A Merchant's Primer on Affiliate Programs

The genius of the Internet is in millions of computers freely networked together. To maximize the number of links in such a free network, one must offer an incentive: pay for the link, pay for the visit, or pay for the purchase. Amazon.com was one of the first to combine a commission on sales generated from links to its books with the placement of its brand image in tens of thousands of sites all over the world, exploiting a strategy unique to a networked marketplace.

It's a natural, so natural that Amazon.com makes it look easy. This kind of retail promotion promises to spread widely in the next few years. But setting up an affiliate network involves a great deal of work and considerable expense for merchants who would tap its power. Here are some of the issues involved.

Tracking Referrers

In a few hours a programmer can write a simple CGI script that can relate the referring URL to sales resulting from that link. Unfortunately, the task isn't that simple. Referral log files aren't accurate enough, so typically the URL link on the affiliate's site will contain the account name or number of the affiliate, which is passed to the merchant. In the URL below, for example, anything that follows the question mark is part of a query string, and passes an affiliate account number "wis308" to the merchant.

In the Amazon.com URL below, both the ISBN number of the book is given, as well as an affiliate account name "wilsoninternetse":

It is substantially more complex to take the visitor to a specific product, but that it where the greatest sale potential lies. A text link to a specific product within context on an affiliate's site is much more likely to result in a sale than a link to the front door of the same merchant's site. Only higher end affiliate program systems such as Be Free! are product specific and take the customer close to the point of sale. Most just take the visitor to a single page in the merchant's store.

Setting Up and Managing Affiliate Accounts

Being able to track referring orders that result from affiliates' links is only half the challenge. The key capability is to set up an efficient system that allows the merchant to handle a number of affiliate accounts. A system needs to facilitate:

1. Application by would-be affiliates,
2. Screening of applicants before accepting them (to make sure they won't embarrass you or embroil you in legal infractions),
3. Generating a unique URL for each affiliate to link to the merchant site,
4. Distribution of the URL and graphics they need to link to your site,
5. Tracking sales commissions due affiliates,
6. Reporting sales commissions to affiliates in a timely manner,
7. Paying commissions to affiliates, and
8. Helping affiliates learn how to maximize sales.

"Running an affiliate program is a big task," says Mark J. Welch, attorney and affiliate program consultant. "One in 10 or one in 20 affiliates will require some technical support for HTML programming. They will delete a bracket or make some mistake and then call you to help them fix it. They'll also call you to find out how much they've earned so far."

One of the important features of an affiliate system is reporting. Amazon provides weekly e-mail reports that show the number of visitors generated for each book an affiliate links to, and how many sales occurred for each book. The weekly e-mail also reports a running total of the affiliate's quarterly commissions to date. Such a weekly report is probably the bare minimum. A number of systems, such as ViaWeb 4.1, offer affiliates their own URL where they can check daily on their commissions. ShopSite Pro 3.3 sends the affiliate an e-mail whenever someone the affiliate referred makes a purchase, though no running sales total is available for the affiliate to refer to. Effective reporting reduces not only customer service time, but also provides the feedback and incentive to the affiliate necessary to increase sales.

Managing affiliate expectations may include discouraging generic sites below 10,000 visitors per month from signing up. Ten per cent of the affiliates will probably bring 90% of a merchant's sales. If one assumes a low 1% click-through rate and a 1% conversion rate (store visitors to actual sales), then only one affiliate visitor in 10,000 might make a purchase. "You don't want to provide support and technology to affiliates who even in the aggregate won't generate a great number of sales," says Welch.

Several companies are emerging as service bureaus to provide the entire affiliate tracking and reporting system. While they help a merchant facilitate all the important functions, they can charge a hefty set-up fee to customize their interface to the merchant's exact needs. In addition, the service bureau charges a continuing maintenance fee. Be Free! and LinkShare require a percentage of gross sales, while Gold Rush Tracking charges by the number of affiliates in the network.

Affiliate recruitment needs to be closely related to other aspects of a new online store. "Don't do aggressive recruiting of affiliates," says Welch, "until you know how much traffic your store will have. You don't want a million visitors the first day. You need to ramp up slowly and first work out the production and shipping problems which show up."

Affiliate Contract Provisions

All realistic retailers plan to spend a percentage of their gross on advertising. Retailers often entice customers in the door with "loss leaders." They understand that special sales are as much about gaining customers as selling product. Once the retailer has obtained a new customer, that customer has the potential of many purchases in the future. A good customer is worth a lot of revenue.

Some important questions for a merchant considering an affiliate program relate directly to marketing strategy:

• What is the potential annual value of a good customer?
• What is the cost of obtaining a customer in your online store?
• Do you plan an affiliate program as one arm or as the core strategy of your system to get customers?
• Do you plan to pay an affiliate each time the customer makes a purchase, or only the first time the affiliate brings the customer to your store?
• Do you have a sound strategy to make first-time buyers repeat customers?

