Cyber Creeps

When thousands of consumers got emails asking them to help electronics retailer Best Buy combat Internet fraud, they were eager to help. But those who clicked on the link and entered credit card and Social Security numbers learned the ugly truth too late: They’d been had.

The link took them to a “spoof” page that looked just like Best Buy’s home page but was actually operated by thieves. “The trust we worked so long to achieve was threatened by this rip-off,” said Dawn Bryant, a spokeswoman for Best Buy. “This is some- thing a business should never have to contend with.”

Neither should consumers. But the reality is that identity theft, predatory advertising, spamming, spying and other sleazy practices have left Internet shoppers understandably wary of buying goods on line. The number of complaints of Internet fraud nearly tripled last year to more than 48,200, according to data from the Internet Fraud Complaint Center operated by the FBI and the National White Collar Crime Center. The Federal Trade Commission says the Internet is now the focus of almost one-in-five of the complaints it receives.

“If these kinds of practices continue, it will run the whole thing out of business,” said Ray Everett-Church of the Coalition Against Unsolicited Commercial Email (CAUCE), an activist and lobbying organization.

Honest affiliate marketers face a double threat. Not only do they have to overcome consumer skepticism, but they have to compete with unethical rivals. Several industry organizations have teamed up with consumer groups and government agencies to educate affiliates and corporate program managers about ways to build consumer trust while combating ethically bankrupt practices.

All the ugly horses

One notorious practice involves Trojan horse software that bundles one or more secret programs along with an application that an Internet user desired.

“A surfer might go to a site and download something that looks interesting or might be fun,” said Jim Sterne, the author of five books about online marketing, including World Wide Web Marketing. “Unbeknownst to them, the download includes a piece of spyware, parasiteware, or thiefware as it is sometimes called.”

In its most benign form, a program might serve ads in a window within the application interface. For example, Cydoor is an ad-serving application that rotates ads in a window on the user interface of applications such as file-sharing software from Kazaa and Grokster.

“No one really likes ads, myself included,” said Robert Regular, Cydoor’s vice president of sales and marketing. “But we are just an ad delivery mechanism showing ads only when you’re in the application, to make money to pay the developers who wrote the software.” He said that Cydoor does not gather any personal information on its uses.

Advertising-supported software gets on shakier ground when it includes technology to track people’s movements on the Web. People who provide this software say this tracking technology improves their ability to show more relevant marketing messages. The problem is, most consumers wouldn’t know they’re being watched.

“The user agreement might have a buried reference, or there might be a box to click to accept the other software, only it doesn’t fully explain what is being accepted,” said Jason Catlett of Junkbusters, a privacy advocacy group. Catlett said this is “another example of junk consent creeping into the fine print of transactions. Even if it’s buried somewhere in the legalese, ethical marketers should not give customers stuff from others that [the consumers] don’t expect.”

What really infuriates affiliate marketers are hidden programs that pop up advertisements for competitors while someone is shopping on the affiliate’s site. Sterne said Gator, a marketing company that offers a free electronic wallet for consumers, “waits quietly until the surfer goes to a merchant site that sells a product that is competitive to one of Gator’s clients. Gator then pops up their client’s ad.”

Conceivably, shoppers might benefit from a better deal, but it is a bit like waving an ad for Fords in front of someone test-driving a Chevrolet. Affiliates call this predatory advertising because they feel their commission has been stolen after they converted the shopper into a buyer.

Sterne noted that many people intentionally download Gator, but said “the sticky part is when Gator comes included in something and the surfer is unaware they agreed to install it.”

Gator executives declined to be interviewed. A company representative referred questions to a FAQ on the company’s Web site, where the home page clearly states that users must agree to see ads in return for the free software.

Can the spam

Unsolicited commercial email now accounts for more than half of all messages, but nobody seems to want it. That leads to a curious question: Why would anyone want to send out emails that nobody wants to read? The answer may stem from the type of commission offered to affiliates by merchants selling those products.

“If a program rewards the affiliate for clickthroughs and not sales, it’s more apt to be abused,” Everett-Church said. “If all [the affiliate has] to do is get the person to go to a site, you are more apt to spam.” On the other hand, he said, programs that pay only for leads that result in sales don’t experience the same kind of abuse, because affiliates must add value in the form of information before users will click on their links.

Everett-Church recommends that affiliate programs that pay commissions based on clickthroughs institute checks and balances to make sure users aren’t gaming the system. “If you’re rewarding people for volume but there aren’t controls in place, you’re unwittingly encouraging abuse,” he said.

The worst spammers buy CDs containing millions of email addresses, then use software to automatically spew out millions and millions of ads touting prescription drugs, low-cost mortgages or what-have-you. But the problem doesn’t end there. If you send your email newsletter to someone who didn’t specifically ask for it, you could be in trouble.

“Spamming is against the law in most states,” said Marc Rotenberg, president of the Electronic Privacy Information Center in Washington, D.C. “Most affiliate agreements have clear usage guidelines on how you can advertise them. If you’re caught spamming, you could be fired as an affiliate for the merchant on whose behalf you spammed.”

The fallout can radiate beyond your network and get you into hot water with your Internet service provider, said Brian Huseman, a staff attorney for the Federal Trade Commission. “Your ISP may shut you down, and then you can’t send any email at all,” Huseman said. Worse, you could be placed on a blacklist so that even if your ISP reinstated you, your emails would be bounced by many other ISPs.

