Affiliate Selling -- chat scheduled for April 20

In our chat session on April 20, 2000, we discussed Affiliate Selling: Building Revenue on the Web with Greg Helmstetter and Pamela Metivier, authors of the book of that title, recently published by Wiley. For details about the book and its authors check:

www.tenagra.com/ips/private/Wiley/affiliateselling/profile.html

For the transcript of this chat program, check www.samizdat.com/chat.html

Attached is an excerpt, (posted here with permission) which cites examples of the four basic types of affiliate programs and lists the advantages and disadvantages of each. The authors make recommendations for which affiliate programs are best suited for particular types of Web sites.

(From Chapter 2, "Types of Programs")

Affiliate programs are rapidly becoming a very popular way for online merchants to target their customer base, by rewarding those who generate traffic to their Web site. There are many different types of affiliate programs available on the Web. Some pay a percentage commission or a flat amount for every successful sale made to a visitor you send to their site; others pay you to simply encourage your visitors to click-through to their site, thus earning money for you whether a sale is made or not; still others pay you a couple of cents every time one of your visitors follows a link to their site; finally, there are those that pay upward of 50 percent of commissions for every sale made to a person you referred to their site.

If you already have a Web site or are looking to start a business, affiliate programs are a great way to generate and build revenue, add content and value to your Web site, and increase traffic by offering products and services relevant to those offered on your site. To succeed with affiliate selling, however, it's important that you choose the right type of program for your business.

There are four basic types of affiliate programs:
-- Commission-based programs (also known as pay-per-sale programs)
-- Bounty/flat-fee referral programs (sometime called pay- per-lead/new customer)
-- Click-through programs (also known as pay-per-click programs)
-- CPM (cost-per-thousand impressions) programs

And for each of these types of programs, there are two types of reward calculation methods: money and incentives.

The type of affiliate program a merchant sponsors depends on the type of products or services they offer on their Web site. For example, if a merchant runs an online sporting goods store that sells work-out apparel, exercise equipment, and nutritional supplements, it might have an affiliate program under which its affiliates earn 10 percent commission on every purchase made by a visitor that was sent by an affiliate site. This is an example of a commission-based program. On the other hand, if the merchant's site doesn't sell a product, but, rather, provides content such as sporting news, it might pay its affiliates $5 for every visitor they send to its site who signs up to receive the sporting goods site's newsletter.

This is a flat-rate program. And in the case of affiliate program providers that don't sell products directly but that offer news, real-time scores, or statistical data, for example, affiliates might be paid a small amount of money for each unique visitor they send to the program provider's site. This is done for the sole purpose of increasing traffic to the provider site. This is a click-through program, sometimes referred to as pay-per-click (PPC).

Examples of click-through programs include those offered by Lycos and the comparison-shopping service mySimon (www.mysimon.com). Finally, an affiliate program provider might offer a percentage of the revenue earned from banner advertisements viewed by visitors on affiliate sites. This is a CPM program. Bottomdollar.com, for example, offers an affiliate program that pays from $0.02 to $0.12 per click-through to its shopping search engine, and $5.00 per 1,000 pageviews seen after the referred visitor performs a search.

The type of reward calculation method used by merchants is less dependent upon the types of products and services offered than the goal they are trying to achieve. For instance, CDNOW's Cosmic Credit affiliate program enables you to earn CDNOW store credit when a visitor to your site uses the link there to buy anything at CDNOW. In this way, not only does CDNOW gain a visitor, in also can be certain that you'll return to its site occasionally to redeem your credit. Thus, CDNOW offers incentives as a reward for its commission-based program to guarantee repeat visitors.

COMMISSION-BASED PROGRAMS

Commission-based is the most commonly used type of affiliate program. These programs pay you a percentage of the revenue generated by the sale of a product or service made to a visitor who was referred by your site. Typically, the commission percentage rate is fixed (15 percent, for example). However, some programs offer higher commissions (or bonus commissions) to affiliates with high-volume traffic and/or with proven track records.

*Advantages*

A well-selected commission-based affiliate program can greatly enhance the value of your site because it enables you to add relevant content providers. For example, let's say you have a Web site that reviews skiing equipment for the sport's numerous enthusiasts; clearly, it would be very convenient for your visitors if you also provided an easy way for them to purchase the equipment you just recommended to them. If you also make an effort to annotate your recommendations, you can earn a significant amount of money. To take another example, let's assume we're major fans of German board games and that we visit a board game review site to read a review about a brand-new, supposedly great, German game. Chances are, we'd be open to a simple, convenient way to buy the game or other games like it if the reviews confirm that the game is indeed worth buying. (Naturally, reviewing products that you also promote for sale raises strategic and ethical issues, not the least of which are how to maintain objectivity and integrity, both of which you'll need to address.)

