The Big Catch

With its 144-year history making and selling fly-fishing gear and other outdoor products, the Orvis Co. has learned a thing or two about where and how to hook new customers. So when the Manchester, Vt.-based company set out in 1998 to lure more shoppers to its first foray on the Web, executives cast around for ways to apply to e-commerce the same principles that have made Orvis a $220 million annual success story.

That meant keeping the costs of acquiring new customers under strict control. “Coming from a catalog background, we went into e-commerce with the idea of maintaining our marketing approach,” says Joe Cassidy, the company’s direct marketing manager. “We weren’t going to spend dollars like a drunken sailor like some of the dot-coms trying to build brands and sales. We look for opportunities where our marketing costs will be a percentage of our sales, rather than our sales being a percentage of our marketing costs.”

Like thousands of online merchants facing the same challenge, Orvis turned to affiliate marketing, inviting content and commerce sites to create links to the Orvis site and share a percentage of the resulting sales. Orvis already had 600 wholesale accounts and set criteria for outlets carrying its products—enough know-how, it seemed, to start its own affiliate program a few months after the site launched. But that wasn’t enough. To move beyond known waters and fish the deeper seas of the entire Web for new connections, Orvis realized it needed help reeling in catches that counted. Potentially hundreds of sites—and their customers—knew next to nothing about Orvis, and Orvis knew next to nothing about them. “The Internet is such a busy medium,” says Orvis CEO Leigh “Perk” Perkins, “that even though Orvis has been around for 144 years, we’re just a speck out there.”

Since hiring Dynamic Trade, a Chicago-based outsourcer specializing in an emerging area known as performance marketing, the company has built its affiliate ranks to 300 since last June, including a number of aggregators representing hundreds of sites. Dynamic Trade has helped narrow the universe of potential affiliates to those making the most sense, puts Orvis merchandise in front of new shoppers, and manages the company’s affiliate relationships— “profitably,” according to Perkins.

The method, in marketing parlance, is contextual relevance. Take Orvis’ new affiliate deals with Shopmerrill.com, the shopping site of financial services firm Merrill Lynch. During fly-fishing season, Dynamic Trade saw a demographic matchup between Shopmerrill’s high-income visitors and a high-end rod sold by Orvis. Their resulting promotion drove “significant” sales, says Jeff Molander, Dynamic Trade’s vice president of marketing.

But contextual selling doesn’t just pay off with pricey goods. Dynamic Trade recently set up a cross-promotion between client Atyouroffice.com and affiliate Bargaindog.com, a discounter that uses e-mail to get the word out. Atyouroffice offered its customers free desk organizers with every purchase of already-discounted office supplies from Bargaindog. The result: a 22.5% conversion rate, far outpacing industry averages ranging from 2 to 8%. “Consumers see products and descriptions in a buy-it-now situation,” says Molander. “This goes way beyond a banner ad.”

Targeted promotions are the latest wrinkle in a simple concept pioneered by Amazon, CDnow and others: Web sites post an offer from a retail partner, along with a link to the retailer’s site for purchase. Whenever users click through and buy, the affiliate site collects a percentage of the sale, typically 5 to 20%.

Give me gravy

For many affiliates, the percentage is pure gravy—“found” revenue that costs them no more than a little cyber real estate. The upside for e-retailers is obvious, too: Like click-through banner ads, affiliate programs can turn a single point of sale into hundreds or thousands of transactions. But unlike advertising based on the traditional cost-per-thousand formula, marketing costs kick in only after sales are in the bag, and program’s results can be tracked. In other words, Orvis and other retailers pay nothing unless and until the sales roll in.

“For retailers, building affiliate networks is an extremely cost-effective way to acquire customers,” says Marissa Gluck, analyst with Jupiter Communications. “It’s low risk because they’re paying solely on revenue and not regardless of whether or not someone buys.” The win-win sounds good to an increasing number of e-retailers—and a legion of sites clamoring to sign up as affiliates. Some 2,000 affiliate programs have popped up since 1997, says consultant Declan Dunn, author of The Complete Insider’s Guide to Associate and Affiliate Programs. Earlier this spring, the first conference on Internet affiliate marketing, Affiliate Force 2000, drew 3,500 delegates to Miami Beach. And Forrester Research predicts that affiliate marketing, today generating an estimated 13% of e-retail sales, will drive more than 20% by 2003.