“An affiliate marketer who intends to be around for any length of time can’t use these kinds of marketing approaches,” said David Nielsen, founder and principal of consumer information resource FightIdentityTheft.com. “Overall, they’re a threat to the legitimacy of the industry.”

Got ethics?

It’s not the technology that’s to blame, industry experts say. It’s the unethical or uneducated businesses that abuse that technology. Unfortunately, it can be hard to know where to draw the line.

“What makes the difference between ethical and unethical is, the person has to know what is happening. You have to be straight with your customers as to why you collect information [like email addresses] and what you use it for,” said Rotenberg from the Electronic Privacy Information Center.

Smart affiliates use their tech tools wisely. For example, there’s a very simple guideline for email marketing. “If the person has asked for an e-mail, it’s okay, but otherwise, don’t send it,” said Steven Salter, director of operations and administration for BBBOnLine, the Internet arm of the Better Business Bureau in the United States.

Huseman agreed e-mail ads are fine on an “opt-in” basis where the user makes a choice to receive messages. That can happen when a consumer makes a purchase or registers on a Web site. Typically, a box will be provided with the prompt, “Click here to receive messages about promotions from this merchant.” The very best approach is double-verification, when users who sign up for promotions get a second email that confirms their interest.

BBBOnLine and other groups are anxious to help rebuild consumer trust. “The whole BBBOnLine program was created as a way to give online businesses a way to show they can be trusted,” said Salter. BBBOnLine.com has a reliability seal for Internet businesses. To qualify, affiliates must join the BBB chapter where their company is headquartered and agree to participate in the BBB’s advertising self-regulation program.

You can also bolster consumer confidence by designing a professional-looking site. “If your site doesn’t pass the visual inspection, users will think it’s not very credible,” said B. J. Fogg of Stanford’s Persuasive Technology Lab, author of a study on Web credibility conducted in partnership with Consumer WebWatch. According to Fogg’s research, design was the top factor consumers used when deciding how trustworthy a Web site appeared to be.

To differentiate yourself from spoofers, it’s a good idea to let consumers know who you are. Be clear in your advertising and on your Web site that you’re an affiliate of the merchants you mention, not the merchant itself. To maximize credibility, it’s a good idea to provide actual contact information, not just a “contact us” form, on your site, according to Leslie Marable, research project manager for Consumer WebWatch.

It’s not enough to have your heart in the right place. Ethical affiliates must constantly monitor their own activities to make sure they stay firmly on the side of the good guys.

And if the affiliate marketing industry doesn’t cleanup its own act, others will likely step in to do the job.

Abused consumers are taking up arms against unethical merchants and affiliate marketers, encouraging state and national legislators to consider tough laws to prevent spam and to punish scamsters. The question for affiliates and program managers is whether to work with them or against them.

JANIS MARA covered interactive advertising and marketing as a senior writer for Adweek. Her articles have appeared extensively in a variety of print publications.

No Free Lunch For Merchants

It sounds like a no-brainer: Tap into a sales force of self-employed affiliates who’ll handle everything from producing product information to Web design to advertising. Let them do all the work, and pay them anywhere from a few pennies to a few dollars – but only if they produce to your exact requirements. What’s not to like?

It’s a strategy that works for Bluefly, the online retailer of discounted designer clothing. In 2003, sales from its affiliate program ranged from 11.5 to 16 percent of the total each month. “We’re really excited with the progress we’ve made. We’re still early on in the process of refining our affiliate program, but I don’t see any reason why affiliates couldn’t contribute more than 20 percent of our sales,” said Bluefly executive vice president Jonathan Morris.

While Bluefly’s total expenses were up, its marketing expenses actually decreased 17.4 percent. The company chalked that savings up to a switch from advertising to email and pay-for-performance marketing, including affiliate sales. As a result of this change in focus, Bluefly’s cost to acquire a customer dropped nearly 38 percent, down from $16.20 to $10.05 per customer.

“The beauty of affiliate programs is that they’re performance based. The amount of commission you pay is dependent on the amount of sales you drive – not always the case in advertising,” Morris said.

But it’s something of a misnomer to describe affiliate marketing as pure pay-for-performance. It’s not exactly a free lunch. In fact, overhead costs can eat into profits, while there’s a danger that inept or unethical affiliates can hurt the brand and actually drive customers away. To really get a handle on the upside to an affiliate program, a merchant must uncover the hidden costs – and risks.

Micro Management

Few affiliate programs are truly self-serve. Amazon.com’s is a good example of one company with proprietary technology that lets affiliates sign themselves up, quickly and easily. Yet, even with the hundreds of thousands of pay-for-performance marketers hyping everything on the site from books and DVDs to toaster ovens, every affiliate must be individually approved before starting, a process that typically takes less than 24 hours.

Merchants can outsource most of the affiliate management to network services such as BeFree, LinkShare and Performics. Networks provide the software infrastructure and varying degrees of human oversight to handle automated sign-ups, link generation and the pushing of special promotions and information. Their staff will sometimes untangle snafus and soothe irate affiliates.

But none of the companies contacted by Revenue put their affiliate programs on automatic. Instead, they devoted anything from a couple of staffers to a full-blown department to managing the program. “For probably the first two years after we started our affiliate marketing program in 1998, we didn’t do a whole lot with it, didn’t dedicate internal resources toward it. We just expected it to run on auto-pilot,” said Bruce Matthews, vice president of business development for electronics retailer Tiger Direct. As a result, affiliates brought in a few sales but the revenue they generated wasn’t exactly eye-popping. The program was floundering.