If the affiliate program you've joined enhances the content of your site, you are likely to get good results from a commission-based system. But it's important to point out that in conjunction with the affiliate program, it's imperative that you establish, then maintain, an interesting site, so that you develop a credible reputation with your visitors. Once you do, your visitors will come to value your opinion and will be more likely to take your advice regarding products and services that you recommend to them.

*Disadvantages*

With the commission-based program model, the primary disadvantage is that the conversion rate -- the number of people who click on a link and subsequently make a purchase -- tends to be quite low, even if you have a high-volume site. Only a small percentage of your visitors (the average is 2 percent) will click on a banner ad or link; of that percentage, only a fraction will actually make a purchase.

So even if you measure 10,000 pageviews on your site in one day, typically, only 200 (2 percent) of those visitors will click on a banner ad or product link. Of those 200, chances are only one (0.5 percent) will buy something, and thus earn some money for you. Recognize that these are only averages. Highly targeted sites, such as those devoted to one specific product (your favorite book or movie, for example) generate lower traffic volumes, but higher conversion rates, because the small number of visitors are finely filtered by virtue of the fact that they have found their way to your narrowly focused site and thus are more likely to buy the product or service.

*Recommendations*

Carefully select the affiliate program or programs you integrate into your site. The more closely the product or service offered by the affiliate program provider matches your content and audience preferences, the more likely your affiliate site will be recognized as a valuable resource by your visitors and the more likely they will be able to make a purchase at the merchant's site.

Be aware that many affiliate providers carefully screen their program participants to ensure that the affiliate's site generates enough traffic (read: interest) to generate an adequate volume of sales. This screening process will also help you decide whether the program is right for your business. If, say a merchant requires its affiliates to generate 10,000 pageviews per month before being eligible to join its program and you generate only 900 pageviews, clearly you need to keep shopping for a more suitable program.

BOUNTY/FLAT-FEE REFERRAL PROGRAMS

Bounty, flat-fee referral programs are less commonly used than click-through and commission-based programs. Bounty programs pay affiliates a predetermined, flat (fixed) fee for every new visitor (bounty) they send to a merchant's site.

Sometimes flat fees are paid to affiliates for visitor actions other than purchases. These may include the visitor completing a registration form, requesting product information, downloading software, answering survey questions, or joining a mailing list. In these cases, bounty rewards are usually in the form of money, as opposed to store credit or other noncash incentives.

*Advantages*

If you succeed in encouraging a visitor to your site to make a purchase, register, or take some other action at the affiliate provider's site, you will probably earn more than you would by participating in a click-through or commission-based program. Why? Because each qualified action is guaranteed to earn some amount of money for you.

Moreover, you only need a few successful signups, downloads, or whatever, before you can start to turn a profit. For example, let's say you earn $1 for every one of your site's visitors who signs up on Clip2.com; if 100 of your site's visitors sign up with Clip2.com to share your links every week, you could earn up to $400 per month. Not too shabby.

*Disadvantages*

The key to succeeding with this type of program is to increase traffic to your site (read: get new users). Some new merchant affiliate programs state that once a user visits the merchant's site, he or she "belongs" to that merchant. That means that even if a user made a purchase at the affiliate provider's site by clicking on a link on *your* site, if he or she was a customer of that merchant any time in the past (no matter what route he or she took to arrive at the site), you will not get paid. This clause has been added to many affiliate agreements because some merchants can justify offering affiliate programs only as a means of acquiring *new* customers, meaning they cannot afford to pay to have their existing customers return to their site. This is especially the case with merchants that already offer discounted prices for their products or service; in fact, some merchants even lose money on affiliate transactions, expecting to break even only when that visitor returns to buy something later. The bottom line: Read the small print on affiliate agreements. For some affiliate programs, you need new blood to keep the checks coming in.

*Recommendations*

Determine how much you will be paid for each new referral versus how much money you could make if you were making a commission from every sale, then estimate or test to see how many of your visitors you can convince to buy a product or service that you're recommending/linking to on your Web site.

