Andy Newlin works for Sierratradingpost.com, in Cheyenne, Wyoming. Sierra Trading Post is an ecommerce merchant that sells outdoor gear and clothing, and Newlin is its Online Marketing Manager. He oversees the affiliate marketing efforts of the site.
“Most any online merchant can utilize affiliate marketing,” says Newlin. “We’ve been using it for five years, and we are absolutely pleased with the results. It enables us to create partnerships with niche, high-traffic websites around the globe, and the results have been outstanding. We view these affiliate websites as strong business partners that together comprise a commission-only sales force. We have thousands of these affiliate partnerships.”
What is affiliate marketing?
Newlin’s analogy of a “commission-only sales force” may be the best way to describe affiliate marketing. Say a merchant, we’ll call her Sue, has an ecommerce site that sells gardening supplies. Say Sue’s friend, we’ll call him Bob, has a website that sells plant seeds. Sue strikes a deal with Bob. Sue asks him to place a banner ad on his site that promotes her gardening supplies. Bob does this, and links this banner ad to Sue’s site, and Sue pays Bob 20% of every sale that he generates from his customers who (a) click on the banner ad, and (b) purchase an item from her site. The arrangement makes sense because his visitors have an interest in plant seeds and she sells gardening supplies. It’s logical that folks interested in purchasing plant seeds may also be interesting in purchasing gardening supplies.
Sue could just as easily ask Bob to become an employee for her gardening supply company. She could hire Bob, and ask him to visit, for example, every landscape contractor in his town. She could pay him 20% of every sale he generates to these landscape contractors. Bob would be, in that example, a commission-only sales employee.
But Bob runs a website. He can still generate sales for Sue’s company, but he’ll use the visitors of his website to provide the sales. And Bob remains, pretty-much, a commissiononly sales person. He’s also Sue’s affiliate.
Andy Newlin’s employer, Sierra Trading Post, has thousands of affiliates similar to Bob.
Many facets of affiliate marketing
An industry has developed around affiliate marketing. It’s big business. There are companies, collectively called affiliate networks, that match merchants’ products with thousands of affiliates. These network companies also track commissions and pay the affiliates. There are companies who write software, known, simply, as affiliate marketing software, that track the commissions due to your direct (that is, outside of affiliate networks) affiliates. There are affiliate marketing trade shows. And there are affiliate marketing consultants.
Paul Colligan owns Theaffiliateguy.com, and consults with companies on their affiliate marketing efforts. “A merchant can’t participate half-heartedly in affiliate marketing and expect to be successful. It takes effort. A merchant must constantly monitor his affiliates to determine which are generating sales, which are not. He must vary the product offers to keep them fresh on the affiliates’ sites. He must monitor the placement of the offer on each affiliate’s site. He should eliminate offers that aren’t generating ‘click-throughs’ from the affiliates. Many merchants don’t do any of this, and they develop a bad taste for the process.”
Colligan believes that affiliate network companies can help. “Network companies bring a lot to the table,” says Colligan. “The obvious benefit is that they have a line-up of thousands of potential affiliates. I don’t know many ecommerce merchants who have time to run down this number of potential affiliates by themselves. But, the affiliate network companies also bring management expertise. They monitor affiliates to make sure the click-through rates are acceptable. They physically prepare the commission checks. They resolve disputes between affiliates and merchants. Those jobs alone could require several internal employees. And they advise on product offers, commissions, and new ideas.”
Affiliate networks themselves work on a commission basis. Most charge a fee ranging from 20% to 30% of the affiliate commission or a percentage of the gross sales an affiliate generates. That is, if a merchant pays his affiliates a 15% commission on sales, a network company would typically retain 20%- 30% of that 15%. Thus, for an affiliate commission of, say, $10 on a $100 sale, an affiliate network company would typically keep $2- $3 above what the affiliate is paid.