But Forrester’s predictions won’t come to pass without crossing over major speed bumps. Affiliate marketing might be low-risk and cost-effective, but it’s hardly problem-free. Managing affiliate relationships can be a labor-intensive proposition. Tracking, reporting and paying sales commissions; nudging poorly performing affiliates into action, and troubleshooting interface problems take loads of time. So does cherry-picking millions of Web sites, each a potential affiliate, for those most likely to deliver buyers.

Industry observers cite the so-called 20/80 rule of affiliate marketing: 20% of affiliates deliver 80% of affiliate sales. But some consultants say the ratio is even more lopsided, more in the neighborhood of 10/90. With nothing to lose and no qualifying hoops to jump through, Web sites eager for extra cash may sign up as affiliates with commerce sites unrelated to their content. Brand-protective retailers worry their links could wind up on sites peddling pornography or racist views.

But the greater likelihood is simply links that don’t produce. “I’ve seen affiliate links incompatible with the content,” adds Gluck, “and instances where site owners are going to join as many affiliate programs as they can, regardless of whether it makes sense for their content, on the off chance that someone’s going to click through and buy something. So you might have a site with content about Chihuahuas offering Metallica CDs. After all, the only thing required of the affiliate is registering and throwing up a link.”

Links that mean business

In fact, a successful affiliate program involves far more than putting up links. “You spend three months getting the software and the right merchandise together, and after six to nine months, you start seeing results,” says Dunn. “People ask me why every retailer doesn’t get an affiliate program. Well, it’s not a quickie. It takes some doing.”

If you’re Amazon, which reported some 430,000 associates in a recent filing with the Securities & Exchange Commission, you dedicate employees—lots of them—to oversee those relationships. But if you’re like most e-retailers, long on ambition and short on staff, you may find yourself looking to outsource.

Not surprisingly, a fast-growing roster of companies specializing in the care and feeding of performance-based affiliate programs has sprung up. BeFree, one of the first service bureaus on the scene, grew out of a case of Amazon-envy at rival Barnes & Noble. At the request of bn.com, systems consultants already working with the company on other projects developed technology that could host and manage an Amazon-like affiliate program, but on outside servers, and voila, a new company was born. Others including LinkShare, Commission Junction and Dynamic Trade soon followed, each adding its own spin to performance-based marketing solutions.

And efforts to squeeze the most out of affiliate marketing haven’t stopped at spawning a new category of vendors. Retailers are experimenting with models that go beyond simple click-through from content to commerce sites. Forrester prognosticators call the new wave of affiliate marketing “cooperative e-commerce” and predict it will evolve into entirely new models. Among them, niche content sites will band together as syndicated “boutiques” to command more attention and improve commissions. Top media brands will hook up with top merchants in exclusive deals to build community as a platform for driving sales.

Finally, merchants in non-competing categories will partner in cross-marketing agreements to target a common customer base with comple-mentary products. And if that’s the shape of things to come online, the future already is here. Last Christmas, eToys and GapKids paired up to refer shoppers to each other’s sites for discounted shopping. This spring, J. Crew ran an e-mail promotion for a Travelocity contest offering a free trip to St. Bart’s. (So why not pick up a few J. Crew T-shirts in case you end up winning?)

In March, WholePeople.com, launched as a spin-off of natural products grocer Whole Foods Market and RealGoods Trading Corp., a multi-channel marketer of renewable energy and sustainable living products. The spinoff, 78% owned by Whole Foods, also pulled in the Nature Conservancy, a group that acquires and preserves endangered wetlands and prairies, and WholeHealth MD, a company specializing in integrative medicine.

The common denominator is the customer. The so-called whole living market is a growing lifestyle segment whose members choose products based on their concerns about the effects on wildlife and the environment, among other criteria. It’s worth $280 billion and represents as much as a quarter of the U.S. population. With an existing customer base of 15 million already buying foods, Whole Foods Market saw an opportunity to expand into new offerings online—if it could change the perception that it sold only groceries. The resulting alliance with RealGoods and others is a soup-to-nuts offering of merchandise, services and content.