Then, Tiger Direct decided to commit. “We dedicated more resources, and started to pay attention and make it work,” Matthews said. In 2001, the company added a staff position devoted to affiliate relations, began fixing problems in the program and added tools for the affiliates. The result: Tiger Direct affiliates now boost the bottom line by over $1 million a month in sales. Matthews said it took a year of solid work to bring Tiger Direct’s affiliate sales from under $100,000 to that million-dollar mark.

Online department store outlet Overstock.com saw a similar boost when it got serious about affiliate marketing. After it revamped its program and made it a strategic initiative, the company saw its top-line revenue generation from affiliates grow eightfold in 17 months. But the program needs a lot of attention, said Shawn Schwegman, CTO and vice president of sales and marketing. “You’re developing relationships, and that takes relationship management.” Overstock.com has a five-person team responsible for 30,000 affiliates, headed by the company’s director of marketing.

Hidden Costs

Whether or not the retailer has staff whose sole job description is affiliate relations, overhead for the program is spread throughout the entire company, from the accounting department that cuts the checks to the janitorial service that hauls off the coffee containers emptied by night owl employees.

The true cost of an affiliate program, said Prakash Bharwani, senior manger in interactive marketing for 1-800-Flowers, is, first of all, the salaries of his staff. “Then, there’s the indirect staff members, my IT team, my accounting team, my creative team, my colleagues. Then the infrastructure costs, server space. There’s a customer knowledge team, and we use up their time to understand how the affiliate program is working.” Bharwani said that promotions offered through affiliates should be added directly to the revenue share to get a true picture of how much the affiliate program costs the company.

The first task of the affiliate manager or team is recruiting and approving new affiliates. Many large retailers approve each application by hand, paging through the affiliate’s site, making sure it’s professional and a good representative of the company. Even though 1-800-Flowers works with LinkShare, Bharwani said the first 30 or 40 minutes of his day is devoted to approving affiliate applications.

Merchants will differ on what’s acceptable, they all share the risk of having their brand value diminished by its appearing on a shoddy affiliate site. Rick McGrath, director of e-commerce partner development for auto parts merchants J.C. Whitney Co., said, “Everybody starts someplace, and I try to maintain a low barrier of entry. But I need to see a clear commercial intent.” Sites that have pictures of the family vacation or someone’s favorite rock band will get the boot. And McGrath has no interest at all in sites that offer get-rich-quick-through-affiliate-marketing offers or multi-level marketing schemes.

Next, he screens for downloadable applications like the Gator eWallet or WhenU, another deal-breaker. “That’s objectionable. I see that as undermining the affiliate program, in my humble opinion,” said McGrath.

Bluefly’s Morris said he scrutinizes affiliate applications closely, and then continues to monitor the affiliates in the program. “We make sure they use the creative we provide and that the environment in which our creative appears is appropriate.” Bluefly staffers manually check affiliate sites, focusing on the ones doing the most business, but also performing random checks on less active affiliates. Besides a general level of professionalism, Bluefly makes sure the sites have adequate privacy policies and disclosures, and, he said, “are legitimately providing a service to their customers by promoting Bluefly.”

The Creative Touch

Affiliates aren’t professional designers, and even the sharpest affiliate can’t compete with the full-blown creative teams that retailers have in-house. Bad product photos scanned from a magazine, misspellings and incorrectly colored logos can make the merchandise look shoddy. To counter this, retailers end up creating special ads, content and images especially for affiliates.

“You don’t want to just keep telling them, ‘Don’t do this,'” 1-800-Flowers’ Bharwani said. “You want to tell them, ‘Do this. If you want to send out an email, don’t send it with those ugly orange and pink colors, use this instead.’ We not only give them creative, but also help them with things like email templates.”

Whether it’s producing separate-but-equal ad campaigns or simply reformatting existing digital assets, this work can stress the company’s resources or add to the overhead. It has the potential to divert time and attention from other forms of advertising. Overstock.com, with over 30,000 affiliates, has a dedicated designer producing materials for affiliates to use. Because the company buys limited lots of products, it instituted data feeds that every night automatically update dynamically displayed products on affiliates’ sites.

Crying Game

Good communication like that is important when working with affiliates, merchants say, not only to help affiliates succeed but to stave off problems. When affiliates feel they’ve been treated unfairly, they can strike back and really dent the merchant’s reputation. Internet message boards are rife with backbiting and flaming recriminations against merchants who disappointed.

“If you have a few disgruntled affiliates or an issue that comes up, you have to be very proactive in resolving it,” Bharwani said. Merchants must deal with a wide range of personalities and operations, from highly professional types to loners in dark rooms. “There are guys who are big corporations and guys who are running it out of their homes. And each person matters.”

Affiliate marketing may not be for every merchant. To avoid damaging the brand or siphoning off resources from critical projects, merchants must have the resources and culture to manage the program well. “You have to allocate resources, absolutely,” says Tiger Direct’s Matthews. “I believe you get out of it what you put into it. The key, he says, is to “balance what they want with what makes sense for you in a business case.”

The bottom line: While there are risks, there are also rewards.

SUSAN KUCHINSKAS, managing editor of Revenue, has covered online marketing and e-commerce for more than a decade. She is also the co-author of Going Mobile: Building the Real-time Enterprise with Mobile Applications that Work.