For example, let's say you're reviewing two affiliate programs from two similar merchants. The first is offering a flat-fee affiliate program that pays $5 for each new customer you refer to him or her. the second merchant is offering a commission-based affiliate program that pays 15 percent of sales. Now let's assume that the visitor you refer purchases $150 worth of products or services. Under the commission-based program, you'd make twice as much money as under the flat-fee program. If, however, the flat-fee program offer $15 per new customer, your referral would have to spend $250 in order for you to receive the same amount of money under the commission-based program.

Obviously, if the products being sold have a low per-unit cost (such as CDs or vitamins) there's little chance you're going to make more than $15 in commissions, so a flat-fee program would work better for you. Keep in mind, however, that most merchants won't offer flat-fee compensation to promote low per-unit-cost products and service -- at least not until micropayments become the norm.

CLICK-THROUGH AFFILIATE PROGRAMS

Click-through programs pay affiliates a small amount of money for each unique visitor they deliver to the program-provider merchant's site. Affiliates generally earn between $.01 and $.05 per unique visitor.

*Advantages*

The primary advantage associated with click-through programs is that you get paid for every unique visitor you send to the merchant's Web site, whether he or she makes a purchase or not. Another advantage is that most click-through programs are well established and therefore, provide advanced reporting tools that make tracking your earnings quite easy. Likewise, little effort is required to set up and maintain your affiliate links; you merely add a text-based hyperlink or banner advertisement to your site, and it practically runs itself. Your only responsibility is to encourage a healthy stream of traffic to your site to ensure that enough of your visitors click through so that you can make some real money.

*Disadvantages*

One of the disadvantages of click-through programs, as compared to commission-based or flat-fee referral programs, is that you receive a few cents only for driving a customer to the affiliate provider's destination; you don't earn money for anything he or she buys as a result. Obviously, if the destination site sells high-cost-per-item goods, you could be losing out on substantial commissions.

Additionally, to protect themselves from dishonest affiliates who fake clicks, some banner ad click-through programs limit the maximum payout affiliates can receive, based on the click-through ratio (the number of banner impressions you display that actually lead to a click-through). For example, a program with a click-through ration limit of 5 percent and a payment of $.03 per click-through would limit your earnings to a maximum of $1.50 per 1,000 banners that you display, no matter how many visitors actually click on those banners to access the merchant's site.

Although a 5 percent click-through ration is considered very successful for most sites (the typical being around 2 percent), if your site contains a highly relevant, targeted content in a popular niche, your visitors are more likely to click on a relevant banner advertisement. Therefore, this type of program could limit your upside and hurt your bottom line. In other words, in this case, you're damned if you do.

And if you don't have a high traffic site, then you're damned if you don't, because unless you have hundreds of thousands of pageviews per month, your earnings will likely fall short of paying for that trip to Paris this year.

Here's the deal: Let's say that your site gets 10,000 page views a month and that you are displaying links for a click-through program that pays you $.03 per click-through. If you get a 2 percent click-through ratio, you will earn $6 for the month. Basically, you'd have to boost your click-through ration to 5 percent before you could afford even to buy a new CD.

Because it's very costly to mail checks for $6 (or less), many click-through affiliate programs require you to earn a minimum payout amount -- usually between $15 and $50 -- before they'll send a check to you. The good news is that most affiliate programs will send checks either every month or every quarter, and carry over subthreshold balances to the next earning period. So, for example, if you earn $12 dollars through an affiliate program with a minimum payout amount of $15 in May, that $12 balance will be carried over to your June earnings. Consequently, you'll only have to earn $3 in June to receive a check from the program. On the other hand, if you don't have a high-traffic site and you're earning $6 a month from your affiliate program, it will take you three months to receive that $18 check.

*Recommendations*

Always read the affiliate agreement/terms thoroughly before joining a click-through program. If your site's traffic measures fewer than 10,000 pageviews a month, you should consider finding a suitable commission-based program. That way, you'll only have to make a couple of sales before you receive a check. However, if you're not really interested in pushing products and/or if you have a high-volume Web site that contains a broad spectrum of content, check out some of the great click-through programs.

CPM (Cost-per-Thousand) Impressions

The fourth and final method frequently used for measuring affiliate activity levels is based on impressions; that is, how many times the affiliate program provider's link is seen by your visitors, as opposed to how many times your visitor clicks on the link or actually purchases something once he or she clicks through. By generally accepted convention, impressions are "sold" by affiliate sites at some price per thousand, or "cost per thousand" (the M in CPM stand for the Latin for thousand).

