Performance based marketing
Eens even kijken wat Forrester Research een paar jaar geleden ook al weer zei: “83 percent of (online advertising) spending by 2003 will be pure cost-per-action deals or a hybrid of CPM and performance.”
Performance based marketing enables the marketer to promote a product or service on other people?s web sites but to only pay when the advertisement initiates an action.
The ability to directly measure the results of Internet marketing has transformed marketing models. Ever since 1905 when John Wannamaker, the founder of WalMart, lamented, “I know that half of my advertising dollars are wasted, I just don’t know which half,” it has been the merchants dream to make advertising accountable. Nearly 100 years later, Internet technology, with its ability to track advertising all the way to the sale, has enabled a marketing model that makes this possible.
On the Internet, marketers know which advertising works, and which doesn’t. Banner advertising doesn’t work, it has low click-thru rates (often less than 0.5%). Until recently online advertising was a buyer’s market with about 80 percent of inventory unsold. Now smart marketers pay only for advertising that provides a positive return on investment. Publishers, who can also measure the effectiveness of advertising demand the true value of their audience.
Performance based advertising is defined as a partnership between a merchant and an owner of an audience (affiliate) that is based on the value of the customer.
Performance based marketing (a.k.a. affiliate marketing, partner marketing, associate and referral programs) enables the marketer to advertise people?s web sites but to only pay when the advertisement stimulates an action. This results based focus has created efficiencies in marketing, enabling the merchant to acquire customers at lower costs and the publisher to receive the real value of their audience.
The concept is simple. The merchant and publisher create a partnership that compensates the publisher if an advertisement stimulates an action. Compensation can be click-thru based (a fixed price is paid for each customer who clicks on the ad), lead based (for example, if the customer fills in a form to request more information), pay per sale or pay per recurring sale (a percentage of the lifetime value of the acquired customer). It’s all performance based, you simply pay upon results after securing a profitable transaction. Performance marketing allows you to ‘buy’ paying customers for your site.
“Fifty-seven percent of all online ad spending will flow to vertical sites and affiliate networks by 2004 as more retailers seek greater returns from their investments,” (Forrester Research.)
Lower Customer Acquisition Costs
Performance based marketing enables the merchant to target personalised, multimedia communication directly to the target market for free. There is no risk because advertising is not paid for up front. Success involves delivering a product that fits the needs of the audience of a website and transacting with the target market in a manner profitable to both parties. If this can be achieved the merchant has access to an unlimited number of transaction points along the web.
The cost of the advertising medium is zero. Merchants can advertise to as many customers as they want, if they can deliver an offer that buys the customer off their owners for a profitable commission. Ebusinesses are not constrained by marketing budgets. In fact a chief objective is to acquire as many customers as possible, in order to achieve critical mass. Increased market share means the company can invest more in delivering a product more effectively. The ability to deliver the product is the only constraint. If this can be achieved profitably using a partner distribution model, customers can be acquired at lightning speeds.(more)…
Increase Audience Value
With performance based advertising, the publisher gets the real value of their audience. They become proactive in their marketing because they get paid to do so. Advertising is placed directly in front of the audience. Response rates skyrocket because the mission of the website is not to just provide eyeballs for an advertisement, it is to stimulate a transaction with the target market. The structure of the publisher?s website will be focused on pushing the target market down an avenue which will lead to the most profitable transaction based on their needs.
Performance Based Marketing Models
Pay for performance has created new customer acquisition metrics including pay per click, pay per lead and pay per sale. These new metrics have been applied to new business models creating syndicated boutiques, commerce networks and elastic retailing.
Performance based marketing strategy execution requires the deployment of software to track and manage campaigns, an analysis of internal resources, and the right product fit. The parent principle applies (80% of sales generally come from 20% of affiliates). Create a real partnership with your affiliates with fair commissions, information sharing, and content syndication. Train your affiliates and manage them effectively.
The Decline of the Banner Advertising Industry
Unlike print advertising, online advertising can be tracked, and is therefore subject to real-time scrutiny when it comes to results. Banner advertising doesn’t provide the results marketers are looking for. Average click through rates are at an all time low (less than half a percent) and the majority of banner inventory goes unsold. Banner ad defenders try to justify low response rates by telling you that banners, even those that are not clicked on, invoke a positive effect on brand perception. Market research findings suggest that this is true. However, real branding is built through a series of customer experiences with the company and/or product. Flashing a company logo on irrelevant content is not nearly as powerful as the interactive, multimedia communication initiated at a corporate website. Marketers want traffic to their websites. Banner ads, with low response rates don’t achieve this objective.
