Alex Mifsud explores the rise and rise of affiliate marketing and provides some guidance for those looking to exploit this booming field.
Many high street retailers will be happy to see the back of 2009, having survived a testing year. By contrast, online retail does not seem to have felt the full force of the downturn. Not only are consumers continuing to purchase online, but they are also deferring to the internet to educate themselves prior to a purchase. In fact, over half of consumers use the internet to carry out research before making a purchase in the shops, hunting down the best deals available (Verdict Research, May 2009).
In line with this growing trend, marketers cannot afford to ignore the masses of user-generated content and reviews that are available online, as they have an important influence on many consumers’ decision to purchase. Many websites offering price comparison and user reviews make their money by operating as affiliates for the products featured. With its business model of generating user traffic and converting it into sales, it’s not surprising then, that affiliate marketing has swiftly risen to become one of the most popular marketing channels in the online sector. By enabling brands to improve their online standout, they are in turn experiencing increased sales.
The boom in affiliate marketing has been further propelled as social media has moved into the mainstream. The dramatic increase in the use of blogs and social networks means that effectively anyone can now become an affiliate. For instance, Amazon has launched a new feature called Share on Twitter, which encourages its affiliate network to use Twitter as a new channel to earn commissions. But what exactly is affiliate marketing and what benefits are merchants deriving from its use?
Affiliate marketing – what exactly is it and why does it work?
The basic principle of affiliate marketing is referral; an affiliate will promote a merchant’s business and is then rewarded by that merchant for business generated. This online activity involves the affiliate referring its website visitors to a merchant’s website, leading to increased sales opportunities for the merchant. The reward for affiliates is based on a share of the revenue generated from the customer for the merchant.
Affiliate marketing is used by brands looking to increase their web presence, deliver returns that can be directly linked to marketing activity, and as part of a wider brand building campaign. Due to its performance-based nature, affiliate marketing presents a relatively low risk marketing option for merchants and requires low initial investment which is an attractive proposition in the current market.
Unlike other forms of online advertising, such as display advertising or paid search, which tend to charge per click, most affiliate schemes charge only if a sale actually results from the referral. For this reason, affiliate marketing is often promoted as one of the most direct performance-driven marketing techniques available today. It also allows smaller businesses with limited budgets to compete with much larger players.
Affiliate marketing also provides an additional way for businesses to add new revenue streams from existing customers and visitors to their website – by becoming an affiliate and making referrals to third-party providers and generating commission from sales that result.
How do I implement an affiliate marketing campaign?
Businesses wishing to use affiliate marketing to promote their products or services have one of two options: to run their own in-house affiliate programme or to outsource it to an affiliate network. For most small businesses, the investment and expertise needed to set up their own in-house programme is probably not worthwhile.
Piggybacking off an existing network is often the more attractive option, especially as affiliate networks come with an established community of affiliates in addition to having appropriate affiliate management software.
Owing to the sharp growth and online focus of affiliate marketing, various portals have now been established which collate background information around the affiliate marketing sector, such as affiliates4u.com and abestweb.com. The Affiliate Network Buyer’s Guide from Econsultancy is also an excellent resource for businesses looking to introduce affiliate marketing into their marketing mix.
Affiliate marketing on the rise
Given the clear benefits associated with affiliate marketing combined with the recent boom in user-generated content, the future market is looking positive. Jupiter Research’s forecast to 2012 for the US affiliate sector projected 13% year-on-year growth. Meanwhile, research by Econsultancy in 2009 estimates that UK sales from affiliate marketing were worth £3.82bn in 2008 - a 22% increase from 2007. Despite the recession, the study found that affiliate marketing sales were expected to grow to well over £4bn by the end of 2009. With further expansion clearly on the horizon, this form of performance related marketing has significant benefits when budgets are tight.
The power of the ‘long tail’
As affiliate marketing grows in popularity, it is also evolving in nature through the emergence of micro-affiliates. Whilst individually these smaller affiliates might not drive much traffic to the merchant’s site, they make up a ‘long tail’ and collectively have the power to drive significant click-through. This ‘long tail’ of micro-affiliates represents a huge opportunity for merchants looking to boost traffic back to their sites, generate buzz and spread messages virally, which in turn leads to extra revenue.
Surprisingly, few merchants are currently maximising the value of this ‘long tail’ of affiliate marketing. In the past, the general assumption was that the administrative and cost implications of working with so many micro-affiliates would cancel out the potential revenue benefits. However, new technologies are challenging this reasoning and offer effective ways for brands to successfully take advantage of the booming population of potential micro-affiliates.
Overcoming the payments headache
In order to fully take advantage of the affiliate marketing ‘long tail’, the issue of payments needs to be overcome. While the online community is global in nature, financial standards and processes often vary from country to country. As a result, effectively paying the affiliate has historically been an issue. Indeed, EntroPay’s annual survey conducted at the ad:tech and A4U Expo events in late 2009, found that 34% of affiliates are not happy with how quickly they receive their commissions, compared to 71% of merchants and networks who are satisfied with the time they take to pay out commissions. The administrative costs of payments are also a sore point as 32% of merchants are not happy with the costs associated with their payments processes.
It’s clear therefore that in order to effectively mobilise the global ‘long tail’ of affiliates, merchants need to adopt an efficient system that allows all affiliates to be paid instantly, regardless of the size of each payment. Efficient and regular payment is even more important to those smaller affiliates or 'hobbyists' who rely on the revenue generated by their affiliate marketing activity to pay for web hosting and search advertising in order to maintain their online presence.
Marketers who recognise and address the issues surrounding payment will put themselves in a strong position to leverage the collective power of affiliates and micro-affiliates and achieve competitive advantage. For those setting up an affiliate marketing scheme for the first time, it is important to join an Affiliate Network that has an efficient system which allows all affiliates to be paid instantly, regardless of the size of each payment.
Despite the projected growth in the affiliate marketing industry, few business are maximising the value of the ‘long tail’. However, as small businesses start to use established networks with more sophisticated payment technologies, this assumption will be challenged and should enable merchants to take advantage of the booming affiliate population, regardless of size.
Alex Mifsud is CEO of EntroPay.