use their tracking and reporting to help us determine the best sites, the best placements within the sites and what creative works best to maximize conversions for our affiliate partners and ourselves,” Rosendorf says.

Unlike blast-it-out brand advertising, pay-for-performance affiliate marketing, in which a retailer posts a promotion and a link from an affiliate partner’s site to the retailing site then pays the affiliate a commission on every sale or other designated action the link produces, leverages the Internet’s interactive capacities. It lets online sellers cast a wide net without overspending, paying to acquire new customers only when the customers click through a link to buy. It can bypass consumers unlikely to buy a retailer’s products to zero in on better prospects. And while affiliate marketing has been around for some time, it’s getting a new look from new customers and a bigger slice of the pie from old ones, sometimes at the expense of pricier tactics such as e-mail list rentals and fixed-cost portal deals.

“With many of our newer customers over the past 12 months, we’ve gotten a larger percentage of their marketing budget than we did two years ago, when they were spending money all over the place,” says Gordon Hoffstein, CEO of Be Free.

It’s all just marketing

Also fueling the gain in popularity is the fact that affiliate marketing companies are expanding to offer more services as merchants look to squeeze more accountability out of other online campaigns. Thus Be Free and other affiliate marketing providers within the past year have moved beyond simply tracking traffic and sales from linked sites into new areas such as the management and measurement of e-mail campaigns and search keywords. “I used to see companies that had specialists in e-mail, in affiliate marketing and in search,” says Stephen Messer, CEO of affiliate network LinkShare Corp. “Now, it’s all just marketing.”

The expanded services available at traditional affiliate services providers are a move to keep up with a fast-changing marketplace as retailers get more comfortable—and more aggressive—online. “XYZ Shoe Company does not tell us it wants an affiliate network, it says it wants customers,” Hoffstein says. “We tell them an affiliate network can do that, so can search optimization, so can e-mail marketing. If you end up getting customers for the merchant, they really don’t care what tools you are using.”

So to win a larger share of retailers’ marketing budgets, affiliate marketers are adding those tools and the ability to track their performance to their arsenals. Be Free’s retail clients can now use the company’s technology to track their e-mail campaign and portal deal results, which allows head-to-head comparisons on a common platform of how an e-mail campaign performs against a portal placement, for example.

Today, affiliate marketing is rising at the expense not only of other online advertising, but of offline tactics as well. “A few years ago, affiliate marketing was one of a whole variety of marketing programs retailers used, and many of them were offline—radio, TV, billboards, half a taxicab,” Hoffstein says. “But as money became tighter, we found a way to apply traditional marketing metrics online. In 2001, there was a big downturn in companies that sold online marketing venues that weren’t pay for performance. Yet our sales went up 18% that year.”

Be Free’s growth in the face of a down market underscores the major change in online marketing in the past 12 months: retailers want to track more than just affiliate marketing results.

That’s what drove outdoor gear retailer The Sportsman’s’ Guide Inc. to try out search management services from its affiliate marketing services provider Performics Inc. “I’m always game for new things,” says business development and Internet director Peter Jarnberg. “And the more I can be out there with a lineup that offers the potential of another pair of eyeballs to see and click on us, the more value I get.”

Closing the gap

Adding search management through Performics has driven a fourfold increase in the percentage of online business coming to Sportsmansguide.com through the affiliate services provider since it expanded into search optimization, Jarnberg says. In fact, search management is driving most of the growth across the company’s entire affiliate marketing program. While Sportsman’s Guide continues to do traditional affiliate marketing with Performics as well as another affiliate marketing provider, that tactic has produced only half the growth of search management services during the same period, he adds.

“Performics finds out for each search engine which of our keywords work best,” Jarnberg says. “It’s giving me a more optimal performance on search engine results than if I had to do it myself or hire a staff. By working with them, sales from search engine optimization has grown many times over as a percentage of our business.”

Performics’ search management services cover search optimization methods ranging from managing keywords to fit search engine algorithms to maintaining relationships with human search engine editors. And recently, it’s added securing paid keyword positions in search results and tracking their performance to the mix. The company actively sells the management of keywords with web search engine company Overture Services Inc. as part of its offering to online marketers.