Profits By Design

Link all you want, but unless your site helps visitors find what they want while enjoying the process, they won’t stick around long enough to buy anything. The big secret is creating a well-designed Web site. That’s easily said, but difficult to accomplish. Quality sites have fresh, interesting content; easy-to-understand organization; visual appeal; and affiliate links that are relevant and attractive.

We asked five very successful affiliate sites to share their tricks for designing a hard-working, pleasing site that keeps users coming back for more. Each site exemplifies a key principle of good Web design.

Build a solid foundation

Thoughtful planning of the structure and content before design began has helped Kitchens.com to fulfill its aim of being the Web’s most comprehensive consumer resource for kitchen design and remodeling. Today the site ranks as the fifth most visited affiliate site in Alexa’s Home Improvement category. Click the site’s “shop” link and you’ll find a sizeable custom storefront linking to dozens of merchants.

Kitchens.com wants to walk its visitors through complex projects (such as kitchen remodeling) while making it look easy and fun. The site is minimalist, with only a few links on any given page. Like a recipe, the site breaks projects into easily digestible steps.

Editor Kate Schwartz stressed the importance of planning when it comes to building a successful affiliate site. Schwartz said the founders spent a full year analyzing the kitchen industry and determining what users would expect from a kitchen design and remodeling Web site before launching Kitchens.com.

“It was expensive, in that one designer and the original editor spent an entire year working on it,” Schwartz said. But the careful planning paid off in reduced maintenance costs, because the site worked well and really did provide just about anything anyone would want to know about kitchens. The structure also allows for updates to be made as new products or styles evolve without the need for adding new sections or reorganizing. Now, said Schwartz, “Basically, we tend to add rather than modify or change.”

Find the right style

A site must appeal to its target audience by developing a unique style using color, typography, arrangement and voice. PowerBasketball.com, a resource for youth basketball coaches, manages to seem friendly and yet professional. Guy Power launched the site in 1998 as a personal project. It’s now the fourth most-visited site in Alexa’s Basketball category. PowerBasketball is an Amazon affiliate, and book and video sales can earn four figures each quarter during the basketball season, which is not bad for a one-man show.

Power wanted visitors to be pleasantly surprised to find a site that offers so much without charging a monthly fee. A self-taught designer, he went through several iterations of site design. “I have spent so much time searching the Internet and studying design, layout, and color schemes,” he said. “You name it, I have tried it. I always liked the look of simplicity and subtle color scheme – the newspaper look.” Power replicated that look by laying out stories in relatively narrow columns on a white background, and adding only a minimal amount of color.

Indeed, visiting PowerBasketball.com gives one the feeling of being on the inside, privy to the knowledge of professionals. The design is a sharp contrast to the amateur look of the site’s competition. Power feels that the current site design will satisfy his visitors for some time to come.

Organizing content and distributing it across the site was tricky. “The hardest part of design has always been to position chunks of content on the main page that will allow the visitor the opportunity to find information that appeals to them without weighing it down.” He wanted to offer enough content on the main page to reassure visitors that the site was substantive, while encouraging them to wander through the rest of the site. Power achieves this by highlighting a small selection of recent stories in the center of the home page but also offering a number of other jumping-off points around the primary content in smaller type. By mimicking the design of more established media outlets, PowerBasketball gets to play with the big guys.

Let content rule

BaseballProspectus.com was launched in 1996 by a group of baseball insiders and sports writers to become an online resource for updated information in conjunction with the group’s annual Baseball Prospectus books. The site, in effect, complements the books.

The Site’s Spartan design makes sense for baseball enthusiasts, who expect endless statistics and reports without much fanfare. In fact, many of the pages look much like the typical stats page in a newspaper’s sports section where sports junkies find their data.

Expect that to change, though. The demands of ever-increasing content are driving a re-design. “We’ve got thousands of paying customers, dozens of stat reports, huge databases filled with player information, moderated chats and as many as 35 new articles per week from a large number of writers,” said co-founder and executive vice president Gary Huckabay. “We have too much stuff for our current design.” The goal of the second-generation design is to make more content accessible via the home page while keeping load time down.

For Baseball Prospectus, content is king. “Promote and spend all you want, but at the end of the day, you absolutely must have the best content in your business,” said Huckabay. “We work very hard to go find the best analysts and writers we can, and that’s the key.”

Maintain consistency

Kendall Holmes launched OldHouseWeb.com in 1998 to be a repository of information, he said, “for homeowners and contractors about living with, working on and restoring old houses. We also sought to build a community of enthusiasts, so old house lovers could connect with each other and share ideas and techniques.”

Old House Web sells a variety of merchandise through HomeStore.com, Rockler.com, and Amazon.com. The site’s biggest sellers on a daily basis are books focused on restoration and remodeling.

Holmes said the basic design concept is to keep it simple. “We try to fit with our audience like an old, comfortable pair of shoes or blue jeans,” he said. That simplicity extends to terminology and navigation. The thousands of pages of information are divided into logical chunks with common-sense topic names, such as “doors,” “cabinetry” or “flooring,” rather than more technical or cutesy terminology.

To simplify navigation, the site employs “breadcrumb trails,” a textual representation at the top of the page showing where the user has been. For example, someone reading an article on waxed plaster finishes would see a bar at the top of the page reading “Home > Walls > Plaster,” making it easy to retrace steps. “But we’re also realistic that no matter how logical the layout is to us, most users aren’t going to be able to follow our logic,” Holmes said. “So we put a search box on every page.”

Attention to design extends to affiliate relationships as well. Said Holmes, “With anything we sell, from anyone, one of our requirements is that we need to maintain our look and feel, so that we can deliver our user experience … even if the final transaction takes place elsewhere.”