“Affiliate programs were designed to circumvent the shortcomings of ad banners, which had consistently failed to generate acceptable returns for the advertiser?s dollar. As website visitors tuned out banner ads, online advertisers decided to use affiliate programs to create more direct connections, from web-based content to relevant e-commerce opportunities. Website publishers realized that subscription-based content revenue models would not generate significant revenue from a population accustomed to ?free? TV and radio content. So they tested whether embedding links into their content offerings could generate a more substantial revenue stream via fees and/or sales commissions.” (Aberdeen Group)
“The problem with banner ad CPM is that it doesn’t provide enough accountability to advertisers. Clickthrough doesn’t provide enough accountability to publishers. Affiliate programs protect both,” says Brian Clarke from Radiation Software. Marketers don’t want to risk low response rates. Publishers don?t want to be paid an average of only a few cents for an ad to their audience. Instead smart marketers are partnering with each other and saying “you own my customers, I want to buy them from you, I will pay you what they are worth- a percentage of their lifetime value.”
Market Size and Growth
According to Forrester, “retailers value intermediaries. Seventy-four percent of retailers plan to renew their deals, which almost 50 percent characterize as very valuable. Portals and affiliate programs perform the best. They drive 34 percent of sales, while niche content sites and comparison-shopping engines muster 12 percent.”
According to findings in a January 2001 Forrester report, “Online Advertising Eclipsed,” 83 percent of spending by 2003 will be pure cost-per-action deals or a hybrid of CPM and performance. This will be up from 62 percent in 2000. The Interactive Advertising Bureau (IAB) estimated models for Internet advertising hybrid deals accounted for 46% of spending, CPMs or impression-based deals were at 44% and performance-based deals were at 10% (Q2 2000).
Last August, Forrester predicted that performance-based advertising would make up 50% of the revenue stream by 2003, up from 15% in 1999. In their report, “The Parting of the Portal Seas,” Forrester predicts that 57 percent of all online ad spending will flow to vertical sites and affiliate networks by 2004 as more retailers seek greater returns from their investments.
“There is a sea change underway in spending for online marketing,” said Charlene Li, senior analyst of Media & Entertainment Research at Forrester. “Companies love the visibility that AOL and Yahoo! deliver, but they need a much higher customer acquisition rate than these broad-based portals can offer. To realize some return from their Internet ad spending, retailers are demanding pay-for-performance deals that only vertical portals and affiliates can deliver. This is where the ad dollars will go over the next five years.”
LOW COST CUSTOMER ACQUISITION COSTS
Performance based advertising is simply one of the cheapest ways to acquire new customers. If a merchant can increase affiliate sales as a proportion of total online sales from just 10% to 20%, it can cut its sales and marketing expenses by 10%, according to Jupiter Communications.
eBay, the leading online auction site deployed their peformance marketing strategy in April 2000, paying affiliates a commission of $3 per registered user. Over the past year eBay has amassed over 20,000 partners. The strategy has been so successful that they launched a second affiliate program in March 2001. During its first weekend, eBay signed up nearly 3,000 partners. Six weeks later eBay had acquired over 12,000 partners. eBay’s affiliate program, which now pays $4 per registered user, generates an average 500,000-plus click-thrus per week. With an overall average cost per customer acquisition of $14, performance based marketing is 350% cheaper.
Defining Costs of Customer Acquisition
The key to performance based advertising is to define the targeted cost of acquisition for a new customer. This is based on the forecasted lifetime value of that customer (i.e. the forecasted profits of the customer over their time with the company). Once lifetime value has been determined it is relitively easy to determine a fair commission that the merchant can pay the publisher for a sale. Cost per action (CPA) can be calculated by looking at the conversion rates of the website. For example, if the targeted cost of customer acquisition is $20 and the conversion of leads gained from the submission of an online form is 10 percent, then commission per action would be $2 (20 multiplied by 10%).
Pay for Performance
Ever since 1905 when John Wannamaker, the founder of WalMart said, “I know that half of my advertising dollars are wasted, I just don’t know which half,” it has been the merchant’s dream to make advertising accountable. Nearly 100 years later Internet technology, with it?s ability to track advertising to the sale, has created a marketing model that makes this possible.