In addition to the transactional fees, many network companies charge a one-time, up-front fee to their merchants, ranging from a few hundred dollars up to $20,000 or more. For most network companies, affiliates sign up for free.
eCommerce companies as affiliates
Heidi Messer is President and COO of Linkshare.com, the first and one of the largest affiliate network companies. LinkShare’s customers include hundreds of online merchants (that is, the companies selling the products and paying the commissions) and hundreds of thousands affiliates. (Sierra Trading Post, Andy Newlin’s employer, is a merchant for LinkShare.) Messer believes that there’s great opportunity for smaller ecommerce companies to become affiliates of larger ones.
“We’ve seen smaller ecommerce firms grow very quickly after they join our network,” says Messer. “To do this, however, they need products with a popular appeal. And smaller ecommerce firms must realize that they are competing with some very large companies for the affiliates’ web space. Large merchants, such as Target, Avon, Overstock, Dell and Walmart, for example, have strong affiliate marketing programs. Smaller companies can pick and choose non-competing products that these larger merchants offer, and earn affiliate commissions from selling them. It’s an opportunity that many smaller ecommerce companies fail to develop.”
“For example,” says Messer. “We know of a company that sells steaks online who’s an affiliate of an online wine company. Buyers of the steaks subsequently see a confirmation page and on this page is the offer to purchase wine. The two products go together, and, since this offer is after the purchase, it doesn’t result in the steak customers leaving for the wine site until after they’ve made their purchase. Smaller ecommerce firms could become affiliates like this in any number of ways.”
Indeed, there are online companies whose total source of revenue is affiliate commissions. There’s FatWallet.com and FabulousSavings,com, both larger sites comprised entirely of offers from other merchants. There’s also Tony Beaudion.
Beaudion’s company, tnpsc.com, offers free screen saver and desktop-wallpaper downloads. But Beaudion’s real business is simply earning affiliate commissions. “We started in 1997 and learned as we went along,” says Beaudion. “People come to our site to download the free screensavers and the free wallpaper. About 1.0% of them will also click on an affiliate offer and about 1.0% of that 1.0% will actually buy something from the merchant. That 1% of 1% makes us a very nice living.”
Commission percentages paid by merchants to Commission percentages paid by merchants to affiliates vary. Typically, products with relatively higher prices receive smaller percentages, and, conversely, lowerpriced items receive higher percentages. Take the example of Sue’s gardening supply site and Bob’s plant seed site. Sue might pay Bob a commission of, say, 2% for each of Bob’s website visitors who purchases a lawn mower from her. And, she might pay him a commission of, say, 15% for each visitor that purchases gardening gloves. That’s because the lawn mower is a higherpriced product than the gardening gloves.
But, merchants can change the percentages from time to time and competition among merchants for the affiliates’ screen space can be intense. A merchant could, for example, temporarily increase the commission on a product to make it more attractive for affiliates to advertise it. Higher commission percentages will attract more affiliates. And affiliates who work with network companies can compare merchants’ products and commission percentages and choose the offers that best suite them.
TheAffiliateGuy.com’s Colligan, “It’s key that merchants offer products with decent profit margins so that they can afford to offer the affiliates attractive commission percentages. I once taught a seminar where an attendee, an ecommerce merchant, said that his products have extremely thin profit margins and that he couldn’t afford to offer his affiliates attractive commission percentages. I told him his problem wasn’t the affiliate commissions. It was his product selection.”
Heidi Messer, with Link Share, “We see commissions in the 1% to 30% range though they can be even higher. Products with lower margins and higher purchase prices tend to carry lower commission percentages.” Andy Newlin, with Sierra Trading Post, “We typically pay between 5% and 10%, depending on the product. And, we pay our affiliates each month.”