While the partners hash out their strategy and assemble the content to sell shoppers on the site and its merchandise, affiliate marketing is a vehicle that brings them there. WholeFoods.com, now shuttered, already worked with LinkShare to manage its 12,000 affiliates. Executives expect a similar number for WholePeople.com, which has been pulling in new affiliates at the rate of about 100 per week. Affiliates will pocket 11 to 20% of each sale they refer. As the site bulks up its merchandise lines, it’s moving away from its overlap with Whole Foods Market. By year’s end, only 15 to 20% of the SKUs sold in Whole Foods Markets also will be offered at WholePeople.

“In a lot of ways, we see ourselves as aggregators of high-quality products and services that in and of themselves might have trouble attracting a customer base cost-effectively,” says David Robinson, vice president of marketing at WholePeople.com.

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Partners and affiliates play distinct roles in the marketing mix, Robinson adds. “We see the affiliate program more as a customer acquisition tool and the partnerships as joint ventures built around content or products. Our goal for the affiliate program is to put out a number of ways the customer can find us. Once they find us, the partnerships are designed to create a more robust site by adding more offerings and the kind of expertise we want to offer in selected categories.”

Whole Foods was quick to seize on affiliate marketing both times it has launched Web sites, but others have moved more slowly. Eddie Bauer, online since 1996, is just now launching an affiliate program with the help of Dynamic Trade.

Why the wait? “Two reasons: resources and branding issues,” says Sally McKenzie, the retailer’s director of e-commerce. “Affiliate programs got started with the dot-com onlies. When you think about their position, that makes great sense, because they had a brand nobody had heard of and had to find all kinds of ways to spread brand awareness.”

But that’s not the case for Eddie Bauer. “Brand equity is first in what-ever we do,” says McKenzie. “We needed to make sure that we would be seen on sites congruous with our brand.” Resources were another issue. “If we got involved with a lot of smaller affiliate sites, it meant an enormous amount of paperwork and communications. So we looked to outsourcing.”

Once retailers launch a program, qualify affiliates, set up commission rates and create a payout system, yet another set of issues creeps up the to-do list. Increasing sales is good for both retailer and affiliate, but many affiliates have neither the knowledge nor the resources to sharpen up on page marketing—beyond simply putting up a link. To boost sales, online office supply merchant Staples.com groups its 30,000 affiliates into categories based on performance. Working with performance marketing services provider BeFree, it offers different support strategies for each.

“We implement very aggressive direct marketing programs to change affiliate behavior,” says Kelly Mahoney, chief marketing officer at Staples.com. “If we have a series of sites that aren’t activating [read: driving sales], we look for the incentives that will not only help them load the links, but we also try to create a sales engine that supports staples.com business. We’ve leveraged our relationship with BeFree for ideas to activate a percentage of the Web sites that have signed up for the program but aren’t generating sales.”

To boost affiliate sales, Staples.com recently began paying bonuses on top of commissions. The rates start at 4% for affiliates generating quarterly sales of up to $150,000 and rise to 10% for those hitting $1 million per quarter. Top-performers get perqs to help them sell, such as special communications and early notice about promotions.

Affiliates needing help to sell more aggressively can access a sales “tool kit,” a proprietary site with tips on how to place offers on the site, drive traffic, post links and more. As a result, staples.com’s year-old affiliate program added 12,000 members in the first quarter alone. And though Mahoney won’t say how much, she claims “significant increases” in the number of activated sites, revenue-producing sites, and revenue itself.

What’s clear is that winning programs are moving away from the one-size-fits-all approach that has worked for book and commodity sellers like Amazon and toward customized models. For Mahoney and many other online sellers, that’s the key lesson learned about pay-for-performance marketing over the past year. “The affiliate channel can generate enthusiasm among shoppers with special promotions and activities,” she says. “We’ve seen there are specific barriers with the affiliates in terms of loading links, hosting promotions and driving sales. But we’ve also seen that the more you look at your affiliate programs by segment—type of affiliate, age, technological capacity—and drive promotions that reflect their issues, the more success you’ll have.”

The matchmakers