Advertisers no longer have to pay for intangibles like branding. They don?t even have to pay for impressions or click-thrus, so there’s no guesswork about whether or not a marketing program is working.
“The affiliates get a commission for any sale that is made on their site and the merchants get a low-cost sales channel, because they only have to pay for what sells, unlike with an ad campaign,” says Jim Lyle VP of operations at Be Free. “With affiliates, you pay for performance,’’ says Julie Wainwright former CEO of the on-line video retailer Reel.com. “You don’t pay upfront and then work to get performance. The return is phenomenal.’’ The affiliate program for Reel.com was so successful, that it “generated more revenue than any of our portal deals.’‘
Performance based advertising is a way by which sites can extend their audience reach and put marketing expenses on a variable instead of a fixed-cost basis explains Adele Morrissette of North Haven Partners. It provides business with access to an unlimited number of websites where they can transact with their target market.
Increase Audience Reach
Without the constraint of having to pay for advertising up front, Internet retailers now have the ability to access huge volumes of customers on an unlimited number of transactional points across the Internet. An affiliate sales channel can represent thousands of websites linking to, displaying and recommending your product and brand to your target market. “The power of a merchant-branded affiliate sales channel cannot be underestimated. You, as a merchant, are able to tap large targeted audiences on an unlimited number of sites. This translates into your products potentially reaching millions of transactional points across the Internet. No other medium has such a vast reach potential.”
“Merchants know that a hundred thousand locations are better than one, especially when those are in context with their products,” says Jim Lyle. And affiliates add value to their websites by providing content and products that fulfil their audience’s needs. Goto.com recruited over 35,000 affiliates in the first two months of their program. Their affiliates who agree to feature a Goto.com search box on their site get paid every time one of their users do a search. “It’s a relatively cheap source of traffic,’’ says Jeffrey Brewer, CEO of Goto.com. If the sites don’t generate any referrals, Goto doesn’t have to pay. And they get free branding. Mr. Brewer says many of their partners are small, sometimes non-commercial websites. He is happy that he can find a way that makes him less dependant on larger companies like AOL and Microsoft for his traffic.
Increase Response Rates
Performance based advertising has reversed the relationship between the buyer and seller of on-line advertising. The publisher who used to effectively lose income when somebody clicked on a banner advertisement (i.e. clicking on a banner would mean the customer would leave the site and therefore see less pages which means that less banner impressions would be served) now only generates income when the advertisement is successful.
“With banner ads, items are not placed in context, resulting in response rates that are half that of embedded affiliate links,” according to The Forrester Report, Syndicated Selling. However, with performance based advertising it is of benefit to the publisher to place the advertisements in the right context, otherwise no income will be generated. Because affiliates only receive compensation for referring qualified leads or sales, they are very proactive in their advertising. It is like having a sales representative at every website your customer visits.
Moreover, the publisher understands their audience more than anybody else. Smart publishers will pursue a strategy that focuses on understanding the individual needs of their audience in order to deliver a targeted personalised message to each individual or audience segment.
The information on the audience segment/ customer will be passed on to the merchant when an individual clicks on an ad and leaves the publishers site. By knowing which websites referred a visitor, the merchant can extrapolate information relating to the visitor’s preferences and needs. A simple example of this, is the customised entry pages that Preview Travel and The Sharper Image deliver to visitors referred from the PCWorld site. However, targeting will become more precise as publishers pinpoint information on their users and pass it on to merchants who put this information into a database, which is used to build customised web pages.
Increased audience reach and increased response rates translate directly into increased sales. To understand the effect on the bottom line, we will compare the figures for banner advertising and performance based advertising. Channel One has found that most large Internet retailers currently spend between $20 and $40 to acquire a new customer, an exorbitant amount compared with off-line retailers. This high cost is primarily a result of advertising on Internet portals like Yahoo, Excite and Lycos to develop brand name awareness.
Assuming every sale is a new customer, we will compare the acquisition costs for banner advertising versus a commission paid in the affiliate model. The average cost per thousand impressions for a targeted demographic buy is $30 and a higher than average click-thru rate of 1 percent is achieved with a 5 percent conversion rate (i.e., someone takes an action like buying your product) the cost of that new customer is $60.