Performics has developed technology that automates for clients the ongoing process of bidding for keywords at Overture, a dynamic process requiring constant monitoring and input as marketers bid competitively for top rights to popular keywords. The technology closes the bid gap up and down in a process similar to how consumers can automate bidding on eBay.

“If you see a big gap between the first bid and the second, you know that the bidder in the top place is overpaying for that word by whatever the spread is. Our automated bidding makes sure that the number one bid is only a penny over the second bid, and within the marketer’s cost parameters,” says Kate Bergin, vice president of marketing at Performics. “A lot of companies that manage their own keyword programs in-house can actively handle only 20 to 30 keywords, and they’re missing out on other opportunities. Because our technology automates management, we’ve found a sweet spot in handling between 500 and 1,000 words for clients.”

Jarnberg, who is just adding paid keyword management to search management services he buys from Performics, says that even without it, affiliate marketing is already a key contributor to Internet sales that rose to 27% of sales for the first quarter from 18% a year earlier. For 2001, annual sales for the company, which also has several catalogs, were $170 million, up from $155 million in 2000. Web sales were up by two-thirds—from $27.9 million to $45.9 million—while overall sales were up 10%.

As the experience of The Sportsman’s Guide and others shows, the past year has brought increased complexity as well as a broadening of performance-based opportunities available to marketers through affiliate marketing providers online.

“These days, even using the term affiliate marketing creates a perception of what we do that doesn’t tell the whole story,” Bergin says. “The traditional definition of the affiliate marketing model provides the marketer with a tool to get hooked up with various opportunities, meaning other web sites. But the traditional model doesn’t provide the service component that does those things for you. A marketer that signs up for the traditional model has to staff and manage back-end administration, payments to affiliates and more.”

Other priorities

Affiliate providers then moved toward more active management of those services, some for a monthly fee, others on a pay-for-performance basis. Performics, which has adopted the pay-for-performance model, offers those services as well as new tools like search management. “Most of our clients have other priorities and they’re not looking to set up a whole other back end to run this part of their marketing program,” Bergin says. “So we manage and implement backend administration including payment to affiliates.” Performics also handles prospecting and other duties on an increasing number of e-mail campaigns on behalf of clients. It now oversees distribution and tracks results on about 60 million to 70 million e-mails per month.

Though some online retailers are pushing the envelope to try new performance based tools and services now offered by affiliate marketing service providers, others are finding that they get plenty of mileage out of a more traditional model in which they themselves take a more active management role. Though he won’t disclose numbers, Handspring Inc. senior manager of customer acquisition Brook Lenox says his company’s affiliate marketing program with LinkShare has been successful and fits his program needs.

“What LinkShare does for us is provide infrastructure,” he says. “They have a simple, robust infrastructure that serves us well. We use it like an ASP. I can go in, see how sales are going. I’m able to message and pay our affiliates—all the things you need to do.” Since fall of 2000, when Handspring, a seller of handheld technology, signed up with LinkShare, payments to affiliates on sales have grown to represent 26% of Handspring’s quarterly online marketing budget, Lenox adds.

Liz Claiborne Inc.’s Elisabeth.com, which sells a Liz Claiborne plus-size brand available only online and in its own specialty retail stores, makes similar use of its affiliate program through Commission Junction Inc. The brand, which debuted online in November 2000, launched its affiliate marketing program with Commission Junction last spring and since then, sales have grown significantly, says Brad Lenz, vice president of e-commerce.

“Commission Junction is online and works pretty much as an ASP for us, versus software integration into our platform that would have been required by others,” Lenz says. “The web is a relatively new channel for us. Commission Junction gave us the opportunity to launch an affiliate marketing program at minimal cost upfront, both in terms of licensing the software and integrating it.”

Fast changes

And at Elisabeth.com, with both online marketing resources and staff time at a premium, that was a deal cincher. “Being in the fashion industry, a third of my online offering changes every month,” Lenz points out. “I have to devote a tremendous amount of resources to model shoots and copy and images that change frequently.”