Holmes credits the flexibility of the Web services system at Amazon.com with dramatically boosting sales of Amazon merchandise. Old House Web uses the e-commerce giant’s XML feed to brand its own version of the Amazon sales pages, putting its own look onto the design. Rather than just linking to a book page on Amazon, this service lets Old House Web seem to have its own information page with pictures, reviews and samples. People may not even realize they’re using Amazon until they check out.

Help visitors find their way

Ron Hornbaker, founder and editor of BookCrossing.com, struck upon the idea for his site one day in March 2001 and pulled the basics together in one all-nighter. The site is a radical take on an online public library. Anyone is free to join and trade books simply by leaving the book in a public place. Books are tracked online using serial numbers registered on the site and pasted inside them. Members frequent the Web site to write reviews, discuss books via message boards and follow the travels of the books that they “release into the wild.”

Today, the site boasts over 160,000 members and 26 million monthly page views. BookCrossing.com generates up to $2,000 a month in commissions from book sales, and, for good measure, it also sells groceries, ink jet cartridges and gifts that bring in several hundred dollars per month.

When it comes to design, Hornbaker has few hard and fast rules. He stressed that navigation is more important than a hip or modern look. “I’m more concerned with offering a consistent, intuitive navigation interface, combined with a clean, readable content section, that works at all browser window sizes down to 600 pixels wide,” he said. In other words, don’t exclude people just because their monitors are too small.

“The charter is a little place in my head that knows what looks good, and what looks bad,” he said. He’s a fan of simplicity, so he lets text do double-duty for information and navigation. At the same time, he likes to keep a lot of information next to the main content. The deluge of data added to the site each day makes for cluttered pages. For example, each book listing offers seven purchasing links to affiliate sites. He minimizes the clutter by keeping design consistent from page to page and by using small fonts to make these links easy to navigate and easy to read.

“Growing a community Web site is a lot like growing a garden,” Hornbaker said. “You’ve got to lay it out with the right spacing and structure, plant the right seeds, build appropriate trellises to guide the growth, hope for some luck with the sun and the rain (or buy water and fertilizer), and then maintain vigilance in pulling weeds and keeping out pests most every day. The neat difference in this analogy is that a well-planned Web site can continue to grow if tended by only one or a few people, whereas you’ll probably lose control of a backyard garden before it covers your entire block.”

To use another analogy, just try to imagine a library that gets larger and larger without a good index.

CHRISTOPHER NULL is a longtime technology, business, and entertainment journalist. He founded the popular Web site FilmCritic.com in 1995 and is currently editor in chief of Mobile PC magazine.

Taxing Times

The lure of affiliate income is a magnet for people with drive and imagination. It’s particularly attractive to the impoverished, those in debt or people wanting to purchase a home. It’s a powerful draw to women yearning to stay home and for men raising children alone. And, of course, it’s like mother’s milk to the tax collector.

Affiliate income takes many forms. Sometimes, you don’t even think about it as income. Have you joined Amazon.com’s affiliate program just to get a kickback on your purchases? That’s income.

Some affiliates get rich. Most earn little. Regardless of earnings, or whether you think of it as income, there are tax consequences that you very simply just can’t ignore.

Let’s start with a couple of forms of taxation that many people don’t even know about when they start up: your business license and your DBA form.

A business license requires paying a fee that generates revenue for your city and/or county. If you get caught without one, you’ll probably have to pay them back for the last couple of years, like Donna Schwartz Mills did in Los Angeles. She wanted to be at home when her daughter was growing up, so she started FamilyContent.com and a series of related sites to help other parents find ways to make a living from home. What she didn’t know is that her little business needed a license.

Some cities are now starting to compare state income tax filings with their database of business licenses to determine who claimed to be operating a small business and didn’t have a license. In addition to paying what you owed in the past, you also may have to pay a fine and interest. This may sting you, but it won’t cripple you. Some cities are nice enough just to warn you and let you start clean. Still, without a license, if you have any trouble or need to sue, even in small claims court, your case will be thrown out.

In case you haven’t heard the term before, DBA stands for “doing business as” and refers to the process of recording your fictitious business name in the county where you set up shop. It establishes a public record that allows people to look behind the name of your business to find out who owns it. It also prevents anyone else in your county from using the exact same business name.

Sales Taxes

As an affiliate, sales taxes will not be an issue. To sell anything, even as an affiliate, you need to have customers. However, once you have your following, it’s tempting to create solutions for them. The minute you get clever, coming up with a product, sales tax rears its ugly head. And that’s what happened to Matt and Jamie Garrison when they first established Aluria Software LLC.

Matt Garrison was practically living in his car when he met his future wife. Soon afterwards, while partnering with Jamie’s master programmer brother, Jim Kruse, they gambled all they had on an affiliate income idea. CBS had just debuted the Big Brother TV show, and they created a fan site with lots of pop-ups and affiliate links. Within 6 months, they’d earned over $35,000. They didn’t expect that, but it didn’t take them long to see how to capitalize on it.

Since then, they’ve formed Aluria, with offices in Florida, to develop their own products. Sales taxes came into play as soon as they sold their first copy of Kid Surfer, a Web browser they designed for youngsters. These days, they operate on a budget of about $50,000 a month, and sales taxes are a big part of that budget.

