Because many affiliates are independent entrepreneurs, and are paid only for performance, they’re constantly looking for an edge on their competition. Few rules govern behavior, and there aren’t any associations to police bad actors, but some of the larger affiliate networks like Commission Junction (http://www.CJ.com) and Performics (http://www.performics.com) have published codes of conduct. (See below for a link to Commission Junctions code and FAQ.) Commission Junction also provides affiliate training at its Commission Junction University every summer, as do Linkshare (http://www.linkshare.com/events/) and Google.

Another place to benefit from training and exposure to best practices is the Affiliate Summit (http://www.affilliatesummit.com), whose home page also serves as one of the few comprehensive indexes left of non-networked affiliate programs.

ReveNews.com used to maintain such a directory, but now serves as principally a blog on the subject.

Sometimes the best affiliates will find you, but you should always be on the lookout for synergy and relevant publishers who would be willing to refer traffic to your site or products for a bounty. Check the websites in your category or search for such links as “affiliate program” or “referral program.)

Publishers who aspire to be affiliates, and so add another revenue stream to their businesses, should expect to invest a substantial amount of effort in this activity and probably will need to employ someone just to manage this activity. Special status and benefits to participating in affiliate networks such as participation in Commission Junction’s “CJ Performer” program are reserved for publishers who are driving upwards of $10,000 a month in referred sales, for example.

Simply signing up for a CJ Marketplace account and taking advantage of the relevant opportunities afforded you is a good place to start.

How many affiliates should I have?

Consumer businesses can successfully manage hundreds of affiliates – so long as your affiliate is performing for you, and you’ve set the right compensation level to make it worth their while and yours – the more the merrier. But there is something to be said for the observation that “less is more.”

AffiliateBenchmark.com’s June 2008 study of 450 affiliates and advertisers (split roughly 2/3 to 1/3 in favor of affiliates), showed that the sweet spot maybe somewhere less than 25.

The same seems true for publishers that promote other products for referral fees rather than as paid advertising. Anything over 25 would seem to create clutter and draw attention away from your own products and services.  It’s for this reason that talented affiliates try to focus on better compensated programs and forget the rest.  There are “super affiliates” who manage very complex and productive programs, as we discussed yesterday, but they’re difficult to attract in the early stages of a business. Estimates vary, but there may only be 100-200 “super affiliates” in existence.

How should you compensate your affiliates?

Following are some common terms to help you describe your affiliate program in terms of the common metrics by which their effectiveness is measured.

 

AOV: Average order value. Calculated by dividing the total value of all purchases by the number of purchases over a given time period, average order value is a metric that may come in handy for measuring either how well individual affiliates are doing, or overall what your benchmark should be for your affiliate program.

 

CPA: Cost per action. If you’re the advertiser, you determine the “action” that is required for a commissionable event. It may be a sign-up for a webinar, a paid subscription, or even just signing up for a free newsletter. The cost or payout for each action should be a reflection of how valuable the action is to your business. You might choose to compensate a newsletter sign up which costs the customer nothing at one amount, and a paid subscription or trial at a higher value.

 

CPO: Cost per order. If the only thing that matters to you is an actual paid order, this is the action by which you’d compensate your affiliates.

 

CTR: Click through ratio. The number of ad impressions in a given campaign divided by the number of “click throughs” or times a customer clicked on an offer is a click-through ratio. Typically this number would only concern you if you were playing the role of an affiliate yourself, and having to buy your own advertising. To determine whether this tradeoff is profitable, you’d measure your ultimate cost per click or CPC against conversions, orders, or actions for which you’re compensated.

 

EPC: Average earnings per 100 clicks. Commission Junction introduced this metric, which: “demonstrates the ability of publishers and advertisers to convert clicks into commissions. The relative rating is calculated by taking commissions earned (or commissions paid) divided by the total number of clicks times 100. For publishers, an advertiser's EPC shows how well that advertiser converts traffic into actual sales or leads. For advertisers, a publisher's EPC shows how well that publisher sends relevant traffic to advertisers' sites.” Within Commission Junction’s member site rankings, EPC is calculated over 7-day and 3-month periods.