Reel.com president Stuart Skorman revealed that they spend $30 for each new customer acquired through banner ads. That may not make sense at first, considering their average order is about $20 and not all profit. But this company understands the lifetime value of a customer. They’re willing to take the risk and lose a little upfront, knowing that repeat sales will result in eventual profitability.
When Reel.com acquires a new customer through their affiliate program, the average commission they pay out is 5% of the sale. At an average sale of $20, the commission is less than $1. This means that when they use the affiliate model instead of banner ads, Reel.com saves $29 on each new customer acquisition. Very good value for Reel.com, very bad value for the affiliate.
Create Competitive Barriers
With over 80% of banner advertising unsold, the market for performance based advertising is there for the taking. However, once publishers realise how the market has evolved they will fill 100% of their unsold inventory with performance based deals. It is important to develop and strengthen a relationship with a network of partners today. This will make it much more difficult for your competitors to get your partners to switch in the future.
INCREASE AUDIENCE VALUE
“We think the affiliate model is very valuable,” says Roy Satterthwaite an analyst at the Gartner Group. “Beyond CPM (cost per thousand advertising models), beyond tenancy agreements, we see affiliate models as win-win for both affiliates and merchants and increasingly easy to implement.”
Generate Advertising Revenue
Performance based advertising not only benefit the merchants. Many website content providers are integrating e-commerce strategies to generate revenues for their site. This is not surprising when you look at the banner advertising industry which pays on average $30 per thousand impressions. With 80 percent of banner advertising inventory going unsold (1999), and excess stock being sold for less than $5, it is very difficult to generate sustainable revenue from banner advertising.
Performance based advertising is extremely easy to implement. The publisher can sign up to a new program, set-up an account and place a few links on their web site in a matter of minutes. “I think the affiliate systems will be wildly successful,” says Ken Lim of CyberMedia Convergence Consulting. “The affiliator makes it easy. They handle the accounting and the coding.”
Pay for performance is quickly becoming the preferred method of ad pricing. According to the Interactive Advertising Bureau (IAB), almost half (46 percent) of the ad deals signed in 2Q 2000 were mixed CPM/pay-for-performance deals. What content publishers fail to realise is that pay-for-performance ad pricing might actually be their path to profitability.
With performance based advertising, publishers do not have to worry about selling their advertising. They do not have to invest their time and resources trying to sell banners in a market only to receive a few cents for each impression. One hundred per cent of their banner inventory can be a good as sold one hundred per cent of the time. “This is a recession-proof marketing channel,” says James Marciano, CEO of Refer-It.com. “When the economy tanks, the CEO cuts the marketing budget first. The sales budget doesn’t get cut”.
“Twelve months ago the Internet was all about driving traffic,” says Ken Brachfeld. “Now we know that few sites will make money solely on ad revenues. So the question becomes: How do we monitise traffic?”
In fact many large publishers have already integrated sales based tactics into their strategies. Time Warner sells CD’s from Atlantic Records and videos from Warner Brothers. Disney is offering travel reservations to visitors of it’s theme parks. “If you can be a profitable business based on ad sales, and then have a successful e-commerce platform on top, then you will have a robust, powerful business going forward,” says Scott Ehrlich, executive producer of News Corp.‘s NewsAmerica Digital Publishing.
Increase Response Rates
But response rates for banner advertising are at an all time low with average click through rates at less than 1%. “We are at the mercy of creative,” said Wenda Harris Millard of DoubleClick at Affiliate Marketing ?99 in New York. If the quality of the creative, the offer or the products are bad, the publisher will not receive commission on sales. Statements like this only emphasize the size of gap between banner advertising and the bottom line.
Performance based advertising ensures sales are made through advertising. Partnerships are not established if they are not beneficial to both parties. It?s a buyers market, the merchant is in a particularly strong position as a buyer in an industry with 500% more inventory than is sold. And the merchant for the first time has the ability to transfer the risk of making the sale to the publisher. The tables of risk will turn at the same time the publishers will demand the real value of their audience.
Anyway, publishers are not at the mercy of the creative. They don?t have to put any ads on their site that they don?t want. Instead of spending time trying to sell banners, they must actively research partnerships with businesses that have products complimentary to their audience needs.
Partnerships will be developed where the quality of the creative, the offer, the products, positioning and the commission rate will result in sales. If the creative is bad, the publisher may invest in improving it, because it is in his benefit to do so. This is a partnership whose focus is on selling products.
