Here's why affiliate programs don't work:
1. Affiliate merchant programs generally pay relatively low commissions to the affiliate and then only on a first time basis. They require a rather sophisticated backend and only a few of them have software that can be counted on to deliver accurate results. I regularly see software that registers more clicks than impressions and of course that isn't possible. The software isn't dependable and it rarely works with third party banner management applications.
2. The affiliate program is very hard to manage for many companies because people cannot or do not place orders on an initial visit. When they do place that order, short of that customer coming back to the referring site or placing a cookie on the user's system, there is no way to determine where a visitor originally came from.
That's if they place their order online. Depending on the business model, a high percentage of orders may be either phoned or faxed in. This requires human intervention and honest determination to make sure that the affiliate information is manually updated. There is no transparency to the relationship from the affiliate's standpoint other than what the merchant chooses to let them see and/or depending upon how honest the merchant wants their software to be. Even in the most honest relationships, determining the point of referral is often quite difficult.
3. The affiliate publisher takes 100% of the risk and usually only makes a couple of dollars on the first sale while the merchant generates 95% of the profits on the first go-around and 100% of the profits after the first time. Affiliate programs are basically nothing more than a hybrid of a non-binding partnership and an advertising program where the affiliate takes all the risk, and exhausts his own inventory; all in the hopes that someone will like the prices enough to order and the merchant will be responsible enough to fill the order properly, and honest enough to report the sale to the system.
The merchant takes no risk whatsoever and his worst case scenario is that he loses a customer (potential profit) but hasn't lost a dime out of pocket if he doesn't deliver on an order. This is sold as a partnership but it really isn't, and real publishers don't work on this basis. In other terms, it is the "you put up the money and do the work and I will let you know if and when you make money" concept of doing business.
This is a concept that most people would not consider in anything but the online world. If a merchant wants to work this way, he is better off to go to the small mom and pop sites that generate a few hundred visitors per month in a good month.
Serious publishers who have earned their reader's respect, may have hundreds of thousands of clients per month, most of whom come back time after time. They know that this is ludicrous and don't give it a second thought. Of course the small sites are just not going to generate the traffic either so it takes a lot of them.
To the casual observer, it may seem as though there are minimal risks of loss to the affiliate. But there is an obvious loss of time/space of available ad inventory that is dedicated to the merchant. This is lost inventory as it cannot be sold and many publishers also pay third-party ad management companies to handle the impressions. This is straight monetary expense.
In the print publishing world, it would be a joke for a merchant to approach the publisher and offer them such an affiliate program. ("We will let you know if you sold anything.") Neither would it work to try and hire a salesperson on straight commission without any legitimate way to determine if and when a sale was made.
To be honest, nobody but desperate websites with no traffic think that this is a good way to do business. It's the "what do I have to lose" principle because nobody visits their site anyway and the site isn't worth spending money on. To apply Groucho Marx to the situation and if I were an affiliate merchant, "I wouldn't want any affiliate who wanted anything to do with my affiliate program."
Companies that make affiliate software programs still think that online publishing is different than life in the real world, but it isn't. In both the print and the online world, inventory is exhausted, time is spent, revenue must be generated, and expenses are incurred. Customer acquisition is costly in both worlds and the publisher will do everything possible to make it beneficial for the advertiser so that they renew.
The inverse of this is equally true. Most advertisers would not accept the publishers word that certain requirements were being met based purely on the word of the publisher. Online publishers must make independent figures available and print publishers make independent audit figures available. If you don't get these from your publisher, you are not following up properly.
Bottom line, in any partnership, there must be a relatively equal risk of loss to both parties and there must be transparency in the business relationship or the partnership will not succeed.
4. Affiliate programs necessitate a significant amount of time in monitoring the program. Most small publishers can afford this time but few do. Larger publishers could easily have dozens or hundreds of affiliate programs and monitoring them all would be terribly costly. They prefer to spend their time doing PR and driving readers to the site rather than monitoring such programs. Doing it that way, they spend their time getting new business for their advertisers instead of trying to monitor affiliate programs.
5. Publishers can only have an effect on getting people to the site to see the ad. They cannot have any effect on either click-through rate or the conversion on the other end. Banner design will have the effect on the click-through and only the merchant can have an effect on the conversion. If the consumer does not like the design, the information, prices, or the merchant does not respond to or properly manage the consumer, that undermines the conversion rate.
Affiliate programs effectively put all that on the back of the affiliate publisher. A publisher could put 50,000 people in front of the merchants banner and if they do that, then they have done their job of giving the merchant 50,000 opportunities.
Affiliate programs say that the publisher continues to be financially liable for things outside their control. Dumb business decisions like over extending prices, poor customer service, out of stock inventory, and more cannot be the responsibility of the publisher, and the publisher may never really know that such problems exist. Yet they alter the publisher's income. The publisher has done his job, yet may not be paid and his only alternative is to quit the program.
6. Sites that employ salespeople cannot effectively work with such affiliate programs. No salesperson can be or wants to be paid commission on the few token dollars that dribble in over time. Even if such programs were accepted, the employer becomes legally responsible for payment to the employee, even though they do not control the ultimate purse-strings. Bookkeeping can get to be a nightmare as well.
7. Where there is such an obvious lack of transparency, there is almost the necessity for the affiliate to get into the merchant's business. The publishers business is publishing and generating traffic, not monitoring the merchant's business in order to maintain transparency.
The publisher needs to do their business and let the merchant do theirs. This way, it is none of the publisher's business if the merchant picks up 100 brand new clients a month or 10,000 clients. The costs are still the same and nobody is in each other's books.