 

Pay-Per-Lead: A lead consists of contact information from a prospective customer. Typically, such a customer hasn’t purchased anything yet, but has expressed an active interest – even a specific preference – for a certain type of product. This kind of compensation is most common in the financial services industry where advertisers may pay $100 or more per lead when the product sought is a brokerage account or IRA (individual retirement account.) Typically this is expressed as a “qualified” lead, meaning the prospective customer’s contact information must be directly pertinent to the product the advertiser is marketing.

 

Pay-per-Sale: Typically a flat fee or percentage of sale paid to the affiliate for the actual purchase of a product or service.

 

ROAS: Return on advertising spending. Typically, marketers speak in terms of ROI or “return on investment” instead of this term, but it can be useful language when you’re trying to compare your returns from paid advertising with returns from your affiliate program, for example. ROAS refers to the dollar-for-dollar ratio of sales to your advertising expenditure. For your spending to be effective, this must always be a positive number greater than $1. (Every dollar spent on advertising should generate more than $1 in sales, or the ad source is either overpriced or ineffective.)

 

It’s hard to say which of these measures your own affiliate program should adopt – it depends on what brings the most value to your business. You might use a variety of compensation strategies, depending on how much you know about your customer retention rates and ancillary product purchases. Because the same amount of effort may go into marketing a $250 subscription fee as a $490 Kindle, you may be forced to compete for the best affiliates.

Typically, you might start by compensating an affiliate for 7 percent of the membership fee, or $X per subscription. You might make it more interesting and offer your affiliate the same percentage on renewals, meaning they’ll be paid two or three times for quality accounts. This can be highly motivating for affiliates who work hard for every sale and would probably welcome their own recurring revenue stream.

Or, affiliates who perform well might prefer more money up front, so they could earn a higher commission rate, say 10 percent or greater. As we said earlier, Amazon is paying 15 percent for Kindle sales, but it also recently halted its search marketing affiliate program, deciding it was more cost-savvy to manage SEM on its own.

If you’re in growth mode, and have a high renewal rate, or if your cost of fulfillment is quite low, you may consider even higher commission rates, but it’s important to constrain your payouts by revenue you’ve actually booked. If you have a money-back guarantee, for instance, you have to make sure the subscription “sticks” before you pay. Bonuses like trips or gadgets also can successfully motivate your best performers.

You may also find it worthwhile to meet up with affiliates and offer them access to your events or other programs, or scout for affiliates at conferences you attend.

Conversion rates really matter to affiliates, so whatever you can do to keep your conversion rates high will reflect well on your ability to attract productive affiliates. If an affiliate goes out and recruits a good lead and your site converts at 5 percent while another site converts at 10 percent, they’ll undoubtedly route their best leads to the higher converting Web site.

Beware Overcompensation

A final caution: The Atlas Institute in May of 2006 released a white paper called “The Hidden Cost of Pay-for-Performance Media.” In this study, it asserted:

“Duplicate conversion counts averaged 2.7 times higher (or 170%) than de-duplicated conversions. The lowest rate of duplication in the sample was 26% and the highest 379%. Conversion duplication translates into big dollars. By multiplying the duplicate conversions by the actual cost basis (i.e. CPA bounties) of each buy, we get an idea of the potential overpayment associated with duplicate conversions. The potential overpayment averaged $255,000 and ranged from $15,000 to almost one million dollars."

Since subscription or membership sites know exactly who their subscribers are, this is much less of a risk than it might be for a site that’s just paying for traffic, but it pays to run de-dupe reports just to make sure you’re not overpaying.

Interview: Chris Kramer, Media Director and Co-Founder, NETexponent, an online agency that focuses on the “cost per acquisition" end of the business.

Among NETexponent’s recurring revenue clients are Audible.com and Brittanica.com. NETexponent’s AffiliateBenchmarks.com – the source of the charts above – will be releasing a new study in the fall of 2009 that Kramer says will sample members of all the Web’s major affiliate networks.