Get the Real value of your Audience
Even if the publisher manages to sell their banner inventory they are challenged to turn their traffic into someone else?s customers. Unlike offline advertising, there is tremendous pressure on banner advertising to provide quantifiable results. Therefore, it is necessary for the survival of many sites to prove that they can provide more than just eyeballs for their advertisements. “Your users must become my customers,” says Scott Heiferman of iTraffic, “I will pay you what they are worth to me.”
The earnings from performance based advertising can be very lucrative. In fact, it can be more lucrative than CPM advertising. To demonstrate, we will do the math for a fictitious on-line IT magazine. This magazine is a leading source of information for a subscriber base of 50,000 most of whom are IT managers and decision makers for the purchase of computer products.
Say, each of these subscribers read on average 25 pages per month with 2 banners per page, the total number of banner impressions sold would be 2,500,000. At an average of $30 per CPM assuming they sell 100% of their inventory their total monthly revenue would be $75,000.
Lets say the magazine realises its audience is worth more than 3 cents ($30 CPM) per banner advertisement. The target market is very valuable since they purchase on average $100,000 worth of products for their company per month. They read the magazine in order to find information to make purchase related decisions. Now, the audience will see 50 commission based advertisements and product reviews per month. Say 4% click on the advertisements and 5% of those who clicked were converted to a sale. At an average sale of $1,000 and at a commission of say 5% lets see the figures:
50 ads x 50,000 subscribers x 4% click-thru x 5% conversion rate x $1,000 average sale x 5% commission = $250,000. This is over 3 times the revenue that would be generated from a CPM based model.
And, if the publisher has deals to share customer information with the merchants, they can leverage this information to sell products to those customers on websites other than their own.
Increase the Value of your Audience
In addition to new revenue streams from merchants interested in selling their products to their site’s visitors, the operator can also offer increased value to its visitors. This is particularly important for specialised and niche-portal sites who own a pre-selected audience with common interests.
The key is to generate maximum value from your website traffic. If your audience is valuable, you will get paid a lot more than 3 cents ($30 per CPM) for each customer. The aim is to increase the value of your audience, to understand and fulfill their needs profitably. The first step is to identify your audience, this can be done the moment the customer enters the website. A cookie can be written into your user’s browser. This enables you to track everything they do, what paths they take through the website and what they purchase. The cookie can be used on partners’ websites in order to identify and serve the audience customised information. If you can link this cookie to personal information, you can disseminate personalised information. If you link to information based on the characteristics of your audience, you can disseminate personalised, customised information relating to their needs.
The aim is to increase the value of the audience by understanding their needs and filling those needs with as many products as they will buy. The relationship with the customer becomes very valuable. This is the reason why a company like Amazon.com was worth so much money before they ever made a profit. Amazon.com, the pioneer of affiliate programs, now has over 450,000 members. The program started in 1997, when a woman met CEO Jeff Bezos at a party and asked him if she could sell certain Amazon books directly from her web site. Her website helped people cope with the break up of a marriage. The books she wanted to sell would help ease the pain and provide comfort for her audience.
Amazon.com owns millions of customers who they intend to interact with and transact with for life. They stopped being in the business of books a long time ago when they realised the value of the information, the relationship and the opportunity to communicate and transact on a one to one basis with their customers.
Books tell a lot about a person. If somebody buys a travel book they can forecast where they are going, they know where they live from shipping information. This information can be used to market holidays, hotels, plane tickets, insurance, etc. If you buy a book about Adobe PhotoShop, they know you?re a graphic designer and a potential customer for computer hardware such as scanners, graphic design magazines, complementary software such as PhotoShop plug-ins and competing products such as Macromedia Fireworks. They can even estimate your salary range. Every time they come into contact with you, they can transact with you at the push of a button. This is because they have your credit card and shipping information from the last time you bought something from them. Every time you buy, they have more information that they can use to sell more products that fit your needs.
Build a relationship with your audience
The value of your customer cannot be underestimated. Everything must be done to strengthen the relationship and to keep the customer for life. Interaction should only take place when it is beneficial to both parties. It should be targeted. It should be customised. It should be personalised. Interact with your customer only when you know you can fulfill their needs. Then you will keep your customers for life. “One-to-one marketing is the Holy Grail of online advertising,” says Scott Heiferman, iTraffic. This does not include run of the network banners that have click through rates of 0.3%. As the owner of the audience learns more about the customer, better targeting will be achieved. The right message will be placed in front of the right customer, at the right time and response rates will rise dramatically.
