How Should You Run Your Affiliate Programs?
New advertisers looking to make a start in affiliate marketing or thinking of launching an affiliate program almost always begin with one question: “Should I sign up with an affiliate network or invest in a solution to run my program in-house, instead?” But this is a question that it is useful for even very experienced advertisers to review on a regular basis. The answer depends on a number of factors. I find it helps to look at it from two perspectives: one from that of an advertiser (or online merchant), and one from that of an affiliate.
The Merchant Perspective
The big advantage of using a network, generally speaking, is that the advertiser doesn’t have to deal with tracking, reporting, or manually cutting payments to affiliates. The network performs all of these tasks. For their services networks charge either a percentage of what the advertiser pays to the affiliates (commonly known as a “transaction fee” – see Sidebar for details), a monthly fee of some sort (many will have monthly minimums of which advertisers need to be aware), or a combination of both.
Affiliate networks may also allow for a broader exposure to a pre-existing base of qualified affiliates and often offers numerous affiliate recruitment opportunities. In this regard however, it should be noted that some networks spell it out in their TOS that they own the relationships with all participating affiliates, whether or not those affiliates were originally recruited by the advertiser themselves.
The alternative is for an advertiser to take on those tasks by running the program in-house and at first glance this may seem to be a more effective way to approach the issue. In-house affiliate programs certainly help save money on network fees and may seem to provide a greater degree of control, but it should be remembered that running a program inhouse will necessitate tracking software (self- or remotely hosted) or a shopping cart with affiliate features. Internal resources will also have to be made available to run reports, be accountable for all technical issues, and for paying affiliates.
From an advertiser’s point of view the advantages and disadvantages of using a network or not must be carefully weighed, and the decision made according to individual circumstances. For advertisers that are new to the industry, I normally recommend launching their very first affiliate program on a network, adding an in-house option in the future if and when it makes business sense to do so.
The Affiliate Perspective
The discussion above only deals with factors affecting the merchant, but in order to arrive at a sensible decision, allowance needs to be made for the preferences of affiliates. They after all will determine the success or failure of a program. According to Econsultancy’s 2009 U.S. Affiliate Census, roughly “two-thirds of affiliates (68%) work with at least one merchant that runs its own in-house” affiliate program “compared to just under a third of affiliates (32%)” who said that they prefer not to work with merchants directly.
Affiliate Summit’s 2010 AffStat Report worded its related question somewhat differently and reported that 47.4% of affiliates favor network-based affiliate programs versus 14% who prefer in-house programs, while the remaining 38.6% were reported not to have any stringent preferences.
While maintenance fees and high monthly minimums aren’t necessarily charged by all affiliate networks, most do charge what is known as a transaction fee — also sometimes called an “affiliate override”. The transaction fee is normally calculated as a percentage of each affiliate payment, and subtracted from the merchant’s account at the time of the transaction.
It can be thought of as being similar to a credit card processing fee where by in order to process a transaction a fee is paid of anywhere between 2% and 4% of the total amount of the transaction. Things work very similarly with the affi liate networks’ transaction fees, with the only difference that the latter isn’t tied to the order amount, but to the transaction that occurs between you and the affiliate that has referred a sale.
As mentioned above, the affiliate network’s transaction fee is normally a percentage of what the merchant pays to the affi liate, and the exact percentage generally varies depending on the affiliate network, from 20% (e.g.: on ShareASale) to 30% (e.g.: on Commission Junction), as well as any specific terms that may be negotiated with the network.
To give a simple example, if a merchant decides to pay affi liates 10% of each referred order, every $100 of sale value will result in an affi liate payment of $10. The affiliate network, in its turn, will then charge an additional 20- 30% of that $10 that is paid to the affiliate. Each $100 sale will thus cost $12-$13 in combined affilate and transaction fees.
In combination this data seems to indicate that affiliates lean towards preferring network-based programs, with perhaps as many as one-third avoiding in-house ones where possible. Based on numerous discussions with individual affiliates, it seems clear to me that most of these views are tied to payment-related questions and the lack of perceived security when dealing with individual advertisers. This is aserious issue for affiliates, and one that must be taken in to account by any advertiser considering starting with an inhouse- based affiliate program.
The Importance Of Program Management
It is not unusual for a merchant to have some confusion about the differences between affiliate networks and affiliate program managers. In fact, this is a misconception that one can find in surprising places. About a year ago in an article published on Adotas.com I read the following:
“Affiliate marketing programs can be set up in two ways: create an individual program or work with an affiliate network… Running an individual affiliate program requires the company to keep in direct contact with the affiliates, maintaining complete control of the program. However, it also requires staffing and managing the program, recruiting affiliates, providing a secure online interface for affiliates to access data feeds and track their performance, and processing the payments to affiliates…”
“Working through an affiliate network will alleviate some of the burden associated with managing the program. By creating an account with an affiliate network, companies only need to load their products into a catalog and watch the sales roll in.
” While in principle, the differentiation between the methods of running an affiliate program is outlined correctly, the last point is very far from reality, at least in most contexts. It is not only incorrect, but quite dangerous to assume that an affiliate network will take care of most of a program’s management and affiliate recruitment.
While some affiliate networks may provide recruitment and program management services (either as a part of their default package, or as an additional service), most do not. If the relevant advertiser or merchant has even a slight confusion about this, then it leads inexorably to a program being on auto-pilot and ultimately failing. Time and again one sees exactly this problem, and it is almost always caused by the perception/misconception of the advertiser, believing that the network’s services include managing the program.
Experience tells us that advertisers and merchants need to be aware that affiliate programs don’t run themselves. They should understand that once they have started an program on a network and loaded their creatives and product feed, they can’t then just sit back “and watch the sales roll in”.
They must ensure that their program is monitored closely. Additionally, ongoing affiliate recruitment must be set in place, as well as policing of inappropriate and unethical affiliate behavior. This is called affiliate program management, a subject for a subsequent article.
EVGENII “GENO” PRUSSAKOV is an author, blogger, speaker and consultant in affiliate marketing and affiliate program management.