Q: What is it that an agency like NETexponent can do for a sub site that they couldn’t do themselves?

A: There are a couple of things we do that are unique. We look to the long-term quality of a relationship and install a feedback loop to understand how the various acquisition channels stack up on retention rates and lifetime values. Working on a site-by-site basis, we are able to let sites know which affiliates deliver the better value. With these types of analytics, we’re able to adjust payout rates on an affiliate by affiliate basis.

Q: So a publisher wouldn’t necessarily pay all its affiliates the same?

A: No, it does vary. At the higher level, you have to watch what the drop-off rate may be for acquisitions from a given channel. If it’s low, you might be willing to pay one to two months worth of subscription fees as an up-front commission, then possibly a bonus on the back end for long-term retention. The New York Times can pay six times that amount because they have much stronger retention rates. But one to two months is a pretty safe benchmark for profitability. Retention is the lifeblood of this business, so you may even be willing to bonus on the back-end if an affiliate brings you quality subscribers.

Q: What other strategies do you employ to make your affiliations successful?

A: When we can get feedback from the client on which keywords are working we can devise a search marketing program that can be three times as profitable as more generic terms. For example, with Audible, if there’s a great audio book coming out, we may do much better on author names or book titles than with the word “free.” Everyone is looking for free or discounted products in this economy, but you have to adjust what you’re willing to pay for such words in terms of their falloff rates.

We’re fortunate with Audible in that a lot of the affiliates that work for the company do nothing but sell books for Audible through pay per click and organic search engine optimization. So, we share as much information with them as possible about what pockets of keywords are working for us. Another client that is extremely successful with its affiliates is the Financial Times. Another non-subscription client we work with has gone from not getting much payback from search at all to having that drive 20 percent to 30 percent of their business. We know we’re successful when the brand – for example Audible – is the top search term and Audible’s affiliates are third and fourth on a search return page.  Our goal is the highest number of orders at the cheapest price.

Q: Since you mention Audible; I signed up because of an add in the New York Subway. To what extent do you integrate offline campaigns and cost per acquisition?

A: We bought keywords around the subway campaigns, and some brand related ads, but to be honest we don’t always know about them. Whenever we can, we try to coordinate to keep the messaging and branding consistent. For example, a credit card company did a direct mail campaign, and we saw a huge influx of searches for which all our landing pages were prepared. You see a very positive incremental lift when you coordinate.

Q: I’ve heard that there’s a risk to becoming overly dependent on your affiliates – how might you tell that this is the case?

A: We like to see the affiliate channel maxed out. Because you know your product the best of anyone, you should always be the best at selling it. But we think affiliates should definitely be driving at least 10 percent to 20 percent of your total business sales volume. When it goes over thirty percent or more, you should probably be looking to see if you couldn’t be doing more to improve your own optimization, search marketing or email programs. Paid search ranks just above affiliate programs in terms of cost efficiency, and can drive another 10 percent to 20 percent. Obviously you want to spend the most money in the most efficient areas first.

Email is the next most effective channel, followed by display advertising, which is more expensive. There is some good data, though, that indicates that having a banner ad program can work with your search marketing to make search more effective. Offline catalogs and direct marketing round out most programs.

Q: What should a subscription site be spending on an affiliate marketing channel?

A: We rarely work with fixed budgets. If you decide that you’re willing to pay $100 per subscriber, because there’s a fixed pay-out for acquisitions, you can spend as much as you want and still maintain the same profit margin.

Q: How many affiliates would a subscription site typically have?

A: There are tens of thousands of affiliates out there, but only a couple of hundred of them drive the vast majority of client sales. These sites are very accomplished in their vertical. There are only 10 or so sites that consistently drive value for Audible. One of the best of our affiliates lately is one of the newest on the scene. The company is Vertive.com in Austin, TX, and their site is offers.com. They deal with a lot of book and subscription affiliate websites and they know how to drive organic and paid search.

