Where is the tipping point between DIY and hiring outside muscle?
By Mary Wagner
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.
Quality vs. quantity
“I’m bigger on quality over quantity,” says Collins. Though he concentrates
on a smaller top-producing group within that affiliate pool, he tries to have
at least some personal contact with every ClubMom affiliate. The payoff is in
affiliates’ loyalty, he believes. “There are those that run programs with better
offers out there, but we do offer top service and we help teach affiliates how
to succeed. So a lot of affiliates stay and promote our site out of loyalty,”
he says.
That also personally benefits Collins, who had performance incentives incorporated
into his compensation after he’d been with the program for a year. Collins estimates
that perhaps only a quarter of affiliate program managers have a program performance
element in their compensation structure, but it’s something he encourages companies
looking for affiliate program growth to consider. “If you achieve the numbers
that they’ve set, it makes it a lot more comfortable for the company to pay
the extra money,” he says.
In addition, he maintains, companies benefit from additional staff. “Companies
that manage their affiliate programs internally would be surprised to see how
much more could happen if they would just add one more person to the team,”
he says. “If they never dedicate the resources, they many never know how prosperous
their affiliate program could be.”
But staffing up isn’t always the answer. It was just such a dilemma as Collins
describes that recently led online apparel discount retailer ClassicCloseouts.com
to turn virtually all the day-to-day management of its affiliate program to
Commission Junction Inc. after a year and a half of trying to operate the program
internally.
“We had up to six people working in-house to run the affiliate program,” says
Daniel Greenberg, the company’s executive director. “We’ve hired seasoned Internet
professionals; we’ve hired qualified but untrained people and tried to train
them; we tried untrained people working under professionals. We couldn’t find
the proper set-up to justify the expenses we were incurring in that department.”
Managing breadth
The problem was that the strength of an affiliate program can also be its
greatest drawback: the breadth of advertising exposure that thousands of partner
sites can bring to a program, balanced against the cost of maintaining those
relationships. “We realized doing it in-house wasn’t going to be cost-effective
on our end because we couldn’t figure out a way to do that,” Greenberg says.
To solve the problem, ClassicCloseouts assigned that responsibility to Commission
Junction, whose affiliate network it already had been using under its earlier
efforts to manage the program in-house.
Under its new agreement, ClassicCloseouts has what Greenberg estimates is
40% of one affiliate manager’s time at Commission Junction and about 10% to
15% of as many as three others. Greenberg himself spends a few hours a week
overseeing the program and monitoring results, while his designer staff of three
and his programming staff of three are available to push banners, copy and other
creative elements through to Commission Junction or address affiliate integration
issues as needed.
Greenberg says it’s too soon to assess how much time the new arrangement,
barely two months old, will require of his programmers and designers. But he’s
prepared to hire extra capacity in those departments if program results justify
it.
Greenberg, who estimates that under the earlier arrangement affiliate sales
represented only about 5% of annual sales that are forecast at about $10 million
this year, would like to see that number increase to 20% or more. “It’s up to
Commission Junction to really go at it,” he says. “There’s really no limit.”
Overstock took a different tack to boost its affiliate program results, deciding
last year to pull most of the hands-on management of its affiliates in-house
and switching network providers. Since it added dedicated affiliate managers
and switched to LinkShare’s network, affiliate program revenues have soared.
Schwegman credits LinkShare with a large measure of the success of Overstock’s
affiliate program. “Because of the power of LinkShare’s network we are able
to acquire somewhere between 1,000 and 1,500 new affiliates per month. We now
have about 28,000 affiliates,” Schwegman says. LinkShare also tracks affiliate
transactions for Overstock and helps affiliate managers identify new business
opportunities.
But after also initially using complete program management services available
from LinkShare while it accustomed itself to the provider’s platform, Overstock
staffed up internally and resumed more of the day-to-day handling of its affiliate
program, with LinkShare’s ongoing support. Schwegman estimates that Overstock’s
affiliate program gets perhaps 50% of a dedicated rep’s time at LinkShare. In
addition to supplying regular reports and performance tracking, LinkShare takes
on such tasks as getting answers to questions not readily available from its
regular reports to Overstock. “If we get a bunch of golf gear, we need to find
some high-powered affiliates that skew toward golf equipment,” he says. “LinkShare
will help us identify a set of specific affiliates and work with us on those
leads.”
