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Why affiliate programs don't work 
(and often spell the demise of even the merchant)

What is an affiliate program?

To make it simple, affiliate marketing generally means that a merchant (someone with a product to sell) creates a business model whereby others who have web sites can refer their readers to the merchant's site for a small commission if the reader buys.  The theory is that if you display my banner on your site and your reader clicks through to my site and buys something, then I pay you a commission.

It sounds simple; more or less like hiring commission only salespeople under an automatic management program.  Under that theory, you can hire millions of salespeople with no cash outlay unless they sell something and the poor performers manage to get rid of themselves.  The other theory is that you as a web site owner can literally sign yourself onto dozens if not hundreds of affiliate programs and make a nice living by putting all the pieces together.

It also sounds pretty reasonable.  You only get commission if you sell something.  There are however, many factors that are not taken into account, some of which will be explained later.

Selling affiliate software

Affiliate software companies lead merchants to believe that picking up affiliates will be easy because it's basically free money, and there is little time spent going after affiliates who will then make tons of money while making even more for the merchant.  The software companies further explain that the merchant can get all this exposure and pick up long-term clients while only paying a token commission once, or at least for a short period of time.

Merchants sell the program to the affiliate based on the idea that there is nothing to lose and there is of course a high likelihood of incredible cash flow.  There are however, no promises.


Affiliate marketing -  waning but still strong

A few companies are still getting into affiliate programs.  We are contacted by them daily with promises of how much revenue is to be gained by participating in their affiliate program.  

Big companies such as Amazon, Barnes and Noble, Tupperware, Avon, and Disney are some of the big names that are associated with affiliate programming.  

Smaller ones include many online pharmacies, nutritional products, herbal remedies, and retail distribution companies that are so many that it is impossible to keep track of.  It is generally these that will make contact to try and initiate an affiliate relationship.

We have noticed however, that there are fewer companies that are offering or at least actively marketing their affiliate programs.  We suspect that either the number of potential prospects is drying up or that they have given up on trying to effectively pass along what basically amounts to a poor business model at best.


Real life success??

Ask any merchant with an affiliate program what their click-through rate is.  Better yet, ask what their conversion factor rate is per banner impression, and you are almost never going to get a straight answer.  You will probably get something like "It all depends... some of our advertisers do very well while others don't do as well.  It depends on the website."

Frankly, that's a crock.  If some are doing well and others are not, then it would behoove them to remove those that are not and claim victory on those that are doing well.  Who wouldn't cut a few losers who weren't making money anyway but were spoiling the numbers for the rest?  The fact is that for many affiliate programs, cutting the losers would mean starting all over again. 

There is no doubt that some of them have a few clients that do well, but again that is a matter of opinion as to what the term "doing well" means.  The fact is that when most of them come up with their answers, an extremely high percentage of their affiliates do poorly, if they do anything at all.  Others define the term "doing well" as doing better than nothing.


Does affiliate marketing work for merchants?

It all depends on who you are talking about and what the goal is.  High click-through rates and conversions are not the only factor that defines marketing success for many merchants.  In many cases, branding is the primary marketing goal (getting or keeping the name in the public eye).  In that case, having 10 million people see your logo would be considered successful if you didn't have to pay for it, even if the conversion rate was zero.

All companies depend on some level of brand recognition.  Nothing is a stronger yet a less worthy factor in any sale.  People will buy on brand name alone, and that brand name doesn't necessarily have to be known as a "good" one.  In many cases, it just needs to be a name that is recognized.  

Affiliate merchants are often looking for name recognition and any sale that happens is secondary and just a side benefit.  If they stick that name out in front of you time after time, it will eventually look familiar enough for you to consider making a purchase or recommending it to a friend.  That eventuality hardly has any positive effect on the affiliate websites that gave the name brand its familiarity.

If you can get a few thousand sites to broadcast your name and logo at no cost to you unless the reader clicks and purchases, you automatically have a branding winner.  Normal, highly-targeted advertising can cost you up to $40 CPM (cost per thousand impressions and depending on the site).  At a 1% click-through rate and a 20% conversion rate, those thousand banners would yield you just two clients.  For many merchants, that means that only means break-even unless one or the other comes back a second time around. 

Affiliates however, may be bought off with just a few dollars.  The click-through rates on average are not nearly as high, but you still get your name in front of the potential customer and start that name recognition process.  And you can get that for about 5-10% and only when purchases are made.  