Simply put, sales taxes are based on the destination state. So, if the Garrisons only ship to Florida, they collect Florida sales taxes. On the other hand, if they ship to California, they must know the tax rates in the city and county, too. California has a different sales tax rate almost everywhere you go. Watch out: your state might have several rates, too.

Starting out small, you’ll probably file sales tax returns annually. But you’ll collect sales taxes from customers all year long. To avoid shock when paying the annual bill, keep good records. Make sure the sales tax money is set aside monthly. Coming up with a year’s tax money at the last minute really hurts.

Remember, this isn’t your money. You collected it from customers. The government isn’t friendly when you’ve squandered their money.

If you haven’t been paying sales taxes, don’t worry. You won’t go to jail. You’ll simply have to pay it. Some states insist you pay several years’ taxes. California audits your sales for the life of your business. Few other states are as aggressive. Generally, you may expect to pay approximately three years’ back taxes.

Avoid all this trouble by simply keeping books and filing returns, even if you plan to just dabble in being an affiliate, using affiliate codes for personal purchases. Jamie Garrison advises that all affiliates should set up their operations like a business from the first day. Then, if it suddenly takes off as her business did, you won’t have to scramble to catch up with government and licensing requirements.

Bookkeeping Isn’t That Hard

Looking at the volume of transactions Schwartz Mills decided she could track the activity without a costly bookkeeping system. FamilyContent.com is maintained in QuickBooks and spreadsheets, as needed. For the longest time, Aluria accounting was scribbled on worksheets. With most income coming from affiliates or ClickBank.com, the Garrisons got quick summaries of income. Matt Garrison simply added expenses at year’s end.

That’s perfectly fine. You needn’t spend a fortune if you can use a spreadsheet (whether paper or electronic) to list your checks and income. Go to the office supply store. Pick up a Dome bookkeeping record book. Many small businesses use them. They’re inexpensive and understandable.

For many people, paper systems are too unstructured, while the big, full-featured accounting programs are too complicated. There is a really nifty, very basic program, The Internet Tax Helper [InternetTaxHelper.com] for accounting-phobes. It’s perfect if you are not reporting to banks or investors. Most people never need a balance sheet.

Are you willing to tackle double-entry? There’s QuickBooks, Microsoft’s Money, Peachtree, One-Write Plus or other software packages. All offer a panoply of capabilities in addition to bookkeeping – invoicing, payroll, banking, electronic bill paying, fancy graphs, cost accounting, complex financial statements. They’re remarkably versatile.

Accounting software produces information for tax returns and financial statements any time. When refinancing your home or trying to get a business loan, you needn’t rely on your accountant or tax professional. Simply print off a report.

Don’t go it alone. Have a professional review your work quarterly. Verify that your entries are done properly. Otherwise, you might think you have a loss, then suddenly learn you have a profit of $50,000 or more.

For some, like the Garrisons, not paying taxes until they file their return is a deliberate strategy. They don’t use bank loans or other debt to cover their operating expenses throughout the year. Instead, they use the money that should go towards quarterly payments. With IRS interest rates as low as 7 percent, this can be cheaper than bank loans, even with a possible penalty and they didn’t need to qualify. This is their choice, but a risky one. It’s against regulations,and if you don’t have the cash to pay the tax and penalties, you may find yourself in more trouble than you avoided.

Donna Garrison deals with estimates by having her husband increase his payroll withholding to cover her profits. That’s easier than remembering to make quarterly payments. But if you don’t have a working spouse, remember, payments are due in April, June, September and January, each year.

Employees or Freelancers?

Being in business means you may need help. Jamie and Matt hired staff, on payroll, with benefits. They didn’t go cheap, treating employees as freelancers. That kind of thing usually backfires. If you have freelancers, give them a Form W-9 to fill out, with their names, addresses and Social Security numbers. In January of each year, send out Form 1099-MISC to each freelancer.

IRS uses a list of 20 points to decide if someone is an employee or not. (You will find the list and explanation at http://www.taxmama.com/Articles-cur/semyth2.html)

The importance of each quality on that list is subjective. IRS looks at each item, applying it to your outside staff. IRS decides if you’re an employer.

Here are questions to ask yourself:

  • Carefully examine your working arrangement with freelancers. Do they work just for you? Do they have a key to your office? Do they use your telephone, your equipment, your supplies? Do their business cards have your company’s phone number?
  • Do they have a “risk of loss?” Are they using your facility, but paying you rent? If they don’t come in, do they still have to pay you rent? Do they buy their own computers and software? Work from their home or office? Pay for their own education? Can they simply quit at any time with no consequences? Or would they be in breach of contract?

If you answered “yes” to questions in the first group, or “no” to questions in the second group, then run, don’t walk, to the nearest qualified tax professional.

What if you didn’t put your buddy on payroll and got caught?

There are “safe harbor” provisions in the law. While you won’t get out of paying the payroll taxes, you might reduce some taxes, penalties and interest. It will help if you can prove your freelancing friend actually reported the income and paid taxes.

How far back will they go? IRS will go back for three years. States may go back even more. If auditors contact you, treat them well. Don’t be rude. Don’t yell, don’t accuse them, and don’t blame them. Be respectful and courteous. Ask them to help you. Typically, they’ll go as easy as they possibly can.

Lots of Affiliate Income – No Tax Returns – Don’t Worry

It’s not uncommon for people who start dabbling in affiliate income not to realize what they’re earning. Starting with no business intent, you join dozens of programs, receiving small checks from each. Perhaps no company sent you a 1099 because no single company paid you $600 or more.