And you don?t have to lose your audience to a click-through. Smart merchants are beginning to realise that nobody really likes their customers leaving their website. Performance based advertising allows merchants to push their products and information on to their partners? websites. The customer may only leave the site to fill in their credit card information and after they will be sent back again. However, as the market evolves it will become clear that a click-thru does not mean you lose your audience. A true performance based marketing partnership is a win-win relationship for both parties, sharing audiences, traffic, customers and information.
Performance based marketing campaigns, are not limited to commissions on sales. Depending on the product/website, the merchant may choose to pay a commission for each time the user completes a certain transaction. An example would be the generation of a sales lead by a user filling in a contact form. Affiliates may be paid by click-thru, each time they refer a user to the website. A hybrid model can be implemented based on a mix of cost per impression (which measures the value of branding) and cost per transaction (which measures the effect on the bottom line). (See Customer Acquisition Models for more detailed analysis.)
New performance based advertising models redefine the consumer selling model as relationships between online retail and media sites mature. According to a report by Forrester Research, retail and media firms will share ownership of traffic, revenue, merchandising, and content to drive revenue and increase brand awareness.
Forrester explains that these programs will evolve from one-size-fits-all links to one of three models: syndicated boutiques, commerce networks, or elastic retailers. “Commerce and content companies need each other more than ever,” said Jim Nail, senior analyst in New Media Research. “Today’s popular affiliate program structure will be replaced by what Forrester calls co-operative eCommerce, designed to satisfy increasing consumer demands for self-service, to diversify revenue streams, and to offer a shopping experience that will engender loyalty.”
Forrester believe syndicated boutiques, will replace links at the smaller content sites, which represent the majority of affiliate partners at present. Syndicated boutiques are co-branded microstores which are imported into the affiliates website. Merchants provide store building tools and automated merchandising to offer a small range of carefully selected, branded products that visitors can purchase without leaving the the affiliate’s website. These small niche sites can convert customers on the spot through affiliation with brand names and intercept new customers enabling the affiliates to strengthen the relationship with their audience.
Commerce networks are partnerships between media and merchant sites which create new buying opportunities by combining exclusive content with relevant product offers. When content generates interest, commerce networks deliver a one-click purchasing experience from a known and trusted merchant that delivers the product. Consumers value the efficiency of researching and purchasing in one session; increased consumer loyalty improves the bottom line for retailers and the deal structure for the content owner.
Elastic retailing evolves as merchants that target similar customer bases and offer complementary product lines create deep affiliations among themselves the way commerce networks link strong content to commerce. Merchants partner with complementary retailers to meet all their target customers’ needs for advice, recommendations, and products—thus stretching companies into adjacent categories. These partnerships allow retailers to successfully target individuals, and to integrate marketing and fulfilment efforts. In sharing the cost of promotion, retailers spend less on customer acquisition costs without changing their vertical economies of scale.
“Retailers need to have a plan in place once co-operative affiliation starts,” says Jim Nail. “Merchants must define their audience, identify their dream team list, and turn business development loose to sign deals.”
Merchants pay affiliates an average commission of 9.2 percent, according to a survey by Forrester Research. To recruit the best affiliates, some sites pay 20 percent or more. Many sites also have a tiered system that rewards top sellers. The online toy store eToys pays a 12.5 percent commission to personal web sites and 25 percent to commercial sites. Amazon books pays 15 percent, Dell PCs pays 1per cent. For financial services LendingTree pays up to $14 per qualified application and NextCard pays $20 per enrolled cardholder. At the moment, most affiliate programs pay 5 percent to 15 percent of gross referred sales, excluding shipping. Channel One predicts that commission rates will grow as the market understands the real value of a relationship with an audience and publishers understand that the importance of performance based advertising to their bottom line.
Performance based marketing strategy execution requires the deployment of software to track and manage campaigns. The software automates the creation of accounts for new partners and keeps track of the activities of the users they refer to the site. Once an account is created, the partner is provided with an account number which is used to track all transactions their users initiate. Partners can log on to their account on the merchant’s website and view reports such as how many users they referred and which products they bought. The reports can be imported into the merchant’s accounting system and they will pay their partners, usually on a monthly basis.