For the rest, Schwegman has segmented Overstock’s affiliate base into four
groups and assigned an in-house manager to each one. One affiliate manger handles
the top 100 accounts; another handles those affiliates that are technically
savvy and adept at integrating various product data feeds offered by Overstock;
one works with affiliates that are coupon and discount sites; while the fourth
handles the others. “We look at the affiliate channel as a sales channel, not
just an advertising and marketing channel,” Schwegman adds. “So we typically
pay lower salaries and higher commission.”
With nearly 30,000 affiliates through LinkShare, Overstock has made the decision
to save itself time by auto-approving all new affiliates. “There is no possible
way at the level we are now that we could manually approve every affiliate coming
in unless I doubled my staff. So when affiliates get auto-approved, the second
they generate any revenue or any significant traffic, we take a closer look
at them and decide which of our four groups they belong in,” he says.
Housecleaning
To keep its percentage of active affiliates—those who actually drive traffic
and sales—at its current rate of 22% to 23%, Overstock does regular housecleaning.
After an affiliate has been inactive for a set period, the company will e-mail
some suggestions on getting started and offer contact information at Overstock
for affiliates with questions. If Overstock does not receive a response in 30
days, it sends a second message. If it still has not received a response 90
days later, it removes that affiliate from its list.
Overstock also pays keen attention to the number of repeat customers it gets
from the same affiliates, responding to a concern shared by many program managers
about the risk of paying repeatedly for the same customer instead of adding
that customer directly to their own base. Schwegman says Overstock offers assistance
in driving new traffic to affiliates that are producing a high rate of repeat
customers.
“Any sale is a good sale, but if I’m giving up the profit on that sale every
single time and that customer develops no loyalty to Overstock, the lifetime
value of that customer is not as great at that of a customer that we acquire
through the affiliate program and then market to later directly,” he says. “It
depends on where the loyalty lies for the end user. We take that into account
when we negotiate terms with affiliates.”
Whether managed in-house or out of house, whether retailers use a full service
solution from a network provider or a software product suite to find solutions
for themselves, affiliate programs rank high among online marketers as a way
to seek out new customers.
But the early-on strategy of simply making links available and waiting to
see which affiliates put them up has proven about as effective as throwing darts
at a list of affiliate partners.
Online retailers today know a winning strategy takes more—more effort to find
the biggest or best fitting affiliate partners and more work to support them
and the program, whether they put in the time directly or arrange with a provider
to do so.
“There are a lot of different philosophies about how to make the magic happen,”
says Collins. “I’d just encourage people to do their due diligence before signing
on with anyone.” l
mary@verticalwebmedia.com
Experience counts—and you get what
you pay for
Retailers who contemplate hiring staff to take over responsibility for affiliate
programs vs. hiring a solutions provider may have more difficulty than they
expect finding qualified personnel at an affordable price, says Shawn Collins,
affiliate manager of ClubMom.com. For one thing, the discipline is new so experienced
managers are rare. For another, they cost. Collins says he’s seen affiliate
manager positions in major metropolitan areas listed for as little as $40,000
a year. “You’re not going to get a person who’s been in the industry for even
a year to work for that,” he says.
Collins cautions that the inexperienced manger can be almost as detrimental
to an affiliate program’s success as understaffing. “A mistake companies make
is to pluck a kid right out of college and tell him to run the affiliate program,”
he says. “If you get someone who doesn’t know what they are doing, or doesn’t
put in the time it takes, the program becomes stagnant.” Over time, Collins
says, he’s learned to identify high-producing affiliates by networking with
other managers, attending industry conferences and watching numerous industry
message boards.
Companies that retain management of their affiliate programs internally should
be prepared to ante up for job experience. “Companies are shooting themselves
in the foot if they are not willing to invest in an experienced person,” he
says. “Then they wonder why the model doesn’t work.”