Overall, perhaps you earned $300 each from 10 companies during the year – $3,000 – and didn’t realize you had to file a tax return. You did.

And perhaps you’ve now expanded to 50 programs, still not keeping track. You’ve been so busy, you’ve never realized your earnings are $20,000 per year from these little bits of commissions.

Here’s a good rule of thumb: If you covered your rent, ate, wore new or clean clothes, and drove a car, you certainly had substantial profits and you will owe substantial taxes.

Suddenly, a letter comes from IRS. They want tax returns. You never kept records. You panic. Where do you begin?

Don’t worry. It’s fairly easy to reconstruct this data. Start with your bank statements. If you don’t have them, they’re easy to get. Ask the bank for copies. Even if they charge you, there are only 12 statements each year. That’s not too expensive.

When you get the bank statements, add up all the deposits for the year. Deduct anything that is obviously not income: cash advances from credit cards, loans from family, money drawn from savings, inheritances, child support. Whatever’s left is your income.

If you cannot get bank statements and all your income came from affiliate programs, send an email to each merchant. They have records. Usually, they can run a report summarizing your earnings from them.

Canceled checks, though, are expensive to replace. You must pay for each check. Hopefully, you still have those stashed in a box somewhere. On the other hand, credit cards are great for purchases, as long as you pay the bills each month. Practically all credit card companies will provide free copies of prior year statements. Since many of them also offer lovely summaries, get those printouts. Half your bookkeeping will be done for the year.

If you’re unable to recover the data (you never had a bank account, or the bank was destroyed in storms or riots, with all records), do your best to estimate the expenses. Make a list of all the things you pay each month. Remember your Internet connection, Web host, telephones, cell phones and other expenses.

If your list makes sense and the numbers are reasonable, the IRS must accept them based on the Cohan Rule, named after George M. Cohan, the entertainer. Since Cohan was always on the road, he couldn’t carry huge filing systems. In his day, there were no Pocket PCs for tracking data. Cohan established that even without receipts, if your expenses are “ordinary and necessary,” the IRS must take them into account.

While it’s really in your best interest to do it all right, don’t worry about messing up. There’s usually an easy fix. All you’ll have to do is pay the bills, which, in all fairness, you do owe. If you do the right thing, you won’t go to jail. If you try to cheat, well, things may go a little harder on you.

If you are so hard-up that you can’t pay, there are even ways to cut a deal. But we’ll have to save that for another day.

EVA ROSENBERG, MBA, is publisher of TaxMama.com and an enrolled agent, licensed to represent taxpayers before the IRS. She has a quarter century of experience dealing with tax issues faced by small and Internet businesses.

A Perfect Ten

Most people who start a small business do at least one thing well. For restaurateurs, it’s usually cooking. For painters, it’s wielding a paint brush. For affiliate marketers, it’s often building a Web site that pleases customers.

But too many small businesses fail because the owner isn’t good at something else: running a small business.

To succeed as an affiliate, it takes a lot more than posting links. Here are 10 tips for getting off to a good start with your affiliate marketing effort.

1. The Business Plan

If you do not care where you are going, any road will get you there. But if you want to start a successful affiliate business, you need a business plan. It’s a document that will guide you on a monthly basis to see if you’re reaching your goals and, if not, what you need to change.

Does this sound like a homework assignment? Well, it is. If you’re going to invest time, money and effort in building an affiliate marketing business, give yourself every opportunity to succeed. Preparing a plan will make you focus on those elements that highlight your strengths and improve weaker areas.

What are the elements? Product development, marketing, sales, operations, personnel, finance and management are the components to be included. It’s a document that will help determine your financing, credit history, collateral and whether you can repay a lender (if that’s your direction). You will also review your organizational plan, legal structure and the other important parts.

It will help you answer the tough questions: What’s your strategy? Have you done a market analysis? Have you done a break-even analysis to know your minimum bottom line? What about tax information? What will you tell the bankers?

How you write the document is also important, so get a good book on the subject to guide you. Short is better. Keep the whole document, if possible, to about eight or 10 pages.

2. Grants and Financing

One of the most frequent questions I’m asked as a SCORE counselor is, “How can I get a grant?” It is usually prefaced by something like “My wife is a minority …” or “We are a woman-owned business.”

The reason people seek a “grant” is because it doesn’t need to be repaid. So, if you want one, ask yourself why someone would want you to have it. What are you offering for that grant? What improvement will you be developing?

There are thousands of programs, funds and grants that have been created by federal, state and local governments. In addition, there are foundations and organizations that offer grants. It is impossible to try to list them. There are many programs for minority- and women-owned businesses. States love businesses that will create new jobs

Just about every major government department offers some kind of assistance to small business owners. For foundations, try FoundationCenter.org, which is quite extensive. Read your local newspapers, check out specialized magazines and network with local groups to learn about small grants.

If you’re seeking a loan, let it be known the SBA does not make loans directly to businesses. They work through banks.

3. Need Help?

Where do you start to find a great employee? You know what the job requires, so write down the tasks in the order of importance. With that, you have the basics of a “job description.” The U.S. Department of Labor has published a book called Dictionary of Occupational Titles available at your local library and the nearest state labor department office. This book contains complete job descriptions by title, saving you the work.

You need this to find the person with the right skills; to describe the job duties to the applicant; and to follow the duties over time, readjusting as needed. Your state agency will write the job description when you list the opening. Also, the labor department is an excellent and free source to find the applicants that are most suitable to perform the tasks. They also list openings online.