8. Most merchants will tell you that their affiliate programs are time and money hogs and therefore, relatively unprofitable. An inordinate amount of time must be spent working on developing affiliate relationships and/or maintaining them. Given a finite amount of time, that time can either be spent working hundreds of small and almost worthless affiliates, or it can be spent filling orders and expanding.
One large retail distributor (advertiser) states that their affiliate program costs them .8 man-hours per week per affiliate. Since they use affiliate management companies such as LinkShare, that figure doesn't include any cost of affiliate acquisition.
That figure does however, include the fact that a high percentage of affiliates that sign up don't ever really launch the advertising even though time has been spent on them and others toss the affiliate program within a few days. It also includes averaging the time spent communicating with affiliates in general and providing information and services, graphics development, and more. That time cost is virtually constant whether the affiliate is doing any business or not.
Who can afford to do business this way? The question therefore is, does the merchant want to spend their time managing affiliates? Or do they want to go more traditional advertising routes and only be concerned with their primary business?
9. Industry information says that many of the large affiliate management companies have over a 96% merchant turnover rate among startup companies. Even well established companies with known name brands have a 40%+ turnover rate. Obviously, most affiliate programs are neither good for the merchant or their affiliates. The time and monetary costs of running the affiliate programs instead of seeking actual business are a major drain to the merchant and most revert to simple advertising programs or die.
10. Most affiliate opportunities are with onesie publishers who have no traffic as they are thrilled to get anyone's banner and the hope that they will make some money. The problem is that they have no traffic and they get bored or discouraged... and they don't make any money.
The merchant may make a few bucks but is constantly in search of new affiliates. Merchants find that they spend most of their time answering questions and reporting to these people or risk losing them. They will also spend much time trying to get new affiliates who aren't doing much either. In the end, most merchants find that they have to choose between their intended business or tending affiliates for the amount of business that they get.
Affiliate merchandising is not a bad add-on to an existing business that has all other channels completely full. However, there is a misconception that it has much of a cash-flow. A GOOD affiliate program almost pays for itself but it is rarely profitable. The only reason that some companies keep them going has nothing directly to do with money.
It has to do with BRANDING. But branding is not cash-flow. Branding is getting your name out there where people can see it time and time again so that at some point in time, they see it and can relate to the name as one that they recognize.
11. Here's the math - Those that push affiliate applications will probably argue, but I would point out that a reasonable click-through advertising rate is about 1%. Most affiliate programs seldom see more than 0.1% and I have seen many that are more like 0.05% or 1 in 2000. Sorry but these are the facts as most affiliates don't do the things that they could to help the merchant out. There is little thought to placing the banner effectively, they are more likely to give the merchant left over junk inventory that is hard to sell elsewhere, or they put the banner on every page and the consumer could effectively see it on 50 pages. The click-through rate is very poor.
Side Note: Affiliate programs are funny things. They cost nothing to get into and the publisher has no financial investment to retrieve. They are easy to get approved on and affiliate programs are a dime a dozen. There are no contracts, no money has changed hands, and there are no performance requirements and therefore no expectations.
In essence, an affiliate program has no value. Easy come, easy go, and who cares. There's another one waiting around the corner anyway. Therefore, the publisher feels no obligation to make the program work and often does not try. They give junk placement, no effort, and when they fail, the publisher's perception of having no value is justified. They are then, easily eliminated.
On the other side, the merchant has few expectations because he has not paid anything. Small site affiliates are a dime a dozen. They do not feel responsible to the affiliate and even if they only get one order, they figure that it is more than they would have had without that affiliate. No thought is given to the performance of the banners, the click rate, and even the loss of a customer or affiliate is of little concern.
Neither party has any real obligation to the other and that is a very poor basis for doing business together.
Even at the higher number (0.1%), consider that in order to generate the same amount of business, and given the same traffic flow, a merchant would have to deal with 10 affiliate merchants constantly to get the same results that he would get with one advertising publisher who doesn't bug him all the time like the affiliates do.
Since most serious online publishers don't deal with affiliate programs, the merchant often finds that he has to go with sites that produce far less traffic. We see between 180,000 and 200,000 people every month. That number doesn't reflect the number of impressions but the number of people that could potentially click to the right area and see the advertiser's banner.
Most sites don't see 1/10th of that but assume that an affiliate does do 20,000 visitors per month. Though we have not approached this scientifically, we see evidence that the average senior site sees no more than 1000-5000 visitors per month (you do the following math on that basis). Effectively at 20,000 visitors, this merchant has to have 100 affiliates to see the same traffic that he would advertising with the quality publisher.
If the .8 hours per week holds true (and it certainly will if you consider the time of acquisition and management of the affiliate account), that is 80 hours per week for affiliate management versus virtually zero hours for working with the advertiser. At a rate of $30,000 per year salary/benefits, the total cost of franchise management is $60,000 plus any additional cost of maintaining the franchise software.
At a rate of $35 CPM for publishing From this point on, the math gets a bit fuzzy as it depends on many factors that cannot be reliably stated in a hypothetical circumstance such as this, but it is fair to say that the cost of maintaining the affiliates not only pays for the banners on the advertising site, but probably pays for quite a bit of advertising on another site as well.
12. The affiliate program looks good from the merchants point of view because they haven't been on the other side and they have usually been sold a bill of goods by the companies that create the affiliate management software. Various points above may be argued and will certainly vary depending upon the merchant and the affiliate, but consider the following as proof of the overall concept.
If affiliate programs were as potentially profitable as many affiliate merchants think they are, there wouldn't be the opportunity to get into them. Sites like Yahoo, CNN, About.com, and other high volume sites would suck up all the available inventory and be making a killing. Online pharmacies could put their affiliate program out there and have all the business that they could handle. But you don't see quality publishers even trying any of these "opportunities", because they know that the click-through rate is horrible and there is no money to be had here.