Elisabeth.com marks down regular price products within 90 days and whatever doesn’t sell goes at 25% off to bargain affiliate marketing sites at the same time the premier sites are getting new regular-price items. “It’s a lot to manage,” Lenz says. “If I decide to launch a new technical functionality, it’s not like I have a lot of people sitting around waiting to do it. Before the people who drive the business are distracted from that focus by testing and launching new business software, I have to be pretty sure of how it’s going to produce a payback.” While Lenz’s marketing manger works closely with Commission Junction on strategies to find the right mix of affiliates, he looks to Commission Junction to handle and track affiliate marketing only; other services and vendors are in place to handle and track e-mail campaigns, portal deals and other online initiatives.

Commission Junction’s pay-for-performance program remains Elisabeth.com’s lowest-cost customer acquisition strategy among efforts that include portal deals, CPM deals and rental of e-mail lists, Lenz says. Since the company pays a percentage only on sales, pay-for-performance is no cost to Elisabeth.com as there’s no charge-through until there’s a sale—and a profit margin to take the percentage out of.

For many of the same reasons, computer manufacturer and direct seller Dell Computer Corp. is shifting more of its marketing budget to its p4p affiliate program through LinkShare. The LinkShare program has driven three to four times more traffic to Dell.com this year than last year, and as the result of sales from affiliates, Dell has spent a corresponding three to four times more on p4p affiliate marketing than it did last year. “It gets us new customers we might not get through other online and offline initiatives,” says Deborah de Freitas, senior online manager at Dell’s home systems unit. For example, affiliate sites include several loyalty or affinity-based sites that reward regular customers with points, deals or contributions to charitable causes. “This lets those customers buy Dell and still shop those sites. It gives them more ways to shop,” says de Freitas.

Retailers like Dell are seeing such increases because in addition to adding new tools and services, affiliate marketing service providers have simply gotten better at their core business. They’re better at matching retailers with affiliate sites, in some cases reducing the number of affiliate links, but improving conversions from the links that stay. “There was a time when people would talk about having tens of thousands of affiliates—they’d actually announce it in their quarterly calls,” says Be Free’s Hoffstein. “But how many of them were driving anything? Now we tell people not to turn down an affiliate if it fits their profile, but to go after those that are going to drive traffic.”

Knowing what works

To clue retailers in on those sites, affiliate marketing services are tapping into an ever-richer base of historical and demographic information as well as relationships with star affiliates in their networks that they’ve cultivated over the years. And after what is now, for some, years of experience, many retailers are able to bring to the table their own sense of which affiliates will work for them. For example, prior to his arrival at SmartBargains.com last June, CEO Rosendorf was executive vice president at Barnes & Noble’s BN.com, where he created the affiliate marketing program the company launched in 1997.

It’s often the case that experienced marketers know their customers better than any vendor, which points to the underlying secret of basic affiliate marketing online. Except for the technology platform, there’s little that’s new about it; it’s simply a form of direct marketing in another medium, and the same rules apply.

Like direct marketing, affiliate marketing is an iterative process in which merchants try something, measure results, and modify their actions accordingly. If they don’t hit the bull’s eye on the first try, they try different offers and different outlets.

One could argue that an affiliate site operates like a retailer’s catalog, a place to post offers. “So what’s the difference between the offer coming to me in a paper catalog or an e-mail and me going to an affiliate site and seeing the offer?” Hoffstein says. “I still need to measure and see what works, and then modify my behavior as a marketer based on that evidence. In a catalog or a store, that cycle might take months. Affiliate marketing does the same thing on steroids.”

At Internet speed, generations can turn over in as little as months. The first generation of affiliate marketing programs offered merchants the technology to blast their offers out in a little-differentiated cyberspace. The benefit was that unlike CPM advertising, it offered the first opportunity to track any results. The next generation narrowed the field with more active management that helped e-retailers better hit the target and lifted more of the load of back-end management off their shoulders. Now, affiliate marketing service providers are branching out into expanded services that drive new accountability from a broader array of online tactics.

And that means that just as Internet retailing is more about retailing and less about the Internet, online marketing will focus more on marketing and less on the fact that it takes place online. “We started as a traditional affiliate marketer but now we look at ourselves as more of a marketing platform,” Hoffstein says. “Affiliate marketing is just one of the tools we use. We put links in e-mails, we track portal deals and we do search optimization. At the end of the day, what we do is use the tools we’ve developed to help the merchant find the right customer and convert that traffic into sales.”

mary@verticalwebmedia.com