If the dollar value of your product is high, you can even get by with a flat fee.  In the case of an online pharmacy, the average per order proceeds amounts to slightly over $200 and many offer their affiliates a $5 flat fee on the first order.


Does affiliate marketing work for the affiliate site owner?

A site owner who makes real money from any affiliate program should probably play the lottery and the slots but stay inside during lightening storms.  

If the goal is revenue, don't expect much of it.  Few sites have ever made any significant money on affiliate ventures and most have failed miserably.  


When does affiliate marketing work?

If your definition of "working" is whether affiliate programs make any money for the merchant, then the answer would depend on how many links are out there.  Amazon probably does quite well in measuring gross dollars that are generated by affiliate marketing.  With an estimated 8 million or so affiliates to the US site alone, they should.  

If each affiliate site sold 5 books a year, Amazon would obviously sell about 40 million additional books.  The site selling the 5 books however, would end up with between $2.50 and $15.00 if the 5 books added up to $100.00.  Split the difference and you are more likely to end up with about $10.00 for the year.  Disclaimer: We have been unable to obtain specific information  regarding Amazon's affiliates average number of books or dollar value but welcome their input. It may be more or it may be less.

Amazon is however, an anomaly with more affiliates than anyone else in the world.  Most merchants consider themselves lucky with a couple hundred affiliates and most of those aren't exactly highly trafficked sites. 


Getting Paid

In addition, we speculate that most merchants never have to pay many of their affiliates what they owe them.  Any program that we have seen requires a minimum dollar value in the affiliate account in order to make a payout.  That makes sense from a bookkeeping standpoint, but also saves quite a few payouts.  

If your average merchant makes $10 per year in commission and the minimum payout is $30, then it is quite likely that the affiliate will have either given up or gone away completely before the payout must be made.  Additionally, there are virtually no controls on merchants to make sure that their figures are honest.  Since purchases are made on the merchants' sites, the affiliate will never know how much has really been sold.

There are also very few incentives for the merchants to pay the affiliate what is due.  They can drag it out for several months after fees are due.  Considering the very low click-rate, the fact that they control the reporting software, or that it requires their human intervention, an affiliate can get a tremendous amount of public exposure before they have to either cough up a few dollars or lose the affiliate.  Many affiliate site owners complain bitterly about many months of affiliate association without getting paid.

Click-through rates of 0.1% are not uncommon and conversion rates of 5% or less are relatively common with many affiliate programs.  If the commission rate is an average of $2 per sale, this means that the affiliate would supply the merchant with 20,000 impressions before the first sale would happen and a total of 300,000 people would see the ad before there would be a $30 minimum payout.  The average affiliate probably isn't going to stick around long enough to give 300,000 impressions to the merchant.


Affiliate programs and dinosaurs have much in common

Major brands are abandoning their affiliate programs in droves and when that happens, one has to take a closer look at the concept. If they are abandoning them, it's reasonable to assume that they are no longer profitable, if they ever were.  It is also reasonable to assume that brand new companies that don't yet have a name are not going to see much better returns than the companies whose names are well-known. 

Affiliates and merchants alike have tried the affiliate model and most find that the small amount of revenue that is earned and the management requirements are hardly worth the trouble, much less the cost.  When dotcoms were popping up by the thousands each day, there was a flood of potential new blood for merchants to tap into with their affiliate programs and nearly an unlimited number of sites that would eagerly promote someone else's brand name for virtually no return.  This is no longer the case.

Far fewer dotcoms are arriving on the web each day and many of those that are new are run by people that have been down the affiliate pathway before.  Say the word "affiliate" to most experienced online business owners, and you are very likely to see a shudder.  


New affiliate selling techniques

Nobody really wants to become an affiliate save the new dotcom owner who is inexperienced and thrilled that someone found him and thought him worthwhile to contact.  The thrill is generally short-lived.

In order to even talk with dotcom owners, many small site affiliate marketers are having to resort to back door tactics like asking for advertising information and then turning the subject around to affiliate marketing once contact is made.  Most know that if they approached it on the affiliate basis, their email would be eliminated.  Many back door salesmen will keep the door open to advertising but want the site owner to "consider" the affiliate program, holding the advertising as possible carrot. 