Click-thru rates and conversion rates
Spend any time in the affiliate marketing community and you’ll hear both merchants and affiliates discuss “click-thru” rates and conversion rates. Both terms refer to the percentage of a site’s visitors that actually click on an affiliate offer and then purchase an item from a merchant. The terms are used interchangeably and can be confusing. For example, 2% of visitors to Bob’s site may click on an offer from Sue’s gardening supply company. That’s a 2% “click-thru” rate. Perhaps 10% of that 2% may actually purchase a product from Sue. That 10% is typically referred to as a purchase “conversion” rate. The affiliate marketing business revolves around click-thru rates and conversion rates. Both merchants and affiliates closely monitor those rates and adjust and juggle products, prices and other factors to improve upon them.
Andy Newlin, “Our affiliates pay close attention to their click-through rates. The good ones analyze it and test constantly. They’ll move the placement of the offer and change up the offer. Visitors that come to our site from an affiliate typically convert at a rate upwards of 13 percent. That is, over 13% of the visitors that our active affiliates send us actually buy something from us. That is very high for our industry. The average is closer to 4%.”
Data feeds and programming scripts can make the offers from a merchant to an affiliate dynamic and constantly changing. Say an affiliate is only interested in hiking shoes that are on sale. That can be programmed into the affiliate’s script, so that when a merchant’s database changes to reflect hiking shoes on-sale, the affiliate’s offer automatically changes on its site. Perhaps an affiliate, for example, is interested in offering hiking shoes from a certain manufacturer for a certain price with a minimum commission percentage. That can be programmed into the affiliate’s script, so that when a merchant actually offers those hiking shoes at that price and commission percentage, the offer automatically appears on the affiliate’s site.
Changing the Internet
The ability to micro-manage offers from merchants to affiliates is changing how merchants advertise their products. Some say it’s revolutionizing the Internet since most all online offers are commission-based, the offers can be easily changed and a merchant pays the commission only when a sale occurs.
Dave McCarthy is Senior Director of Advertising for Miva Direct. Miva Direct helps merchants find suit- able affiliates and affiliate networks. “The industry has evolved so that the merchants pay on a cost-per-acquisition only. In many respects, it’s no risk advertising for the merchants and it can be a nice source of additional earnings for the affiliates.”
Everyone agrees that both merchants and affiliates should actively monitor and manage the process. Says McCarthy, “Merchants and affiliates should have analytics software installed on their site. Merchants should monitor, for example, those affiliates that generate the most sales. And merchants that use affiliate networks should use the analytics software to confirm what their affiliate network is telling them. If an affiliate network company claims that it’s generating a given level of sales for a merchant, that merchant should have the software installed to independently confirm it.”
Sierra Trading Post’s Newlin encourages merchants to work with affiliate networks as well as seek out direct relationships with other websites. “Search the Internet for companies that offer products, services or even editorial content that is similar to your products,” says Newlin. “If those sites have ads already on them, then they probably have experience with affiliate marketing.”
Newlin’s employer, Sierra Trading Post, utilizes both a network company, LinkShare, and also manages direct affiliates outside of the network. To monitor the direct affiliates, Newlin uses affiliatetracking software that his company has developed internally. This software will tally the commissions due each affiliate and otherwise track traffic and sales that each affiliate generates. There are many independent software companies that offer such tracking software, however, and many third-party shopping cart providers have it built-in with the cart.
Both McCarthy, with Miva Direct, and Newlin encourage ecommerce firms to test a product before they offer it to affiliates. An ecommerce firm could advertise a product using Google’s AdWords, for example, to determine its “click-thru” appeal. Moreover, ecommerce firms that are interested in becoming affiliates could sign-up for Google’s AdSense program as a test. AdSense is Google’s own affiliate marketing network, whereby website operators can pick specific offers from Google’s “AdWords” advertisers, and display those “AdWords” offers as a method to earn “click-thru” commissions. In that manner, an ecommerce operator can pick which offers from Google to display on his site and then gauge whether his traffic responds to those offers. That could indicate whether visitors to his site would respond to other affiliate offers.
Says Miva Direct’s McCarthy, “There’s a huge opportunity for merchants right now. To determine whether their products will move on an affiliate’s site, they can put a product up on Ebay or even CraigsList.com for free. If it sells there, it will probably sell on other websites.”