Setting up and maintaining a performance based marketing program is a major commitment of a merchant?s resources. It involves a substantial investment in both technology and people to run the program. It took TheLobsterNet.com over five months to implement its program. “It’s quite labour intensive,” says marketing director Phillip Rose. Keeping it running is a full time job for two people in a company of seven. It is important to consider the quality and quantity of your resources. Do you have the money and people necessary to execute an effective performance based advertising strategy? Will you be able to maintain your strategy and keep it running smoothly?
Performance based advertising is one of the cheapest ways to acquire new customers. For most industries, that is. Your product must be right for performance advertising. It must be profitable for partners to sell your product. You must sell a great product at a great price. If you cannot come up with a commission (based on lifetime customer sales) that benefits both you and your partners, don’t bother proceeding. There must be high traffic sites in existence that contain your target market and who will participate in your program. Performance based advertising must make sense for your product and industry. If you don?t see an immediate and obvious fit, you?re probably better off focusing your resources on a different element of the Internet marketing mix.
Performance based advertising enables the merchant to place his or her products on an unlimited number of transaction points along the network. However, each partner will require a different level of support. A large network of partners will be a significant drain on your resources. Therefore, your advertising will be most effective if it focuses on sites with the largest volumes of your customers. Nearly all your sales will come from a few select websites. “It’s the 80/20 rule: 80 percent of your sales come from 20 percent of your affiliates,” says Craig Palli of BeFree. Bill Lederer of Art.com says the ratio is more like 95 to 5. Your strategy should encourage only the most successful partners, the ones with websites that fits your product. It should be unattractive to those who just cost you time and money.
“Forty-two per cent of the survey’s respondents report that less than ten per cent of their affiliates have generated even a single impression. Twenty-one per cent of respondents report that figure as less than five per cent. Anyone still think mass affiliation is the way to go?” Affiliate Metrix’s debut, “2001 Merchant Report.”
Performance marketing enables publishers to generate real value from their customers. Channel One believes it will become the primary source revenue for publishers who once made their bread and butter from advertising. Their success will depend on the quality and execution of their marketing programs. Affiliates will be like your most sophisticated resellers, constantly analysing the market trying many different programs, measuring and controlling their profitability. You have to be competitive.
There is no room in the future market for merchants who cheat their affiliates by paying $1 per customer acquisition when the lifetime value is worth $50. “If you’re a referring site, you should be getting more money,” says Bill Lederer, “end of story.” He explains that the current market ratio is out of proportion and unfair. “In the long run, if affiliate programs are going to work, they must be more equitable.”
It is important to consider your affiliates as true partners not just cheap referring pawns in your strategy. Performance based advertising requires a more long-term commitment than traditional advertising. The lifetime value of your customer should be recognised and paid for accordingly. “It’s a function of how much they’ll buy from you over time,” Mr. Lederer said. “Look at your customer acquisition costs and ask yourself, what’s the biggest commission I can offer?” Then decide on the structure of the offer to make it the most appealing to your partners.
There are two types of commission models for performance based advertising. With a bounty fee, the partner receives a once off payment for the referral of a customer. The dollar value may be even higher than the value of the initial purchase; it is based on the lifetime value of the customer. This high dollar value stands out and is appealing to many website owners who would like to make fast cash from their audience.
The residual income model is more closely linked to the real value of the customer, since it pays the partner for every purchase they make not just the first. It provides less risk because the merchant does not have to gamble on the lifetime value of the customer. Art.com pays a commission of just 6% to their affiliates, but by tracking the customer relationship, they pay 6% on every purchase by a customer acquired through an affiliate. “You have to constantly ask, are they getting a fair share. We pay low commissions, but someone can go to your site, then buy six months later, and we pay you,” Lederer says. Channel One has found that when paying lifetime commissions, the best structure is a higher percentage for the initial sale, and a reduced percentage for later sales.
“The more you give, the more they’ll refer. Financial incentives are the ultimate motivator”. Mr. Lederer has found. Nearly half his new partners come from referrals from existing partners. Generous bounty fees or lifetime commissions are concrete proof that you consider your affiliate a true partner. True partners will develop their content and acquire their audience with your products in mind. They will transform the structure of their website to channel their audience down the avenues that contain the most profitable products. If your products provide the most profit for your affiliates, you will win.