Be aware that most jobs are filled by word of mouth. That’s an effective way to recruit, but you must be good at finding out the qualifications of the person (See next topic.)

Keep the job description; it will help you to supervise the employee later.

4. Ask Good Questions

Whether you need information to complete a task, to interview a potential employee or to buy a new computer, it is essential to know your goal. When asking questions, you’ll narrow the scope of your questions to obtain the information needed.

The more technical the project, the more you pinpoint your questioning. You knew that.

When interviewing a job applicant, most of the data will be at your fingertips after you read the resume and application form. You’ll need other information, but there are legal requirements about what you may ask.

To stay within the boundaries, ask open-ended questions such as “Tell me what you liked best about that position” or “Will the hours present any problem?” Avoid asking about ethnicity, religion, sexual preference, politics and other personal areas.

Check your local labor department for more information on what you can and can’t ask during an interview. It may help you avoid some big problems later.

5. The Home Office

Most affiliates work at home, but many never set up an area dedicated to that work.

Prepare your work area in a professional manner. Working on the dining room table over a long period of time isn’t the answer. Have a specific area that the family or colleagues know is your “office,” even if it’s a corner of the living room or a closet.

The convenience of a home work area is well known. However, family and friends need to respect the privacy and the hours you indicate you’ll be working. Keep your work life separate.

Get a separate business phone that’s off limits to family except in an emergency. Get call-waiting so you don’t miss calls.

Will you have occasional business visitors? If possible, arrange an entrance to your “office” that avoids family areas.

6. Manage Your Site

Didn’t anyone tell you it would be a full-time job? Update your site by adding fresh content at least two or three times a week. That will keep it interesting to visitors.

Repair broken links regularly. Tweak the appearance to make the site faster, more logically organized and easier for customers to navigate.

As you start to get questions from customers, add the information they’re asking to an online list of frequently asked questions. That will cut down on questions from other customers.

Have friends visit the site and test it for you. If you listen closely, they’ll give you important clues on how to make it better.

If you do these things yourself, you’ll reduce your maintenance costs. But make sure you have the skills and knowledge to do them right.

7. Hire an Accountant

So you’re not an accountant? Nor a bookkeeper? You may need an accountant to do your taxes, and you also may need one to guide you in keeping records.

Start by discussing your business with an accountant familiar with small businesses. You can do this record keeping via computer programs or the old-fashioned way: paper workbooks. Just be sure you are including all the elements needed for tax purposes.

If you are going to do this yourself, a lot of discipline is going to be required. Keep a mileage book in your car and use it each time you go on a business-related trip.

Keep all those receipts. At least once a week, record income, and expenses. Not only does this keep you from falling way behind, it keeps you alert to your business plan progress.

Check your bank and credit card statements carefully to be sure you haven’t missed anything. And meet with your accountant at least quarterly to make sure you’re still on track.

8. Market Your Site

Your Web site is your store. And it’s your job to get people into your store. Make sure your packaging is clear, well organized and attractive. Proofread everything before you put it on. Check word usage carefully. (Do you mean compliment or complement?)

Do you have an electronic and paper brochure describing your business? Bring it along when you go to meetings, public events or conferences, and be sure to network with people.

Develop a publicity plan listing key messages about your company. Where are the best media outlets for your story? Online newsletters and local radio and TV shows are some ideas. Don’t be shy about calling them.

Send press releases to local media to announce your new online business, but be sure there is newsworthy information included. (It’s newsworthy if you would want to read it about some other business.) Follow up a few days later with a phone call asking if they saw the release and ask the news desk if you can provide further information.

Can you afford banner ads on other Web sites? At the least, be sure you have a poster with your Web site in the back window of your car.

Maintain a customer mailing list (email and snail), and use it often.

Get a book on marketing for a lot of other practical and inexpensive ideas.

9. Know Thy Competitor

This logical step is basic when going into business. Let’s explore where you can find out about your competition. Demographic studies are available at state, county and municipal centers. You’ll find facts about most businesses in the area. Look around at the area.

Using your common sense, you can talk to suppliers, manufacturers, distributors, wholesalers, salespeople, public officials, customers, trade organizations and can find out just about anything you need to know. Be their customer. Work for the competition. Ask them directly.

What is all this nosing about going to tell you? It tells you what they are doing right and how you can do it better, and the reverse. It shows how they do business, where they advertise, buy supplies, find help. It answers who their customers are; what their prices and discounts are; whether they give more quantity or quality; how many of them there are; and what kind of reputation they have.

These steps should give you lots to work with and improve upon. The more you do, the more likely that you and your venture will be successful.

10. Get Legal Advice

How would you know when you need a lawyer?

You need one to decipher legal language, when you’re faced with legal action, when you enter long-term agreements or when you purchase property or a business. You also may need one for taxes, patents, copyrights and, of course, lawsuits.

Legally, you don’t need a lawyer to form a corporation. You don’t need your hand held throughout your business transactions. A good business friend or mentor can probably give you just as good advice as a lawyer. A good attorney will tell you that he is not good at business decisions.

However, when you do need a lawyer, be sure you inquire of as many sources similar to your enterprise as possible to find the right one. Don’t be bashful! Interview the lawyer to be sure you’re getting the experience you need for the question you need answered.

MARION S. KURITZ is a SCORE small business counselor who previously was assistant director for the New York department of Economic Development. She’s also worked with the New York departments of Labor and Social Services. She now has a successful home-based jewelry business.