One recently spent over an hour with me, talking about advertising, our demographics, and such until he felt it was time to mention a "partnership opportunity".

This of course is new lingo for affiliate merchant.  This kind of "partnership" means that the site owners supply the ad space inventory and believe in the product more than the merchants themselves.  The site owners supply everything right up until there is a sale made.  Then the "partner" merchant pays a few dollars for the one sale and walks away with the client.  Nice partnership!

Sites that use these techniques are not worth considering any business relationship.  If they can't be upfront about the way they want to do business, they probably aren't any better once in business with them.


So who are the winners in affiliate marketing?

Companies that write the affiliate software are the only real winners at this time and they of course trot out the very few companies that are actually successful in the affiliate market. However, the actual successes are about as prolific as the guy who makes millions because he bought someone else's 'how to make money in real estate' book. You never see the affiliate software companies trot out affiliates that have actually made money, only a few select merchants who run their own affiliate programs.


Bottom line says:

If these programs were successful at all, sites like Yahoo, Excite, MSN, CNN, and others would chew up all the inventory and small sites wouldn't stand a chance at getting any.  If you were running your own affiliate program, wouldn't you rather work with 3-4 large sites with 3-4 relationships and who hired people that know how to market your product?

If you ran Yahoo and these programs were successful, wouldn't you rather hire just a few affiliate managers than a ton of salespeople.  At best, you see companies like Alexa working with Amazon, but very few other big relationships.  If the money isn't there for the big guys, it's not there for anyone else.


The worst affiliates

There is certainly room for debate on who the worst is but certainly, those that either reflect badly on the advertiser with their poor customer service and those that don't pay owed fees to the affiliate are among the worst possible relationships.

The single type of merchant that can be the worst are those whose services cannot be tracked online and automatically.  They require human input in order for you to collect your commissions.

A perfect example of this is the online pharmacy who runs an affiliate program where you link their banner to their site for a payoff, if and when the reader clicks through and eventually orders a prescription.  The key here is the word "eventually".

People cannot order a pharmacy prescription from an online pharmacy until their doctor has rewritten their prescriptions and they are faxed in, usually along with several other documents.  

That means that even a click-through that turns into a sale cannot be registered as a sale until the patient downloads the proper forms and completes all the documentation.  Unless the patient goes back to the affiliate site and clicks through after all the paperwork has cleared, it is quite unlikely that any sale from this client will ever be reported as a sale, even if it could be.


Making an affiliate relationship work

Becoming a successful affiliate isn't impossible but it does have several major requirements:

You have to be working with an honest merchant.  Since they control the entire backend, it can be difficult to ensure that such honesty exists.  Sure, they could lose your referrals if they don't pay you what you are owed.  But most web site owners forget about their site, many more never even check in to see how they are doing, and others are disappointed but keep holding on because they don't have anything better.  Even if you do all that but you opt out because they don't pay you, how much business and exposure can that merchant get in the meantime?  Besides, would you know if you were only getting half the income that was due to you?

A recognized name brand - If your affiliate isn't being run by a name that is already recognized, it's going nowhere.  When given the choice between multiple vendors, most people will go with who they already know.  If you are representing an unknown merchant, you are only helping establish the brand.  Don't look for any income from this merchant for a very long time.

Watch your affiliate merchants very closely.  If you are in doubt, question them.  If they don't answer you or you cannot get resolution, don't wait around.  Take your business elsewhere until you find an affiliate that works.  Personally, I think that there are very few of them and that most site owners are better off biding their time, making their site grow, and looking for companies who believe enough in their product to advertise them.


What does work?

There are no alternatives to just plain old good common sense advertising to as targeted a market as you can find.  Unpaid labor doesn't work out well and neither does free advertising.  It never has and never will.  

When an advertiser has money invested in an ad program, they are going to put their best foot forward on developing and testing graphics for consumer acceptance.  They are also going to be more diligent about customer service because there is an inherent out-of-pocket cost to each client.

When a publisher has an advertising client, they are also held to certain requirements.  Certain positions are often guaranteed and in many cases, the number of impressions are also guaranteed.  Failure to meet those obligations is called breach and at the very least will result in a non-renewed contract.  In essence, both sides have something to lose.  In affiliate relationships, there is not only nothing to lose, there is very little to gain.

Advertising relationships have been proven to work for many years.  Affiliate relationships are seldom known to work.

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