An accounting system to track sales commissions must be established. Prompt payment is extremely important even if the partner only generates a small amount of commission. A weekly payment program may be too expensive. A quarterly payment program will not satisfy your affiliates. Channel One recommends that you pay your partners on a monthly basis, but only on commissions exceeding a reasonable minimum. Develop fair payment policies and pay your partners on a timely basis and you will keep them.
It is extremely important to address the issues of trust and credibility ahead of time. You must prove that you’re honest and financially stable. One of the most important ways to prove your honesty is how you handle commission reporting. Affiliates should be able to access their accounts in real-time using the web and be able to drill down to see detailed information on each referring sale. This information should be sent to your customer each month along with payment. The whole process should be 100% verifiable by the each partner within your network.
The basis of performance based marketing is a synergistic relationship between the vendor and the owner of the audience. A fundamental part of this relationship is the information that is acquired relating to the audience. Information is the key to Internet marketing, the key to targeting and the key to fulfilling the needs of the target market. The value of information increases exponentially as more information is acquired. Share information with your partners, share their personal information and allow them to link it to a cookie and their database. This is a fundamental prerequisite for . “Firms and their partners can lay the groundwork for dynamic collaboration by starting small with trusted partners to engage in basic information sharing,” according to Steven J. Kafka, research director at Forrester Research. “Dynamic collaboration will speed new products to market, streamline operations, and support high-quality, cost-effective service,” said Kafka.
You may require exclusivity in your product category in return for the “lifetime customer” commission, detailed customer information or a higher commission. By instituting a true partnership with lifetime and residual income or sharing information, you are making a serious commitment. It’s fair to ask for this commitment in return.
To form a synergistic relationship with your partner you must understand their needs. Most of your affiliates will be publishers, they acquire their audience by publishing high quality content on the web. Provide them with content for their website and you will have a true partner. Not only will they generate revenue from the sale of your products but they will add value to their site by publishing your content.
You will have to provide your partners with HTML code, graphics, logos, a how to manual… everything your partners need to set up their stores. There are two strategies currently taken for providing content for the publisher?s site. The first, is to provide the publishers with banners to drive traffic to the merchant?s site. The second is to provide the publishers with the product information needed to drive customers to the merchant?s order form. The second strategy makes more sense for the following reasons:
1. People ignore banners, less than one percent click on them.
2. Nobody really likes driving traffic away from their site, unless of course the traffic is heading towards an order form where the site owner will make a commission.
3. Providing high quality content enhances the affiliate’s site. It ties them in, it?s a lot easier to remove a banner than high quality pages about the product or service.
If branding is important, make the presence of your logos on your partner?s sites mandatory. Depending on how attractive your program is, you could require a substantial presence on your partners’ sites. However, never really take your partner?s customer off their website. Provide an easy return to their site if they go to yours. Actually, if you have instituted a partnership-oriented program, your partner should not mind totally losing that visitor to your site during this session. Long-term, it’s in his best interest, because his interest is your interest.
You should e-mail a weekly or monthly newsletter, which includes their commission report; special offers and information that will help them generate revenue for their business. Your partner is part of a team; you must make him feel like it. One of the most effective ways to build community is to set-up a forum or chat room so they can converse with each other online. This is also a very effective way of supporting your customers since they will support themselves. It is a good idea to have your forum strictly moderated with a member of your organisation checking, organising, replying to messages and keeping the conversation flowing. A web-based forum is also a very effective means of market research.
“Training of affiliates is one of the key success factors to a performance based advertising campaign,” says Declan Dunn, author of Winning at the Affiliate Game. Make your partners successful and you directly benefit.
You will need to figure out a way to screen applicants or have a clean and easy way to weed out troublesome, poor performing or potentially embarrassing affiliates. Tech support for your affiliates needs to be in place. You’ll be amazed at the mistakes they make.
Automate to the maximum. In a password-protected partners section of your website provide every conceivable piece of information that your partners could possibly want. It not only meets their needs, it cuts down on the time it takes to support your partners by answering questions and requests.
Finally, start slow. Use a test period to check all systems and ensure it is bug free. Find out what your partners need and build your network.
Great article. I believe that the clients will prefer moving to a results based model and that there is a big shift. Today everyone is looking for results.
The pay per call industry growth is a great example in this aspect.
Thanks for the read.
VP Business Development
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