CPM-based affiliation models are most often used with advertising banner syndicators such as DoubleClick, AdKnowledge, and LinkExchange. These services work by aggregating the available banner space on their thousands of affiliate sites and then turning around and selling these slots to advertisers that want to display their banners. In this way, small Web sites can sell ad space without having to hire a direct sales force or deal with the advertiser (though some syndicators require that their affiliates meet certain traffic volumes).

Speaking in Internet time, banner advertising has been around a lot longer than affiliate programs on the Web, and as a result, it has developed into a somewhat mature industry, but according to some, one that is in decline since users have learned to ignore banner ads much as they have learned to ignore television advertising. More frequently now, users regard banner ads as necessary nuisance when they download a page, and are increasingly less likely to click on them. While we believe that banner ads serve an important purpose (in particular, building brand awareness for the advertiser) and are here to stay at least for the foreseeable future, we don't think they are anywhere near as well suited for driving e-commerce as affiliate programs. Including products and links to other affiliate revenue opportunities is a lot more interesting, fun, and profitable than banner advertising programs for you as well as your site's visitors.

Banner ad-related affiliate programs are, therefore, not the focus of this book. This discussion is intended primarily to differentiate between CPM and other payment models/terminology used for affiliation, in the most general sense of the word. That said, there are a few CPM-structured affiliate programs available that don't require affiliates to participate in banner ad syndication.

*Advantages*

The advantage of CPM Models -- getting paid based solely on what people see -- is that it is one of the easiest ways to generate revenue if you've already got traffic coming to your site. All you have to do is slap on some ads to start earning a fraction of a cent for each pageview; you don't have to carefully select what is displayed on your site nor try to align the ad spots with the interests of your visitors (though ad syndicators can help you do this).

*Disadvantages*

Unfortunately, as a thoughtful site develops who spends a lot of time experimenting with the precise look and placement of elements on your site, the last thing you may want is something whose design and content you have no control over. You could, for example, have to display an obnoxious-looking slow-downloading, animated banner ad that has nothing to do with the content of your site. Obviously, not all banners are in poor taste; the point is that you, the site developer, have little or no control over what appears. You also are limited as to the format of banner ads. The vast majority are a standard size 468 pixels wide by 60 pixels high, which Web designers are forced to design around.

Perhaps the most unfortunate aspect of CPM-based compensation is that it generates an incentive for site developers to entice visitors (sometimes through clumsy or tricky means) to see more pages rather than better pages.

For instance, a less-scrupulous designer might be tempted to break up an article to appear on many small pages in order to be able to include more banner ads, when one longer page would have made for a more convenient and more logical user experience. Well-targeted e-commerce opportunities, on the other hand, are actually regarded by many users as a site enhancement! (Has anybody ever considered banners to be an enhancement to a site?) From our point of view, appropriate product (or service) information can be considered content only if it is relevant and useful within the context of the hosting page.

Not surprisingly, then, some studies have shown that visitors are more than twice as likely to click on product's name or "buy now" link as they are to click on a banner, because users already know what to expect (more information and a chance to buy the product), whereas banner ads usually do not make clear what the result will be if you "click here." As stated earlier, users are clicking through banner ads less and less frequently across the board (down 95 percent by some estimates), forcing some who sell banner space to lower their rates from a $30 CPM down to a mere $2 CPM. Web companies that promised (their investors) to become profitable are finding that the advertising CPM model doesn't work very well; hence, they are unable to sell their available ad space inventory, despite lowering their CPM. To supplement or replace these programs, former banner-sustained Web sites are turning to the commission-, bounty-, and click-through-based revenue programs that comprise the focus of this book.

*Recommendations*

There is no rule that says you can't have multiple revenue models coexisting on your site. In fact, you should experiment with any and all that make sense, given your business, design and editorial requirements. If you have a good space for banner ads, which doesn't seem well suited to links that use other types of compensation methods, and if the ads won't detract significantly from your users' experience at your site, then by all means, give CPM a try.

Excerpted from AFFILIATE SELLING: BUILDING REVENUE ON THE

WEB by Greg Helmstetter and Pamela Metivier. Copyright 2000

by Greg Helmstetter and Pamela Metivier. All rights

reserved. Reprinted by permission of the publisher John

Wiley & Sons, Inc.

You can buy this book from Amazon.com, Affiliate Selling: Building Revenue on the Web

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