Q: Can you offer any rule of thumb regarding how many click-throughs it takes to generate a registration?

A: That’s a huge challenge, because nobody is compensated on impressions. Even in paid search, we know how many impressions served, but we’re not paying on the impressions so not a huge concern. If you can get your click-through rate rate up, that increases total click volume. But how much volume you need to generate a sale has many more variables like how considered a purchase it is. 

~~

Kramer’s other tips:

1. I would rather drive a smaller number of higher quality customers and keep them spending more on my site than be forced to always acquire new customers with less loyalty.

2. Beware the “quick-hit” sites that offer free iPods or other gadgets. “There are a lot of sites who got really burned by these multi-tier marketers like Netflix which paid for customers who cancelled right away. Working with such sites still has a negative impact on subscription marketers today. I’d be extremely cautious about working with any incentive-based affiliates.”

3. Be sensitive to where you think your most efficient acquisition volume may be. “All our clients want more and more customers, but you have to keep an eye on your acquisition to retention ratio. If you don’t, you could burn through the market very quickly without growing your base.”

4. More than 35 percent of respondents in the AffiliateBenchmark.com survey couldn’t say what their conversion rate was for the category of goods and services they promote. Kramer said he thinks 2 percent to 5 percent is typical. But he cautions, there are few rating systems for affiliate performance. Commission Junction and Google do rank them; Linkshare does not. “There’s no real guide to the top performers as there is for ad servers and ad networks.”

5. Finding good B2B affiliates is definitely much harder than with B2C. There are fewer B2B affiliates to begin with; “the real successes come from B2C.” The B2B success stories mostly have to do with building sites that are very specific to that particular business, meaning they may also represent your competition.

6. Why the focus of so much paid search conversation centers on Google: Google gets 80 percent of all the transactions of all clients; yahoo, 15 percent; MSN, 4 percent and  everybody else, 1 percent.

Resources:

Commission Junction’s glossary http://www.cj.com/downloads/wbnr/affiliate_glossary.pdf and “Ten Tips: The top ten things you should focus on right now to improve the performance of your affiliate marketing program.” http://www.cj.com/downloads/wbnr/10_tips_for_success.pdf

Eric Wall’s site http://SEObook.com offers paid courses in search engine optimization, which is a key to being a good affiliate (“free” traffic is always a good thing). There’s plenty of free material to get you started.

AskMrVideo’s Affiliation Agreement (an example of what to include in your own affiliate contracts): http://www.askmrvideo.com/public/70.cfm

NETexponent’s site: http://blog.netexponent.com/ and AffiliateBenchmarks.com. Note that the latter will be updating its Affiiate research report this summer for release in early Fall.

Amazon’s affiliate program is a great way to learn the basics from one of the best: https://affiliate-program.amazon.com/

Information on how Google calculates your “quality score.” http://adwords.google.com/support/bin/answer.py?hl=en&answer=10215 . Your quality score ranking also can affect your rating as an affiliate. A Quality Score is calculated every time your keyword matches a search query – that is, every time your keyword has the potential to trigger an ad. Quality Score is used in several different ways, including:

    * influencing your keywords' actual cost-per-clicks (CPCs)

    * estimating the first page bids that you see in your account

    * determining if a keyword is eligible to enter the ad auction that occurs when a user enters a search query

    * affecting how high your ad will be ranked

In general, the higher your Quality Score, the lower your costs and the better your ad position.

Commission Junction’s Code of Conduct: http://www.cj.com/code_of_conduct.html, and Commission Junction University : http://www.cj.com/news/event_cju2009.html. CJ also provides a free, Web-based webinar called, “Is Affiliate Marketing Right for Your Business?”: http://www.cj.com/webinar/09/webinar090312_aff_mktg.html.

Affiliate Summit is the largest conference in the online affiliate industry, though many other affiliate networks host their own annual events. http://www.affiliatesummit.com/

Revenews.com: Informative blog about the affiliate marketing business. 

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