We're about to go through a period in which there will be a great deal of competition for qualified affiliates -- not the affiliates who have a few hundred visitors a month, but the ones with tens and hundreds of thousands of visitors per month. Low volume sites won't make much money at all and will soon become discouraged, but the higher volume sites are vital to the merchant. You need to come up with a payment plan to offer these key affiliates enough to attract them, and to keep them loyal when competitors try to lure them away. Here some of the emerging payment models:

• A hefty commission (15% to 20%) if a sale results from a direct click to a product from the affiliate website. Amazon has 30,000+ affiliates that it pays up to 15% of the sale price. This system, however, has angered some of Amazon's affiliates. It doesn't seem fair that Amazon doesn't have to pay if a visitor ends up purchasing another book instead, since Amazon ends up with a paying customer from the visit. Nevertheless, Amazon offers a substantially higher commission than their competitors.
• A smaller commission (5% to 10%) on any sale made during a visit to the store from a link to the merchant site. This is the BarnesAndNoble.com strategy, currently paying an 8% commission, and the most common strategy being adopted. It is technologically easier to implement, and seems fairer to the affiliate.
• A smaller commission on any present or future sale made to a trackable customer whom an affiliate originally brought to the site. Some affiliate program software, such as WebGenie Site Sponsor, places a persistent cookie on the visitor's computer, so when a sale is finally made -- even after several visits -- the source of the referral can still be tracked. Spree.com has a sort of MLM plan that allows an affiliate to get a commission on future repeat sales by their referrals.
• A flat rate for bringing a new purchaser to the site, independent of the amount of purchase. While this is still a pay-per-purchase program, the next rung down the ladder which pays for any new visitor to the merchant site, regardless of whether they purchase or not, is called a pay-per-click system.

In addition to the amount of commission, contract provisions also need to detail how often payments will be made and what is the minimum payment. Amazon pays once per quarter on accounts with more than $100 in referral fees. A merchant doesn't want to spend time and energy writing hundreds of small checks.

It is extremely wise to have an attorney help you draft your agreement with affiliates, and to make the agreement as clear as possible. One lawsuit could ruin your whole day.

Branding

Part of the genius of Amazon's affiliate program was the appearance of their logo on thousands of affiliate sites, establishing their brand on the Web. Some affiliate programs require the affiliate to use a logo or banner supplied by the merchant; others are more lenient. Many affiliates like to include logos from established sites in order to enhance their own site image, so you'll want to make various logos, banners, and buttons available for affiliates' use.

Trust, Reporting, and Auditing

A key issue in the growing competition for affiliates is trust. How does the qualified affiliate know you won't underreport sales, or just fail to pay commissions when they are due? The most qualified affiliates are beginning to look critically at merchants' credibility, stability, and the fine print of the commission program.

We will probably see more and more third party firms emerge to bring integrity to the system. While Be Free! and LinkShare charge the merchant a percentage of sales, they also help affiliates trust the system, since Be Free! and LinkShare have a vested interest in not underreporting sales.

Developing a Network of Affiliates

The final piece is building a network that brings the merchant customers and increased sales month after month. "Recruiting the affiliate is not as hard as it ought to be," observes Welch. "Hundreds of people will sign up, but most won't do anything." Nevertheless, once you've got the bugs out of your affiliate and fulfillment systems, "build your network quickly," says Tom Gerace, president of Be Free! Inc. "The early investors sign up a lot of sites quickly and benefit."

"Merchants need to think in terms of exclusive arrangements," says James Marciano, president of Refer-It. You may want to require that an affiliate sign up with no other merchant who sells products that compete with yours. Or you may want to offer special perks to affiliates who sign exclusive agreements. (But be careful; you don't want to get into trouble like Microsoft.)

We're already seeing several companies emerging as matchmakers for affiliates and merchants seeking to meet. Refer-It offers a fast growing databases listing merchants that have set up referral programs. Soon such third-party sites may become an important asset to merchants seeking the right kind of affiliates. Other matchmakers are the affiliate program service bureaus. Since they already provide services to their client merchants, helping them to find qualified affiliates is in both their interests.

Now that we're seeing affiliate programs mushroom across the Net, expect to see a powerful impact on advertising models. James Marciano concludes, "The small business can't afford to spend a lot of money to pay for impressions, but they can afford to pay for results." In a pay-per-purchase model the interests of the affiliate and those of the merchant are aligned. Now the affiliate does whatever is needed will help the merchant sell products better, since he gets a piece of the pie -- and at a fraction of the cost of a CPM (cost per thousand "impressions") advertising model.

Individuals and companies mentioned in this article: