The Posh Payoff

Diamonds, private jets, multi-million-dollar mansions, haute couture, luxury vehicles and high-end handbags – customers looking for upscale goods and services could probably find all these items in posh places like Beverly Hills or they could just head to the Web.

The online shopping environment for upscale merchandise has been robust in recent years.

Websites such as NeimanMarcus.com, with annual sales that jumped 30 percent in fiscal 2005, and Diamonds.com, are flourishing.

This climate of vigorous sales is driving merchants, including fashion icons DKNY and Prada, to unveil e-commerce sites in the coming months and incentivizing affiliate sites like American-Luxury.com and Splendora.com to promote high-end merchandise to their niche audiences.

Initially luxury merchants had trepidation about the effect the Internet would have on their brand equity. eMarketer’s senior analyst, Jeff Grau, says, “Because the Internet is often thought of as the place to go for bargains, luxury merchants were concerned that it would cheapen their brand. Luxury brands’ emphasis is on quality and fashion rather than price ” they did not want to be associated with a channel that was for bargain hunters.”

But lucrative benefits have outweighed these concerns – the Internet not only offers a new source of sales and higher profit margins, it is a way for merchants to avoid high overhead costs of paying employees and expensive rents in tony areas. And many luxury merchants that have moved online say they did so to meet increased demand.

LUXE FOR LIFE

That demand is evident in several categories. In 2005, Forrester Research found that jewelry/luxury goods, apparel and health/beauty were making the most inroads into total sales – and the market researcher forecast apparel and home products as the two categories to grow the fastest between 2005 and 2010.

Traditionally the categories that have sold the best online have been computer hardware/software, books, and toys/video games. ComScore Media Metrix found that for the 2005 holiday season, the jewelry and luxury goods and accessories categories showed a 22 percent gain in visitors in December over November.

Apparel: The conventional wisdom about e-commerce was that apparel never would sell well online because people want to try things on before they buy. But more familiarity with a brand’s size and quality expectations as well as easier return policies are causing consumers to buy more apparel online every year, which accounts for a large segment of high-end merchandise.

“People are becoming more and more comfortable buying apparel online. For example, denim is one of our top categories – we keep adding more brands due to the demand of what clients are asking from us,” Carel Hearon, eLuxury.com’s marketing and affiliate manager, says.

Accessories/Handbags: According to comScore Media Metrix, the percentage of Internet visitors to Coach.com increased 117 percent in 2005, and a 2005 Women’s Wear Daily poll found that a large percentage of women (48 percent) buy accessories online. Accessories such as handbags and scarves sell well over the Internet because they are not restricted by size or fit requirements.

“Handbags and accessories are our strongest categories. You don’t have to try on a handbag, so there is a lower return rate,” Hearon says. Others agree.

“We get lots of winning bids for eBay on terms like Balenciaga Le Dix and Chloe Paddington for handbags,” says Michelle Madhok, who runs SheFinds.com, which focuses on shopping and fashion. Madhok notes that such handbags retail in the $1,000 range.

Shoes: Madhok adds, “We sell tons of shoes – especially from Zappos Couture” – with an average price point of $250. She says the reason is, “No matter your size, shoes always fit – that makes them especially attractive for Internet shoppers.”

Trisha Okubo, founder of Omiru.com, a style and fashion affiliate, says, “Our best categories are shoes and other accessories, likely because the fit issue is minimized in these categories. Our experience with high-end shoes is that brand name matters. Bluefly has worked for us because it provides discounts on well-known designer names.”

Lingerie: The 2005 Women’s Wear Daily poll found that women like to purchase intimate apparel online such as lingerie because they enjoy the privacy of shopping from home. Underwear is SheFinds.com’s No. 1 category. SheFinds.com partners with BareNecessities, which offers brands such as La Perla and Cosabella that sell bras that typically cost more than $100.

Jewelry: According to comScore Media Metrix, the increase in the percentage of Internet visitors heading to Diamonds.com was 223 percent, and the increase to Zales.com was 163 percent from November 2004 to November 2005.

Eddie Bakhash, president of AmericanPearl.com, which has been in business since 1997, says it has experienced a steady growth of approximately 20 percent annually for the past five years. The top-selling items are rings, earrings and necklaces, and the average price point for a product is $1,000. Brad Matson, chief marketing officer for Bluefly, says it added jewelry “based on demand,” adding, “It is an important and growing segment for Bluefly.”

Home Decor: Forrester predicts that home products will grow 8 percent between 2005 and 2010. Marilyn Olsen, who runs four sites, including American- Luxury.com and French-Luxury.com, sells a wide range of high-end merchandise including furniture, kitchenware, interior design and gardening essentials and is an affiliate for upscale furniture merchants such as Design Within Reach, Frontgate and Horchow.

She explains the success of these categories:

“As people furnish their kitchen, they want to be able to cook and entertain casually in as much style as they do in other parts of the house,” Olsen says. When people visit American-Luxury.com to buy leather armchair barstools that retail at $729 each from Horchow, they can see a Jura Capresso Impressa espresso machine that retails for $2,399 from Sur La Table.

Other Items: The definition of a luxury item is something that adds to pleasure or comfort but is not absolutely necessary – an indulgence. Merchandise in all sorts of categories could match this description – such as spa treatments, luxury travel, upscale baby clothes, gourmet foods and high-end gifts.

For the 2005 holiday season, the leaders in the luxury segment were RedEnvelope with its December traffic (2.4 million visitors) seeing a 62 percent increase over the previous month; and Tiffany & Co., up 47 percent over November with 2 million visitors, according to comScore Media Metrix.

Luxury shoppers, who make up a mere 2 percent of all online buyers, account for nearly 7 percent of online retail sales. According to Forrester, the online shopping revenue reached $170 billion in 2005 – $12 billion (7 percent), was sales luxury sales.

Indeed, some online luxury shoppers are affluent people. In March 2006, Time magazine found that of adult Internet users with household incomes of at least $150,000, 12 percent of respondents said that the Internet was their primary place to shop for apparel and 18 percent said it was their secondary place. And upper-income shoppers have been driving sales for the past two years, noting that luxury goods retailers were the strongest performers during the 2005 holiday season, according to Ernst & Young Consumer Trends Center.

Forrester finds that luxury buyers are comfortable with Internet and Web technologies and have shifted a great part of their spending to the online channel as usability has improved. Luxury buyers, in fact, are 36 percent more likely to be comfortable with online transactions involving their credit cards and are 25 percent more likely to be technology optimists than average online shoppers.

CONVENIENCE IS KEY

And the Internet is an excellent way to reach lucrative clientèle – high earners who work long hours and have little time to shop. American-Luxury’s Olsen attributes part of the growth of her site to this. “I think a lot of it is time constraint,” she says. “The sophisticated customer is increasingly very, very busy and they don’t have time to go to the mall.”

Forrester found that convenience-driven consumers make up approximately 31 percent of all online shoppers and represent nearly 35 percent of all online spending. And many of these convenience shoppers are buying upscale merchandise.

“It turns out it is a convenience thing – most of our customers live in major metropolitan cities – they could have gone to the stores,” says eLuxury’s Hearon. “We thought our top buyers were going to be in places like Des Moines, Iowa, where there were not stores to buy the latest Rock & Republic jeans.”

And for people who live in more rural areas, it is certainly more convenient to shop online than to take long trips to metro areas. eMarketer’s Grau says, “The Internet makes it easier – it brings into reach the items that people in small towns cannot get.”

Jeremy Palmer, QuitYourDayJob.com’s CEO, says he has worked with Zappos.com, and was surprised that there was a market for expensive shoes but reasons that “people in fly-over states like Utah [where he lives] want luxury shoes but are limited in what they can buy – the audience is smaller but there is demand.”

Olsen agrees. “In some areas of the country, it is harder to find upscale merchandise. I think they tend to appreciate Internet shopping more than someone who has access to brick and mortar,” she says.

In addition to convenience, Grau says the growth in luxury online sales is due to the maturation of e-commerce where consumers feel more comfortable buying very expensive things online, so there are more items offered to meet demand.

“Merchants started out with books and CDs and gained confidence to where consumers buy a watch or a ring, whereas a year earlier they never would have. There are three main reasons: trust, education and presentation,” he says.

TRUST BUILDING

The biggest tool for building trust is improved customer service with excellent phone representatives, consistent delivery of quality products and better shipping policies for easier returns.

Madhok says, “Shoe companies are great with free shipping and free returns, so there’s no risk in ordering.”

Hearon adds that, “For apparel, such as denim, people will buy two sizes and keep one and return the other so they can avoid the hassle. We have great shipping policies to do that.”

Grau explains that merchants make it possible to enter into a live chat so there is more hand holding when it comes to buying a high-end product.

“You see on jewelry sites lots of educational information that explain what to look for when buying a diamond ring – how to evaluate quality and what carats mean. They [service representatives] help a customer shop and they gain more trust in the brand that takes the time to educate the customer about how to buy a diamond ring.”

Another important component to luxury shopping online is the presentation of merchandise that websites offer.

Consumers visit websites after they have been in a store since they can often find a great range of color and sizes. Online shopping is not only about pre-shopping, but securing exactly what you want, according to Grau.

Olsen says, “I work like a personal shopper and make it easier for people to find things. I am able to show them all of the options in one place and make their decision making more simple.”

Luxury shoppers do not think of the Internet as limited or the lesser alternative to off-line shopping but as a unique way to shop, according to Bluefly’s Matson.

“At Bluefly, you can see 100 dresses in one color very quickly – you would have to go to 10 stores to see that,” he says. “Bluefly has an engine that lets you look at all of the dresses that are black, size four and between $200 and $400, from more than 365 designers.”

There are some e-tailers that allow customers to enter their physical dimensions and the site will in turn offer up styles that are suited to your figure, Grau says.

Online shopping also serves consumers who want to stay on top of the trends, making it easier to achieve a certain look. Hearon says many of eLuxury’s customers “have high household incomes but some are willing to live in a shoebox to have the latest Louis Vuitton bag and shoes. They are very fashion-conscious and are aware of the trends and want to wear them and will do whatever it takes.”

Celebrity gossip and style watcher websites have brought the demand for “it” labels to cyberspace.

“Now women want the bag they see Jennifer Aniston carrying. Before, to get their hands on the designer item, they’d have to shop in a big city. Now designer labels – even discounted designer labels – can be found on eLuxury, Neiman Marcus, Yoox and Bluefly’s websites,” Madhok says.

Omiru.com’s Okubo says that, “the growing status-consciousness of our culture encourages the gravitation towards luxury brands. What you buy and what you wear is seen as an extension of your personality, really; an extension of you. What does this mean for retailers? People want Prada or Polo, not a private-label brand. Luxury brands have an automatic stamp of approval on them.”

NICHE IS NICE

This phenomenon provides an opportunity for publishers to focus on an area of their expertise, become an evangelist for a brand and reach potential customers – whether it is for premium watches, fine crystal or evening handbags. Moreover, luxury purchasers tend to be passionate and loyal and showy about their brands and this lends itself well to merchants looking for loyalists to endorse their products.

Liane Dietrich, vice president of Merchant Services for LinkShare, attributes the increase in luxury-brand sales online to affiliates.

“There are lots of niche and content sites that are playing the role of ‘recommender’ – they recommend products and merchants to consumers and that is paving the way for luxury brands to take their place.”

Clearly affiliates are attracted to upscale merchandise for the high commissions – many luxury sites do not offer discounts and have limited “sales” or “clearance” sections. Luxury merchants report that paying full price does not deter consumers from buying.

Another reason affiliates promote luxury products is the cache that luxury items offer them.

“I think it’s very important to note that affiliates are attracted to luxury merchants for the perception of high-average- order value and high conversion, as well as the visual value that the luxury connection adds to the affiliate’s site,” Dietrich says.

But affiliates need to be sure they offer the brand that leads a potential customer to their site. Shawn Collins, president of Shawn Collins Consulting, warns, “If unchecked, affiliates will exploit the brand – they will leverage the brand names like Gucci or Dior even if they don’t sell those products. Affiliate managers should kick them out after one or two ‘outs’ if affiliates mess around with the branding. For example, in paid search arbitrage, affiliates can bid on trademarked names such as Dior but these keywords frequently get abused and affiliates drive traffic to their sites when there is no product there.”

SELECTIVE, EXCLUSIVE, DISCRIMINATING

Affiliates should be aware that in exchange for potentially high commissions, the programs are not easy to get into and will require that affiliates not only have a highly trafficked site, but a well-designed site that features other upscale sellers. And they will be closely monitored with their keyword buys and how they present brands on their site.

“Luxury affiliate managers are pretty brand-protective. They are looking for a reduced level of discounting; a clean, visually appealing site; and possibly some other merchants on the site that would help raise the legitimacy of the website,” Grau says.

“Obviously, Rolex doesn’t want to see an advertisement for Rolex watches on a Wal-Mart affiliate site,” Palmer says. “The terms and conditions of luxury programs spell out how they want their brands advertised.”

Hearon says, “We are very selective – we have 300 people apply per week and I let in three. I evaluate the ‘look and feel’ of the site and I have an intern look at every affiliate. I make sure we are not on coupon sites.”

“You have to be cautious with affiliate marketing – if you are selling a fine-quality product, you want it to be showcased in the best possible light,” AmericanPearl.com’s Bakhash says. “Consumers evaluate the company and product based on where it is – which is why we really like Yahoo Shopping and Amazon.com.” AmericanPearl is on dozens of other sites through Yahoo Shopping, and Yahoo Shopping is their best affiliate.

Sak’s Fifth Avenue and Neiman Marcus are private programs and currently Neiman’s must approve all photos used on a site, according to Madhok. “I’m hoping as they begin to trust us, this requirement will go away since it impedes the speed of Internet publishing.”

But not all luxury brands are strict.

“Every luxury merchant is going to have a different tack on it. Some luxury merchants are very open to driving revenue that is valuable additional traffic for them – whether it comes from a very high-end affiliate or a small niche affiliate might not be as strong of a concern,” Dietrich says.

Matson says Bluefly has “hundreds of affiliates, which is helping Bluefly to grow. We get 60 [applicants] per week and take 20 or so. We look at quality and fit and examine each affiliate on a case-by-case basis.”

Hearon attributes the success of eLuxury’s affiliate program to “partnering with the right companies and making sure we send out newsletters once a week and communicate as often as possible with our top affiliates [such as] ShopAmex and American Airlines.”

These types of membership and loyalty sites work well for luxury brands by playing up the benefits of being a member in addition to getting the points or rewards. In addition, it plays into the idea of a luxury brand – because of membership, because people are often getting the first crack at a newly released item.

Each of the affiliate networks has a share of luxury merchants. Commission Junction has Bluefly; Performics has RedEnvelope and Frontgate; and LinkShare has eLuxury and Blue Nile. Merchants are looking for networks that are sensitive to where their brands might be, and how their brands are portrayed in any sort of marketing. For this reason, the networks offer a variety of tools that provide merchants with the reassurance that their brand is being marketed correctly.

The days of thinking that companies such as Overstock and eBay, which sell mass-market products like books and iPods, epitomize online shopping are over. The Internet is no longer incompatible with the exclusivity of luxury goods. Retailers of upscale merchandise are and will continue to look to online shopping as an essential sales and marketing channel.

Video Ad Explosion

In early August, Foster’s Beer announced two changes. First, they’ll no longer try to be “Australian for Beer” and, second, they’re moving all their television ad spending online.

Although the decision only affects a $5 million ad budget, it’s a bellwether: Companies are flocking to online video ads as the way to reach customers.

Recent reports claim advertisers will spend $74 billion to buy airtime on TV in the U.S. for 2006. The online ad spend is set to reach $26 billion or 9% of the total US market.

“This [online video ads] could very well become the dominant form of online advertising … probably within the next 18 to 24 months,” says Bob Hanna, senior vice president of sales at Burst Media, which offers a network of publishers for advertisers.

A recent local online advertising report by market researcher Borrell Associates expects local video advertising to become a trackable category in 2007. And the biggest online ad opportunities currently revolve around real estate and automotive. Combined, these two categories comprise slightly more than one-third of all local online advertising, which is expected to grow 31.6 percent to a $7.7 billion category in 2007.

For its new online video ad push, Foster’s Beer is on Heavy.com, the online video site geared toward young males. Prior to Heavy content, which ranges from videos of scantily clad young women to spoofs on America’s Funniest Home Videos, you can find video ads for candy, beer and cars. But the edgier and more risque videos run without pre-roll ads.

Online Is Not TV

Heavy’s motto, “Because TV Sucks,” is instructive. For five years, it has been said that online content is constitutionally different from television: Advertisers will have to change their approach to creating video ads. A panel of online advertising, media and Web executives at the OMMA conference in New York in September agreed the most effective online video ads should be 15 seconds in length or less. The panel also promoted the idea of creating spots specifically for the Internet and digital media rather than repurposing existing television advertisements. That way the ads can be developed to enable consumers to click through to gain additional product information.

Advertisers may also have to be more open about where these ads end up as demand increases.

McKinsey Quarterly, an online business journal from consultant group McKinsey & Co., recently determined that in 2005, 80 percent of online video ad inventory was being used.

“The maximum supply of video ads is currently about $600 million a year – far less than future demand, which we expect to reach $1.4 billion to $3.2 billion in 2007,” the article “A Reality Check for Online Advertising” states.

Still, Randy Kilgore, chief revenue officer for Tremor Network, says, “The juggernaut called online video advertising is here to stay.”

And content providers are rising to the challenge. In August, Google, Viacom and YouTube made announcements about video advertising solutions. Two months later, Google purchased the less-than-two-year-old YouTube for a whopping $1.65 billion.

YouTube, which shows about 100 million videos daily, won’t disclose its advertising fees for visible ad spots. Google, at the end of June, also started testing an advertising model that features some video ads in a sponsored section. Google would also not disclose the fee for those video ads.

Not only are publishers opening up space, but technology solutions are also increasing; for example, Burst Media is now facilitating streaming video within banner ads, and Klipmart, a video ad solution heralded for interesting innovations in video ads for movies, was acquired by DoubleClick in June. DoubleClick is also the parent company of affiliate network Performics. EyeWonder and e-line Technologies are also in the space.

Despite television screens getting larger and flatter, viewers are enticed by the flexibility of on-demand viewing that the Internet enables.

One source for online video placement is on television network sites. Fox is streaming more than 40 episodes of prime-time shows online, with Toyota as the sole sponsor, and other networks are following suit.

That’s because most Internet users have watched online video; 25 percent watch regularly, at least once a week. Users regularly see online video ads and, according to the Online Publishers Association, 44 percent have taken some action after viewing an online video ad. Much of this reach comes during times when people wouldn’t normally be watching TV, given online video’s growing domination of the day-part audience.

And broadening the marketing window into daytime hours can be put to profound use. Thursday-night TV is no longer the last, best opportunity to influence consumers going into the weekend – that title is now held by the Internet on Friday mornings and afternoons.

Within these online shows, pre-roll, mid-roll and post-roll advertising is offered: just like on television. For instance, Heavy.com runs a static ad for Virgin Mobile for five seconds before one of their “Behind The Music That Sucks” shorts. There are also longer, more elaborate ads for Nike and Coors with production quality that is indistinguishable from television ads – and these ads are arguably as good as the content they precede.

Viewers are sometimes unable to fast-forward through “pre-roll” ads. Mid-roll ads crop up in the middle of a video. This format of advertisement would not be practical in a video short but makes sense in a streamed TV show. And, because content is limited, some companies offer ads at the end of videos – post-roll.

New Opportunities

One benefit of streaming prime-time shows and live sporting events is ad opportunities go to marketers who would traditionally advertise with these shows as well as new advertisers who could not afford network television ads. But online video, except in cases like Fox’s shows or news shows like Evening News with Katie Couric (which is being streamed online), doesn’t look like television and should not be treated like television by advertisers.

The bread and butter of sites like AtomFilms, Heavy and Yahoo Video is short video. Most video online is less than five minutes long, and advertisers can’t run one-minute commercials they’ve shot for television.

Companies who have a difficult time understanding that are “trying to apply an old media solution to new media,” says Forrester senior analyst Brian Haven. “In the long run, that’s just not going to be a very successful way to approach online advertising.”

DoubleClick’s vice president of rich media, Ari Paparo, notes that for online video ads, less is more. “You aren’t going to be able to repurpose TV ads – a 30-second ad doesn’t work online. Fifteen seconds is the maximum for a single ad unit.” Paparo suggests a new model: a short preroll spot of three seconds and then the content, then a long post-roll spot. He also believes interactive video ads show real promise, where you can telescope when it’s over to find out more – like for a high-involvement product like a car.

But companies who have strong-roots advertising on television, direct marketing companies, may have other challenges. Edith Bellinghausen, vice president of new media of Razor & Tie, an entertainment company that includes a record label and direct marketing operations, is watching where online video advertising is going but says the company is not ready to rush in.

Razor & Tie will try online video marketing soon “because we have to, but we’ll never move away from TV altogether.” The placement of their spots depends on the product; their children’s music CDs might, for instance, be advertised on Nickelodeon. The documentary Biggie and Tupac was advertised on MTV and VH1, among other cable stations. But sometimes a television campaign is more cost-effective and focused when it’s run on local cable stations.

Potentially, online video advertising could work in a similar way, for focused campaigns for companies with lower marketing budgets.

Bellinghausen notes that YouTube already has videos posted by parents at shows for Razor & Tie’s Club KIDZ BOP. But when considering their children’s CD products, she points out another question facing advertisers who are looking to jump on the user-generated content bandwagon: Are advertisers protected from ad placement next to undesirable content?

“We’re intensely focused on them not ending up somewhere they don’t want to be,” insists Tacoda’s CEO Curt Viebranz. Tacoda sells ad networks based on behavioral segments and YouTube is now in their network. But Viebranz notes, “If you begin to drill down into YouTube’s site, we’re not there. We’re where you enter the site.” Because advertisers are sensitive to being placed near questionable content, Tacoda errs on the side of caution by placing ads near the home page, rather than in the murky underbelly of YouTube’s offerings.

The anarchic nature of user-generated video sites means that brands will have to deal with some uncertainty about placement. “Brands have to think a little more openly about what they’re associated with,” urges Haven. He also believes that online video advertising will cause a philosophical shift in marketers’ approaches: “What YouTube is really doing is issuing a challenge to marketers. You’re not going to just put an ad up on our site, you’re going to have to participate in our community and you’re going to have to be creative about how you do this.”

The shift will force marketers to think more like content providers and will ultimately result in more entertaining creative. The interactive, participatory aspect of the Internet was long held as the reason that television-like ads would not work online. But consumer-generated sites have enabled the ultimate level of participation: consumer-generated ads.

Get Users Involved

While the Coca-Cola/Mentos viral ad on Revver is a great example of a user-generated video that was eventually purchased by Mentos and accepted into their advertising arsenal, companies can go one step further thanks to CurrentTV. CurrentTV, the Al Gore-backed San Francisco-based company that allows users to submit content online for possible broadcast on television, also offers consumers the opportunity to create ads for L’Oreal, Sony Electronics and Toyota.

The first ad to be accepted for television was created by a 16- year-old and sanctioned by Sony. Viewers can rate the ads, which are posted on the site after being thoroughly screened. If the ad makes it to the network, the creator gets $1,000 and is given a licensing agreement. And if the ad makes it to cable or satellite television, the viewer makes $5,000 – for network television it goes up to $10,000.

CurrentTV’s president of sales and marketing, Anne Zehren, says it seems counterintuitive that major brands are the ones participating in this experiment. “At first, people thought the larger brands would have the most resistance because they’d have to give up control as brand guardians. But their marketing departments are now brand hosts; they’re craving innovation and the smart ones want to take a risk, as long as it’s not a free-for-all.” Zehren emphasizes CurrentTV’s commitment to making quality content, with greater control than one finds on other user-produced video sites.

Of course, users have been creating (unsolicited) video ads for companies and posting them on YouTube but most have yet to be formally embraced by the marketing departments of those companies. At the same time, it is certain that brands participating on YouTube’s brand channels will host their own contests to create video ads now that YouTube has announced the creation of brand channels as a way to monetize the site. Initially, sites like YouTube attracted movie advertisements – streaming trailers on such sites makes sense.

And short-content format is ideal for music videos: Warner Bros. has announced that they will promote Paris Hilton’s music debut on YouTube. But YouTube also seems to be a draw for small businesses, companies that would never have the budget for a television campaign.

Several months ago, Allison Margolin, an attractive, young, Beverly Hills-based criminal defense attorney, posted a video advertising her services on YouTube which voiced her disagreement with marijuana laws. The question is, how many people watched the ad before a Los Angeles Times article about her in August mentioned it?

Viral video is also a big deal. Lured by the prospect of reaching millions of consumers without also spending millions of dollars for television airtime or space in print media, companies have shifted more ad dollars to the Net. Video viral marketing has expanded from a negligible piece of the advertising pie to a $100 million to $150 million industry, researchers estimate.

“We’ve recently engaged top talent to help us build viral videos for brand awareness during the off-season, produce training videos to help our online partners to sell our product and to create product videos that sell the features and benefits of TaxBrain. All of these videos are intended primarily for online consumption,” Todd Taylor, manager of business development for TaxBrain, says.

Measuring Up

Right now one can only guess how many people are watching online, especially compared with the number of customers reached with television ads. There are two unresolved issues: online video advertising’s reach and the ability to track it.

“What’s missing right now is what is the return on investment and all the technology surrounding this. How are we sure it’s been placed contextually?” asks Forrester’s Haven.

But Tremor’s Kilgore, the former vice president for Dow Jones Online, disagrees and says, “Audience accountability is a significant advantage for marketers when they consider online video advertising.”

He claims that advertisers can count actual viewers of video when they are actively watching – not getting up for a snack. The other advantages are the ability to track completion rates and geographic data, frequency and targeting based on historical behavior and optimization of spots based on real-time effectiveness – where there’s no need to wait for the focus group. Also, with companion units, online video advertising can offer immediate user interaction. Advertisers can choose geotargeting, demo targeting, behavioral targeting, day-parting, etc.

Hotspotting

Five years ago, there was speculation that hotspotting would be the way to monetize online video advertisements. That is, brands would partner with content creators for product placement in online videos. Viewers could click on items on a counter or an actor’s sweater and be whisked off to a site to purchase it. Hotspotting is finally here, but not widely adopted yet. But if a viewer were watching some cartoons online, would he really click on the Coors ad to get a six-pack of beer delivered to his house? Hotspotting only works for particular products.

Hotspotting did make sense, however, to French clothing company Shai. Their online porn video ads have caused a minor sensation, but not necessarily more customers. Viewers can click on the clothes the actors are wearing as part of an interactive catalog. Before they take them off, that is.

With improved measurement capabilities, big brands jumping on the bandwagon and cheaper costs, video and video advertising are becoming a staple of doing business.

DIANE ANDERSON is a senior editor at Yoga Journal. She previously worked for the Industry Standard, Brandweek, HotWired and Wired News. She lives in San Francisco.

KATHI BLACK is a professor of philosophy (ethics) at The University of San Francisco. She was previously an online entertainment reporter and senior researcher at the Industry Standard.

Sex Education

You may or may not approve of what they are marketing, but nearly everyone can learn something from the strategies that the adult industry uses to capture consumers online. The thriving adult industry has a history of pioneering many online marketing techniques and continues to provide useful lessons in how to attract and convert an audience.

From the creation of the affiliate model to monetizing user-generated content, where sex sites go, mainstream marketers often follow. The selling of sex products and content has grown to become a more than $2.5 billion annual business, according to publisher AVN Online, as each year 72 million people visit the more than 4.2 million adult content websites.

Spoil Your Partners

While search marketing and display advertising provides most of the traffic in many industries, affiliates drive most of the visitors to sex sites. Adult affiliates are treated more like partners, and publishers are unafraid to show their gratitude. Keeping affiliates happy is paramount in the hyper-competitive adult world, says Clark Chambers, general manager of adult affiliate network NicheBucks.

Like many consumers, affiliates don’t have much brand loyalty and will work the partners that offer the better returns if they aren’t satisfied. Chambers, who got into the business because a friend needed someone to oversee his exploding affiliate program, rewards his best affiliates with gifts on top of their generous commissions. He has given jewelry, video games and digital music players to his best affiliates, including one teenager in Russia who makes more than $7,000 a month.

Affiliates do the primary search engine marketing and optimization, which reduces the risk for publishers and eliminates competing with them for the same keywords. Chambers makes sure that his affiliates have access to current conversion statistics and a variety of marketing tools, including a steady stream of images through RSS feeds to attract new customers. Adult sites will even host the affiliate websites for free, according to Chambers, who has been managing adult affiliates for eight years.

Adult sites will pay more than the first month’s subscription fees in commissions to keep the traffic coming, according to an adult industry consultant who asked that his name be withheld (he says his family doesn’t know where he works). The payouts are very generous to prompt affiliate webmasters to work harder for the program, and because they can easily find other content sites to promote, the consultant says. Publishers also emphasize the personal touch by being readily available to their affiliates and quickly responding to their phone calls, and by meeting in person at industry events.

Promoting Competitors

The adult industry has not only nearly perfected the art of affiliate relations, but also grows stronger through publishers earning extra revenue by also acting as affiliates themselves. “Co-opetition” is the practice of promoting competitors’ websites when visitors try to exit a website without buying something, according to Jim Lillig, president of marketing consultancy Synergy Intermedia. “It’s a last resort after exhausting all the other ways to monetize” visitors, he says.

While many publishers may not be willing to promote competitors by acting as an affiliate, Lillig says publishers may be able to earn more revenue from those who don’t buy from them than those who do. Lillig, who helped to build Mr. Skin, a subscription website focusing on celebrity nude scenes, into a successful franchise says, “98 percent of customers leave most websites without buying something.” Admitting that you may not have a product that suits every taste is a difficult but significant realization for publishers looking to maximize their revenue.

Ed Kunkel, the chief operating officer of SexSearch.com, agrees that pitching competitors’ products helps to grow sales across the industry. “[Competitors] have the audience you need and vice versa,” Kunkel says. “It’s a huge world you have access to; there is plenty (of demand) for everyone to make enough money. … Since there is no way of completely dominating a market, you might as well share the wealth amongst each other.”

Analyst Greg Sterling of Sterling Market Intelligence says that publishers who link to their competitor’s sites can benefit. “Intercepting a person before they leave a site in an unobtrusive way would be successful in capturing some number of sales,” according to Sterling. He says applications developers such as customer relations management software company LivePerson are experimenting with displaying competing products as a last resort.

By acting as an affiliate for niche adult publishers (such as sites focusing on older women or those of a specific ethnicity), publishers can also track the conversion rates of different types of content and then develop their own competing sites, according to Lillig. He recommends creating multiple niche sites to highlight areas of content as well as to learn more about consumer habits. Also, publishers who present information about competing products gain credibility with their audience, he says.

Analyst Sterling says companies can increase their reach by parsing their content and creating niche websites, such as search technology vendor Marchex’s development of local search sites from a single database. “The creation of niche sites is a good idea if it can be done skillfully and it’s not just spam,” Sterling says.

The adult industry is a tight-knit group who know each another and “form a big circle,” referring traffic to each other in the belief that it’s better if consumers buy from a competitor than if they don’t buy at all. Adult publishers who trade links with competitors can increase their traffic without having to purchase advertising, Lillig says.

However, that circle often traps customers by generating pop-up windows when customers try to exit, an annoying practice that continues to get some adult publishers in legal trouble. Lillig says that while the pop-ups may be frustrating, adult sites studied the practice and identified the exact number of pop-up windows to maximize revenue. Though pop-ups are still in use, many adult companies now ban affiliates who create pop-ups that trap users with unending windows.

Leading the Technical Charge

Lillig says Mr. Skin was one of the first companies to watermark an image and allow it to be spread around the Internet as viral marketing to enhance branding. Mr. Skin reached millions of potential customers by putting its logo on images and by embedding pre-roll ads into celebrity videos that were circulated via email and through peer-to-peer networks. “They became moving ads,” he says.

The adult industry also popularized giving free sample content in exchange for customers providing valid email addresses and co-registration, which gives customers the option of simultaneously signing up for newsletters from competing adult sites, according to Lillig. He says adult marketers took an early lead in tracking email performance, including who opened emails and where they clicked.

Adult sites have also been adept at identifying seemingly unrelated trends in entertainment and integrating them into their product. For example, one of the fastest-growing segments is “reality porn,” an imitation of reality TV programs that has prompted adult publishers to launch dozens of niche sites.

Another cultural phenomenon being integrated into adult sites is gambling (see article on page 66). Playboy.com will open its first Internet casino by the end of 2006, and 121 Gaming Inc. this summer launched GrandNevada.com, which features naked card dealers.

Publishers need to study the latest trends and find complementary ways to expand their reach, says 121Gaming president and CEO Howard Mann. “We saw an opportunity to go in a different direction with something that added entertainment value,” says Mann, of his combining gaming with nudity.

Adult content publishers are frequently the earliest adopters of technologies such as streaming video and webcams that later are adopted by other industries. “The VCR became popular because people wanted porn, and VHS won out because that was the format that porn adopted,” Mann says. Media companies who are currently evaluating which of the new high-capacity DVD formats (Blu-ray or HD-DVD) to sell should watch to see which technology the porn industry favors.

In addition to technology and cultural trends, adult marketers are also quick to turn the latest publishing trends into tools for deriving additional income. Affiliates are authoring blogs about the adult industry to increase their natural search result rankings, and publishers are creating MySpace profiles for their rising acting stars to differentiate their brands, according to NicheBucks’ Chambers.

The Upper Hand

Of course adult sites have a distinct advantage over their general audience counterparts – sex sells, and the demand for content is almost limitless. “If there is one thing that is universal, it’s that men love to look at naked women,” says 121Gaming’s Mann. Even without any marketing, millions of people will search for adult content. “I know adult networks that get similar traffic to Yahoo,” he says.

Conversion raters are higher on adult versus PG personals searches, according to Mark Brooks, the editor of Online Personals Watch. The “conversions are best when people are looking for sexual connections,” he says. Brooks, who previously worked for AdultFriendFinder, says adult publishers can make back the commissions paid to affiliates to acquire a customer within one month, while it may take three months or more for mainstream personals.

However, because of the generous payouts on adult personals sites, publishers have to spend additional time managing their affiliate relationships. “You have to look after [the affiliates], allow them to call you on the phone and take their requests seriously,” Brooks says. Publishers also have to be steadfast in making sure their affiliates do not damage their brand by being overly aggressive. While he was at the company, AdultFriendFinder stopped allowing affiliates to do email marketing because there was too much abuse.

Lessons Not Learned

The adult industry has mastered how to tempt consumers with just enough content to prompt them to purchase without compromising sales, something that most retail sites have been reticent to experiment with thus far. Adult publishers successfully convert traffic by providing affiliates with free samples of their content, a strategy that publishers should adopt, says Shawn Collins, co-founder of the Affiliate Summit conference.

In the adult world, the profits are in the video content, and affiliates lure and hook customers by showing image galleries (often thumbnails) of naked people, and then directing them to the publishers who sell unlimited access accounts. Collins says video, audio or print media companies could greatly expand their conversions by using affiliates to distribute free samples of their content.

For example, the television networks or movie sellers could distribute clips from their sitcoms or films to affiliates to pique consumer interest, which enables customers to realize the value of the content, according to Collins. Media companies have yet to exploit the power of distributing content through affiliates, Collins says, and were slow to team up with video search engines such as YouTube.com to increase their exposure.

This strategy of partnering with large search engines and requiring users to register is the opposite of the niche marketing that has been critical to the adult industry’s success. Video search engine sites have too much content to successfully promote niches (such as British comedy or period-piece dramas) that would convert well as independent affiliate sites.

“Showing teaser videos and allowing them to be distributed virally” could boost the sales of online video, Collins says. Online music stores should allow affiliates to host and play select songs for free, and Amazon should share its technology for previewing a few pages of a book with affiliates. Reuter’s news is one of the video services that allow affiliates to display its content, but the company keeps all of the revenue from its pre-roll ads, which takes away the incentive from affiliates.

As the adult industry has shown, whetting consumers’ appetites by letting them peek at the goods goes a long way in prompting conversions. Adult publishers prove that by working closely with affiliates, innovating by embracing technology and treating competitors as assets, publishers can create new products and increase their revenue.


JOHN GARTNER is a freelance writer in Portland, Ore. He is a former editor at Wired News and CMP. His articles regularly appear on Wired.com, AlterNet.org and in MIT’s TechnologyReview.com.

Gambling Stakes Rise

You can’t drive on the highway, watch TV or go to the supermarket without being reminded of America’s obsession with betting. Casinos are popping up faster than you can say “double down,” the World Series of Poker has become a prime time television spectacle and Powerball payoffs are reaching the size of state budgets.

Cashing in on a booming industry that offers some of the highest payouts around might seem like a good bet for affiliates, but not when that business is illegal. Gambling law experts say federal law makes it fairly clear that operating Internet sports books is a crime. But the law is not quite as clear regarding the issue of other Internet games, such as poker and blackjack.

Revenue from, and public support of, gambling (or “gaming” as the industry prefers) in all its forms has never been higher, but pressure from the federal government increases the odds that online gambling marketers may be putting their money and freedom on the line.

The policies of the federal government and some states are, broadly speaking, at odds with the rules governing online betting parlors in many countries, like Costa Rica and Antigua, where most casinos have their operations. The current regulations also put law enforcement in conflict with millions of Americans who place bets online, using their home computers to wager on sporting events and games like blackjack and poker.

Poker is hot right now and poker revenue at brick-and-mortar casinos in Nevada and New Jersey may have jumped 37 percent in 2005, according to the American Gaming association, but Internet gambling is the fastest-growing segment of the gambling market, according to a Pew Research report from March of 2006. Ignorance – whether real or feigned – leads to blissful betting, as nearly 20 percent of Americans surveyed by Pew denied knowing that online gambling is illegal.

More than 80 percent of Americans either support or don’t object to gambling, and last year between $10 billion and $12 billion were bet online globally, according to William Eadington, director of the Institute for the Study of Gambling and Commercial Gaming and professor of economics at the University of Nevada, Reno. Even though online gambling is illegal in the United States (with the curious exceptions of state-approved horse racing and lotteries), approximately half of the total online wagering comes from inside the United States.

Despite its popularity, even those who support gambling are reticent to admit it and many recognize its addictive powers. Less than five percent of Americans admit to gambling online, while 70 percent of Americans say that legalized gambling encourages people to spend money they don’t have, according to Pew Research.

Since no online bettors have been prosecuted, individuals log on without fear for all-night poker games, and some confident folks have even quit their day jobs to earn their living betting.

While online gambling may become a $25 billion annual industry by the end of the decade, legislative changes and more vigorous enforcement could prompt many U.S. gambling marketers to fold. However, some legal experts claim that online gambling will not end unless U.S. authorities prosecute every one of the 50 million Americans who bet online every year.

Sports Booked

In July, the “handcuff-click heard ’round the world” took place at a Dallas airport, where BetOnSports CEO David Carruthers was arrested following an indictment for racketeering, conspiracy, fraud and violation of the federal Wire Act. Carruthers, whose company was headquartered in Costa Rica, was charged along with BetOnSports founder Gary David Kaplan and four alleged co-conspirators who worked for U.S.-based DME Global Marketing and Fulfillment. BetOnSports later closed its Costa Rican office.

The arrest forced many companies who participate in online gaming to shuffle their strategy as they awaited trial, and to see if indictments against other organizations would follow. Proprietors of online gaming sites stopped traveling to the U.S., and a much-anticipated gaming conference in Las Vegas was scaled back.

Seven weeks later, law enforcement agents in New York arrested Peter Dicks, chairman of Sportingbet, which offers online sports betting and is traded on the London Stock Exchange. Sportingbet is one of the largest online gambling operators in the world with revenue of $193 million, for the year ended in July, with two-thirds of that coming from the United States, according to the company. Agents of the Port Authority of New York and New Jersey arrested Dicks upon his arrival at Kennedy Airport, acting on a warrant issued by the state police in Louisiana. The arrest was the first time that officials at the state level had adopted similar tactics and pursued charges against a director of a publicly held Internet gambling company.

“The best advice is to stay away from [online gambling],” says attorney Linda Goodman, founder of the Goodman Law Firm, a practice focusing on Internet compliance. Goodman, who primarily represents affiliates and advertising agencies, says this first-time indictment of a marketing company that promotes online gambling opens the door for other affiliate and ad networks to be prosecuted. “If you pick up one of those [gambling] clients on your network, they can charge you with conspiracy.”

Marketers minimally need to include language on their websites stating that advertisements are not intended for American audiences, according to Goodman. Gambling websites should not accept payments if the customer who attempts to set up an account lives in the U.S., she says.

Goodman believes the federal government is more actively pursuing online gambling agencies because the potential pot for taxation is getting sweeter. “Billions of tax dollars are going out the door,” she says.

Online bettors who live outside of the state of Washington probably need not fear as law enforcement’s limited resources prevent targeting individuals, according to Goodman. The Washington legislature passed a law in June of 2006 that upgraded the penalty for running a gambling site from a gross misdemeanor to a felony, and provides gross misdemeanor and felony penalties for betting online in the state.

Patrick Smyth, the president of Gaming Transactions, Inc. and CEO of Keno.com, says that marketers and online gambling companies can operate without fear if they follow one rule. “As long as you don’t take phone bets, you are fine,” says Smyth, whose wife Kate Kozak worked as brand director at BetOnSports (Kozak has not been charged).

Smyth says the Department of Justice only pursued BetOnSports because founder Gary Kaplan was alleged to have run a sports book in New York before heading to Costa Rica.

Because gambling is illegal in the U.S., many of the proprietors who accept wagers from the United States are headquartered in Costa Rica or Antigua and may have offices in Canada, as is the case with Smyth’s company. “I pay taxes in Britain, but I should be paying taxes in the United States, which is where my customers are,” says Smyth.

The BetOnSports indictment accelerated a change in the marketing of online gaming sites, according to Smyth. To help its partners avoid prosecution for promoting illegal gambling, online wager sites have created fun-only gambling sites with “.net” web addresses to supplement their existing .com gambling sites. The .net sites don’t outwardly promote online gambling, but once registered, participants will be asked if they would like to open an account on their pay-for-play sites, Smyth says.

Hedging Bets

The creation of .net sites provides a defense that has yet to be tested in court. Online casinos and poker sites are transitioning to promoting either just their .net sites, or promoting only the brand name, such as is the case with Bodog and PartyPoker, which operate both .net and .com sites.

Despite the potential revenue, the large networks have historically shunned online gaming, prompting the formation of gambling-specific networks. “We do not have any gambling sites within our affiliate network, nor do we allow any affiliates to link to gambling sites,” says Kristin Hall, product marketing director at Performics.

Gambling networks such as CyberSuccess Group, CasinoBlasters and MainStreet Affiliates have been happy to pick up the slack and offer generous commission programs. For example, PartyPartners.com offers signing bonuses of $75 for each new account opened, or a revenue share of 25 percent or more of gambling losses.

Christopher Shawn, vice president of business development at CyberSuccessGroup, says very few affiliates have closed because of the indictments. “Affiliates, however, have expressed concerns about sending traffic to sports books that accept telephone wagers, as this could be a violation of the United States Wire Act, which is directly related to the BetOnSPORTS Indictments.”

In addition to the potential legal penalties, affiliates could also earn nothing if the gamblers they refer win. Dave Johnson, CEO of WagerWeb.com, says his company pays commissions once a week, and any losses by the gambling sites are carried over until customers lose.

Johnson, who has been operating WagerWeb from Costa Rica for seven years, launched an affiliate network that now boasts 1,500 members. Some of his affiliates who reside in the United States told him they were nervous about continuing operations during the new climate of prosecution, but he argues that the risk of prosecution has not really changed. “The potential [of being indicted] isn’t greater now than seven years ago, there is just more exposure,” he says.

Each state has its own rules about online gambling that marketers should be aware of, Johnson says. If an affiliate were torn about the risks, he “would recommend that they go another way.”

Marketing companies are also distancing themselves from online gambling activities. Mike Shopmaker, CEO of Virtumundo, Inc., says his Overland Park, Kansas, company draws the line at gambling sites that require customers to provide credit card numbers to play. Companies such as Virtumundo client GoldenArchCasino.net, a Cyprus-based gaming site, that offer both pay-for and free gaming, are acceptable, but Virtumundo only “occasionally” markets for gaming companies.

Crapshoot

A new law that makes it illegal for financial institutions to process transactions for customers of Internet gambling sites may reduce the amount of virtual wagering. Congress surprisingly passed the Unlawful Internet Gambling Enforcement Act as part of unrelated legislation during an early hour session, and President Bush signed it into law a few days later.

While most U.S.-based banks and payment processing companies such as PayPal have not been accepting payments to gambling sites from domestic customers, the new law all but guarantees they will stay away.

In the wake of the new law, Sportingbet sold its U.S. operations for $1, and electronic transaction processing company FirePay, which along with Neteller transferred U.S. payments to many online gambling companies, said it would no longer send funds from U.S. customers.

However, Goodman says lobbyists for the online gaming industry could ensure that more restrictive laws are not enacted and may eventually use their influence to erode the current laws. The gaming industry could ask for legislation with more exemptions or challenge the existing laws in court. Also, a desire to tap in to the billions of dollars of potential tax revenue from online gambling could prompt the federal government to change its policies.

Gambling expert Eadington says U.S. lawmakers’ stance on Internet gambling will be increasingly hard to maintain. The exceptions in the law that have been “carved out” for betting on horses and pay-to-play fantasy sports leagues, as well as interest from state lotteries in accepting bets online, have opened the door for more exceptions that would ultimately doom online gambling prohibition, he says. Consumers who support gambling and don’t have a voice in the political process could also become more vocal in opposing new laws, according to Eadington.

Online gambling is growing internationally as nations including the United Kingdom, Sweden and Italy are regulating and taxing the leisure activity, Eadington says, making the current U.S. laws politically untenable. “Can the United States continue its prohibition strategy when the rest of the world is moving in another direction?”

A complaint started by a tiny nation in the World Trade Organization (WTO) could ultimately result in the United States reconsidering its position on Internet gambling. American Jay Cohen was operating an online gambling site on Antigua and Barbuda, a Caribbean nation of two islands, when he was convicted in 2001 of violating U.S. gambling laws.

Antigua complained to the WTO that the United States was violating a trade principle known as “national treatment” that requires foreign companies are treated the same as domestic organizations. Since it was legal for U.S. companies to accept online wagers for horse racing, Antigua argued that gambling websites there should also be allowed to take bets. Antigua has been victorious in nearly all aspects of their complaint through several levels of appeal.

However, the WTO lacks the authority to force governments to comply with its ruling, according to attorney Goodman, so the United States could continue to prosecute foreign gambling organizations. But Antigua is likely to ask the WTO for permission to ignore U.S. copyright laws as a penalty for its noncompliance. If the WTO grants the action, Antigua could begin selling movie DVDs and music CDs internationally, that are produced in the United States, which Goodman says could result in the entertainment industry using its extensive influence to persuade Congress to legalize online gambling.

Wagering On Mobile

The next innovation in gambling will be play-by-play gambling from mobile devices, according to Gaming Transactions’ Smyth. Companies such as LiveHive Systems are creating services that enable bets on each play, such as whether a golfer will successfully sink a putt, from mobile phones or handheld computers.

Also, if China legalizes online gambling, the demand for online gambling will skyrocket, says Smyth. “There is still so much room for growth.”

Whether or not online gambling is made legal in the United States, the industry will continue to expand, according to Smyth. If American affiliates and marketers no longer support the industry for fear of prosecution, international organizations will happily take their place.

Disclosure: Revenue magazine accepts a very limited number of advertisements from online casinos in each bimonthly issue and only if those advertisers are promoting an affiliate program and not actual gaming enterprises.

JOHN GARTNER is a freelance writer in Portland, Ore. He is a former editor at Wired News and CMP. His articles regularly appear on Wired.com, AlterNet.org and in MIT’s TechnologyReview.com.

Taking A Stand: Q & A with Brian Littleton

ShareASale is an affiliate network that has taken a hard stance on spyware, adware and parasite-ware by not allowing any downloadable applications into its network. That business model has won legions of affiliate supporters. ShareASale is growing, and is still considered the smaller, nimbler, more fun network – throwing memorable parties and playing host for standout social events. The company’s founder, president and CEO, Brian Littleton, is committed to affiliate marketing and creating a successful business by building strong relationships and sticking to his beliefs. He recently won AffiliateFairPlay.com’s first-ever Fair Practice Award (see Revenue September/October, page 18). Meanwhile, he, and everyone around him, is having lots of fun making it happen.

Lisa Picarille:What made you decide not to allow downloads or applications within your network?

Brian Littleton: Several years ago when the issue first came up to us, we took a look at how some of the software download applications worked – and it was obvious to me that they didn’t belong in any affiliate channel that I had any control over. As an affiliate network, our main job is to track a consumer from the point of a “click” to the point of a “sale” and commission the referring affiliate. Based on our testing, it’s impossible to accurately track this and commission the proper affiliate if there is a download or application in effect. Further, we witnessed some extremely disturbing distribution methods and behavior from some of the players in that market. Thus, to ensure that ShareASale is not party to any practices that contradict our values, we do not allow any downloads or applications within the network.

It is my opinion that these downloadable applications, most of which involve customer loyalty of some kind, should be a completely separate channel from the affiliate channel, one that is tracked and commissioned differently. They perform an entirely different service than that of an affiliate – and actually remind me more of the type of action such as using my “Reward Miles” credit card for a purchase as opposed to a “sales generating” affiliate. I love consumers, but it has never been my understanding that a consumer has the right to dictate where a commission on a sale should go. That doesn’t make sense to me. A lot of times, loyalty applications and affiliates could actually help each other out if they were properly channeled, but that may take time for affiliates to welcome back into the clickstream a party which has, in the past, taken money out of their pocket.

LP: What are the pluses and minuses to that business stance?

BL: The only minus is the occasional client who wishes to work with an affiliate who we do not work with. In those cases, we try to convince the client why partnering with a download or application is disadvantageous to their affiliate strategy. If that doesn’t work, we guide the merchant to another network. We don’t really see a financial downside to that, because our ultimate goal is to be a sustainable and long-term “sales focused” network. Also, it’s our view that the loyalty channel, which is essentially what most of the download applications are, does not belong in the affiliate channel. The affiliate channel should be focused on bringing in new customers, new businesses. Affiliates are able to extend beyond the brand and seek out different demographics. The purpose of a loyalty marketer is to drive consumer loyalty; it’s a different goal.

LP: Is there any other type of business/entity that ShareASale doesn’t work with; religious groups, sex sites, etc.?

BL: We review each and every application into the ShareASale Network – and have done so for as long as we’ve been in business. While I don’t want it to be our job to prejudge anyone’s ability to become a successful affiliate, it is important to me that we keep a certain level of quality in the affiliate applications. To that end, we screen for things such as adult content, hate groups, etc. More important to us than the actual site content is being able to verify an affiliate’s contact information as well as their ownership of the site that they have applied with. Because of the effort we put into this process, I feel we offer a great value to merchants in taking as much time as we do to verify affiliate information. Beyond that, we believe in every affiliate’s right to “start small,” and tend to err on the side of the affiliate in deciding if their site should be accepted for content reasons.

LP: You seem pretty tight with the ABW crowd. How has that relationship impacted your business?

BL: The ABestWeb community is a great friend to ShareASale, and I hope to continue to participate there as long as they will have me. I don’t have any explanation as to why our network has become popular there except to tell you that I think it is because we make a dedicated effort to take every request seriously without regard for whether an affiliate generates $5,000 per month or $5. Every business has “big” clients that are important, and obviously we have some relationships that garner more of our attention at times; however, one of our greatest assets is the collaborative expertise of all affiliates and merchants in this industry who are willing to give us advice on each issue we come across – and I’m always grateful for the advice that they have given me over the years.

LP: People cite ShareASale as the fourth-largest affiliate network. Do you aspire to be among the “big three”?

BL: I aspire to put together the best product that I can for the market that we serve. If you take a close look at the individual networks that are out there, I think you will find that each has strengths within its individual market that makes it as successful as it is. For us, we started out with the hopes that we could provide a solid technology platform and a network of quality affiliates to a market that was being mostly ignored by most networks. We wanted to provide an alternative, mostly for small to mid-size companies, who didn’t feel like their needs were being addressed, and to that end we’ve been fairly successful. Our goal isn’t necessarily to become one of the “big three” but just simply to continue improving both our technology tools and network of affiliates. There are distinct markets within which we compete very well, and within those markets we want to be not only the best solution available but also a solution that our customers are happy with.

LP: Do you any feel pressure to expand?

BL: I founded ShareASale in the year 2000, and have been able to launch and run the company without the assistance of outside capital. A close friend of mine in this business, and I, often discuss the pluses and minuses of being “independent” and I can tell you that I don’t feel any pressure to expand outside of what I feel we do best. We’ve added people nearly every year, but we do so within the realm of what we need. Expanding a business isn’t an important goal of mine. Doing what we do, and doing it well, is important to me.

LP: How many merchants are in your network?

BL: At the time I am writing this there are 2,071 merchant offers in the network. That does include some merchants who may have multiple offers so the true number of merchants is a little lower than that. Of the 2,071, there are 1,866 who are participating as “pay per sale” merchants – which is our focus. Pay per sale could indicate a revenue share, such as a percentage of a sale, as well as a flat dollar amount.

LP: How many affiliates?

BL: While we do discuss some numbers with merchants who call to ask, I try to avoid discussing the size of the network mostly because I think concentrating on the numbers isn’t a very good way to describe to a new merchant how affiliate marketing works. It is my personal feeling that merchants are mostly responsible for their own success whether they participate in ShareASale or any other network. Using a number like “100,000 affiliates in the network,” for example, is misleading to a prospective merchant because there is really zero likelihood that all 100,000 would ever become sales-generating affiliates in their program. For some merchants, one or two affiliates can make a successful program, and for others, it is 1,000 or 2,000. … ShareASale has been a successful platform for both of those types of merchants.

LP: Would you consider a merger or acquisition to grow the company?

BL: As a businessman, the potential for mergers/acquisitions is always a discussion that I would be open to. It isn’t, however, our main focus. We want to finish our own goals in putting together the best technology that we can, coupled with a quality network that merchants can grow with. I feel like there are large opportunities for growth even without considering the possibilities of M&As.

LP: Performics and Zanox are both based in Chicago, like ShareASale, and Zanox would give you a presence abroad. Would you consider teaming up with another company to expand your business?

BL: I’ve been lucky enough to meet with the folks both at Performics and Zanox, as well as LinkShare, who also have offices in the Chicago area. We’ve got quite a good group of affiliate marketers in Chicago including several merchants and affiliates. It should probably be renamed “Affiliate Row” as there are about five companies specifically concentrating on affiliate marketing within a five-block radius or so in this part of Chicago.

LP: Are there any plans to expand into other geographic areas?

BL: Geographically, I can’t say that we do – but in terms of markets we are hoping to have a full Spanish-language site available soon so that we are able to move into markets that otherwise would not be open to us.

LP: So, it’s a Hispanic version of ShareASale? When is that happening and what prompted that move?

BL: In my opinion, just taking the United States as an example, Spanish-language populations are and will continue to be important avenues for economic growth. It is one of my personal goals to learn Spanish myself – as well as a goal of this business to be able to provide a product for that market.

LP: What are the biggest challenges facing ShareASale over the next year?

BL: Growth puts a huge strain on resources both technological and human. Over the next year we expect to continue on a fairly high growth curve and thus will be faced with continual challenges to remain ahead of the curve. Things such as database design, fault management and even something as simple as timely payments can be affected purely by the scale of their scope – so we’ll be quite busy just tackling those challenges. Affiliate marketing itself is also becoming more challenging for merchants, and ShareASale will be providing tools to merchants to counter those challenges. Take, for example, the collision between the “affiliate channel” and the “loyalty channel”; we will need to provide better tools to merchants so that they can separate, track and commission these two channels differently without conflict, so that the two channels can be complementary and help each other grow. There are countless examples just like that one, where a technology provider has opportunity for innovation and we will be working on each one.

LP: What are the goals for the company over the next year or two?

BL: As has always been our goal, we want to put together the best product we can. Our affiliates tell us that they want more and more brand name merchants, so we are working on that. Our merchants tell us they want better reporting tools and methods for multi-commissioning a sale, and we are working on that. In our particular industry, I haven’t found it to be too effective in laying out goals too far in advance, due to the ever-changing landscape. Being a relatively small company, we have used to our advantage our ability to be flexible – and customize our solutions for merchants and affiliates as they need them. That is probably one of our biggest advantages; actually, as we get a lot of feedback from clients who tell us we were the “only one who would do what we needed,” etc.

LP:Why did you put together Think Tank? What are you looking to accomplish at this event?

BL: The ShareASale Think Tank is an event that we are putting together for November 4, 2006, at the Wynn Las Vegas – despite various unofficial events, parties and get-togethers. … This will be our first organized event including both sessions and social activities. Our goal is pretty simple: We want to bring a select group of ShareASale merchants to the Think Tank and allow them the opportunity of “pitching” their program in front of some of the best and brightest affiliates in the industry. Affiliates in attendance will be able to critique individual offerings, brainstorm new ideas on conversion/creatives/etc., all leading to an improved program for the merchant as well as a new personal relationship with those affiliates in attendance.

Of course, true to ShareASale, there will be social events to keep everyone from feeling like they are at a conference. If things all go well we are hoping to put on a Think Tank event every six months or so with different focuses to encompass all of the diversity that is an affiliate network.

LP: Tell me what you consider to be ShareASale’s greatest differentiator in this marketplace.

BL: To me, it is simply the willingness to work with our two greatest assets: merchants and affiliates. Affiliate marketing technology isn’t something that you can create and put into a box to sell off the shelf. Each new merchant who comes on board has the opportunity to work with us directly to make sure that they are getting exactly what they need in terms of specific reporting, creatives or even payment setup. Affiliates are treated the same way if they have specific needs that we are able to accommodate. Our ability to be flexible has allowed us to not only win client contracts in areas of competition, but also strengthen existing relationships. Especially with merchants, it has been really helpful for some of them to be able to deal directly with me on certain issues such as customized technology and contracts. We also have been able to continue to provide a level of support to our clients that has remained high despite the increased growth in number of merchants and affiliates – and this is something that is important to us going forward as well. Everyone at ShareASale pitches in and helps us where we need help on a given day; it isn’t unusual.

Leading the Way

Online lead generation gets no respect. Online lead generation affiliates less so. While the sector is growing by leaps and bounds – 290 percent over 2005, according to the Internet Advertising Bureau – people like Peter Martin and Robert Jewell just seem to drag its reputation through the mud. These guys had the honor of being sued by New York State Attorney General Eliot Spitzer in March for selling the private details of up to 7 million customers to marketers when they said they wouldn’t. Spitzer called it the “largest deliberate breach of privacy in Internet history.”

“There are people that don’t do things on the up and up,” Dan Felter, chairman of the recently formed Online Lead Generation Association (OLGA), says. “Online lead generation, when done properly, can be done well,” says Felter, who is also CEO of Opt-Intelligence, a lead generation firm.

High-profile busts like Spitzer’s only give a black eye to an industry trying to police itself and keep undue regulation at the door. Last year the online lead generation machine brought in $753 million, according to the Internet Advertising Bureau (IAB), which predicts over $1 billion for the lead gen space in 2006.

Revenue for online lead gen made a healthy gain to reach 6 percent of all Internet advertising spending during the first half of 2005, according to the IAB. That’s $347 million. Go back to 2002 and it was only 2 percent of Internet advertising spending in the first half of that year, or $114 million. But that is a year-to-year increase of 204 percent, IAB figures show.

DEFINING THE SPACE

Just the phrase “lead generation” also means different things depending on who you’re talking to.

When an advertiser needs new potential customers to sell to, one method of getting names and ways to contact these people is to buy a list. This list of people is called the leads. Generally these people have already expressed an interest in the product – be it iPods, real estate, cars, mortgages or other retail goods – and have agreed to be contacted by the advertiser. This is also known as permission-based marketing and in some cases it is called co-registration.

The most popular online lead gen technique is the “opt in.” This is where a customer registers online to join a free newsletter or newspaper or social network and sees a page where he can request to receive additional newsletters or marketing from third-party companies. Generally, you check a box to say it’s okay. Interaction with that page is sometimes required to complete your registration.

Some companies also practice “double opt in,” where you check a box but also must follow a link in an email as a way to confirm your email address but also, in essence, asking you twice that you really meant to opt in. Popular opt-in trends include an effort not to ruin your surfing experience by serving you multiple pages of opt-in options and by allowing you to bypass offer pages.

Suspect practices that used to be commonplace but are now considered intolerable are “opt out,” where you are automatically signed up for other offers and you must uncheck the boxes to refuse; pages where offers outweigh content; offers of free products for forwarding the offer to others; free offers that still involve a fee; offers that require the downloading of adware or spyware; and, of course, offers that do not explicitly say they will not sell or give your private information to other advertisers.

Since there is a commission for every lead generated, it becomes attractive to enter a pay-per-lead or pay-per-sale contract with an advertiser. And with that model being very much like the affiliate marketing model, affiliates have flocked to lead gen. The flood of lead gen affiliates in the online world – like anything – breeds bad eggs and good.

POLICING LEAD GEN

Enter OLGA. Chairman Felter helped start the trade group when he realized what a stench surrounded the word co-registration, or co-reg. When describing what his company, Opt-Intelligence, does he tries to avoid the word co-reg. “If you could see the people’s faces at conferences when they finally got what I did,” he recalls.

OLGA currently has more than 25 lead gen companies as members and considers its mission to define best practices and champion transparency in the industry. Felter boasts that lead gen could become “almost as valuable as search.” However, he adds, “barriers to enter the market are pretty low.” Hence, the surge in online lead gen affiliates operating in a sometimes-ethical vacuum. “It’s the cutting corners that give lead gen affiliates a bad name.”

Felter says, early on, when opt-out was more common ,”advertisers all got burned by co-reg.”

The offers would end up on disreputable sites – such as porn – and the advertiser would essentially receive a “data dump”: raw lead information with no indication if the leads were from opt-in or opt-out and no way to measure the quality of the lead. That’s why Felter hates using the word co-reg, but also why the industry is poised to explode as burned advertisers come back to the well.

And as they return, now is the opportunity to prove that this time around advertisers, publishers and lead gen companies can all get along and share the wealth. “There is something called common sense,” Shai Pritz, CEO of Unique Leads, says. “If somebody is doing shortcuts, it will come back to bite them.”

Jim Vines, CEO of LeaderMarkets.com, agrees that it isn’t really very hard to figure out when someone on your network is doing wrong. “Having been an affiliate myself, I know the way traffic should look.” He claims to know when something doesn’t look right. Usually it is too many leads over a short period of time coming from a single affiliate. Vines says he goes the extra yard by talking to all their affiliates on the phone before sending any offers. “I have to personally see if they know what they are talking about before I send them anything.”

It might stand to reason that an industry that requires so much policing is inherently ineffective. “There is nothing wrong with the tool but how you use the tool,” Vines says. He adds that policing just comes with the territory. At least to Vines, the fun of it all is the personalization. “Leads are just the icing on the cake,” he says. “Whenever an affiliate calls, we know them. Our job is to help our affiliates find the campaign that is working the best for them. We can help them figure out what list is best for them.”

GOOD LEADS

Matt Hill, CEO of eForce Media, says they apply technology and science to matching leads to clients. Others, he says, create leads by traffic driving – but so many requests go unanswered because there is no matching. A guy looking for a mortgage deal ends up getting a thousand calls by mortgage brokers, Hill says. Or leads come but no calls are made because the company can only afford to buy so many leads per day. “Most companies in this space only sell about 50 or 60 percent of their inventory,” he says, “so it doesn’t matter if leads fall on the floor.”

Pritz at Unique Leads also aims high, which is why he runs a closed network. “The affiliate managers will say what offers they want and we create the links for them,” he says. “The control is better that way. There are human beings involved; we do what we can to make sure the system works.” Unique Leads likes to see website screenshots and have an understanding of UI experience of each site they sign and they always make the users sign privacy policy forms.

“Like every industry on the Internet there are black hats and white hats,” says Hill. “It’s a business that’s been around longer than the Internet. But since the Internet, it is becoming more sophisticated.” He says his lead gen company’s mission is to find the most perfect match between leads and clients. He says there are still some big companies who do opt-out co-reg because the volume they get is so big it cannot be ignored – but in the end, he says, “those companies will weed themselves out.”

“Some websites say, if I throw a few opt-outs on my page I make 20 cents more,” says Felter, adding that the websites figure a few opt-outs won’t be noticed. And some companies will turn a blind eye to it all because the sheer numbers of leads (regardless of their quality) are meeting their quotas.

Chris Jeffers does B2B lead generation as CEO of netFactor and says that his buyer is a marketing executive. “They are frustrated because less than 2 percent are converting and completing online registration,” he says. “This is critical for sales – sales says, ‘give me quality’ but marketing is rewarded for providing tonnage.” This means sales and marketing are effectively operating against each other. Quality leads can help close the gap.

GUIDELINES AND BEST PRACTICES

That is another aim of OLGA: to define the best practices for the whole industry. The founding members of OLGA include Felter; Stephan Pretorius of Acceleration eMarketing; president of Feedster, Chris Redlitz; and Kitt Collier Odukoya, director of marketing at EarthLink. Member companies include Active Response Group, CoReg Media, eForce Media, Flatiron Media, Innovation Ads, LeadVerifier, MediaWhiz, Monster Worldwide, ON24, SendTec, Unique Leads and WiseClick Media.

Initial guidelines that OLGA endorses include that advertisers always know where their offer is being placed; that advertisers clarify that they are buying an opt-in only; that the leads did not come from offers “forced” onto customers via opt-out or opting in as a requirement of registration; that it is easy for customers to bypass all offers if they prefer; that the registration process in general is about the content and not all about signing up for offers; that an auto-respond email include opt-out and unsubscribe links; and that it is always clear what exactly the customer is signing up for.

If trade associations and policing succeed there is no doubt the industry will grow even more than it has already, provided there are no more high-profile debacles that could trigger a call for federal regulation. No one wants that. “We need to keep rules flexible so that people can operate their businesses,” says Sujay Jhaveri, CEO of Flatiron Media. He says “pro-business people in the business world” will take care of tempering regulation. He notes that the CAN-spam legislation passed in California was much stricter than a version that went federal. Testing the limits of regulation will probably continue. “You are dealing with a marketplace that is very profitable,” Jhaveri adds. “Online multilevel marketing will mimic off-line eventually.”

Other events to look forward to in online lead generation will be consolidation. Hill of eForce says there are many lead gen companies that have maybe 10 employees who are operating in niche areas that are ripe for acquisition. In fact, eForce just completed funding for that very purpose, he says: to add companies’ expertise to what they do. And, he adds, the transitions are very easy since the employee counts are so low; you see an immediate profit increase by applying the traffic you acquired.

Vines of Leader Markets says being a former lead gen affiliate helped him be a better president of a lead gen network; that is, he wants to remain small. “Some affiliates can do six figures of traffic per month,” he says. “They don’t want to feel like they have come to a cattle call.” That’s why he wants to keep it personal with his network. “I’m not looking to become the next CJ or LinkShare,” adding that while the challenges are many, so are the rewards. “If someone is gun-shy, they probably shouldn’t be in it,” he says.

OLGA’s Felter says the key terms are transparency and awareness. “You’ve got to watch your metrics. What are you getting and is it valuable?”

Anne Fognano: The Mother Lode

The old adage that necessity is the mother of invention is certainly true when it comes to this mother.

More than a decade ago Anne Fognano, then a new mom, needed a way to earn additional income while being able to work from home.

She had just completed her master’s degree in clinical psychology when her son Austen was a year old. And while it was her dream to be a therapist working with children, she also loved being a mom and wanted to be home with her kids.

However, she was also used to engaging her mind and needed to keep busy. She was a Prodigy user, and paying for dial-up service she surfed the Web looking for parenting sites and family-oriented Web pages, but found little that was interesting or useful to her. Being an extremely curious person, Fognano began opening up the source code to some of those sites and then taught herself some HTML.

In 1997 she started a website for Beanie Baby collectors after being appalled by the scalping that surrounded the hot collectibles. Although not a massive collector, she just thought Beanie Babies were cute, and was irate about people taking advantage of kids by doing unsavory things like tracking the shipments to Hallmark stores or tracking UPS shipments and stealing them.

She also admits that she had a lot of time on her hands and no specific focus or mission. Her site FunkyMommys.com was designed as a trading board for moms and kids to swap Beanies without fear of being ripped off. At the height of the Beanie Babies craze, the site had more than 2,000 members but Ty, the maker of Beanie Babies, began to enforce its trademark in cyberspace and sent cease and desist letters to those using the word “beanie” and even “beans.”

Although Fognano at the time thought that she could have fought Ty (her message board was called Bouncing Beanie Board), she didn’t have the time or money for a protracted legal battle with a big company. She also could have just changed the name of her board; instead, she pulled down the site and contemplated her next move.

THE COUPON CRAZE

By now it was 1997 and Fognano still had a mortgage to pay and two young children to care for at home. So, she decided to put up an online resale shop for moms. She settled on a doll-house theme (see image) and then spent $2,000 to have an artist and programmer create the site. Fognano was very pleased with the way it turned out and thought the site was beautiful. Moms could post ads and pay her 25 cents for each one. Things were going pretty well. The site was getting some decent traffic and Fognano was adding even more content including coupons from an early dot-com drugstore (PlanetRX.com). The popularity of the coupon portion of the site led her to add a coupon box in the lower right corner of the page. Soon she noticed that 98 percent of her traffic was clicking directly on the coupon box.

But instead of being delighted, Fognano was devastated that she had worked so hard and spent so much money to create this site she loved but people were only interested in the coupons. After she emerged from her funk, she signed up with two of the first merchants to have affiliate programs – Amazon and Barnes & Noble – and she decided that she needed to dump her beloved doll-house theme and concentrate on the coupons.

Currently, Fognano has three very successful coupons sites – CleverMoms.com, CleverDads.com (manly things), CleverBabies (baby and toddler items through 5 years old). She is a super affiliate and works with Commission Junction, Linkshare and Performics. She has one employee. Previously, she had two – one full time and one part time. But earlier this fall, she discovered that she could handle some of the load herself as both of her kids went off to school for the first time.

Fognano had been home-schooling her children because each of them had unique learning issues. Her daughter had a language impairment and Fognano battled the school for years. It now has a program and Haille, who is now 9 years old, can attend classes full time. For the last year a teacher had been coming to the Fognano’s home to help. Her son Austen, now 11, is a very gifted student and there was no advanced placement class for his grade. So, Fognano home-schooled him until the third grade.

THE MOTHERING INSTINCT

“I’m one of those mothers that want things to be perfect for my kids,” she says. “I took care of them when the school wasn’t.”

She likes to take care of people. Fognano’s two employees were both stay-at- home moms that she has never met in person or even talked to on the phone, despite that the one in Portage, Wisconsin, has worked for Fognano for four years and the one in Syracuse, New York, had worked for her for one year.

While she admits it was slightly odd to be paying people to work for her that she’d never met, she says it was a great arrangement. Both of the moms were previously loyal visitors to her site and began sending Fognano deals – sales and coupons – and she decided that she should start paying them for their efforts.

Although Fognano has been an affiliate for almost a decade, 2006 has been a year of changes for her and her business. Sending her kids off to school meant more time to attend conferences, shows and events – something she never had time for previously.

Earlier this year she attended a conference in Dallas for women in business (EWomen Network in June). She referred to the event as “one big Oprah show,” but she heard some great speakers and took home some sage advice. Top of the list was learning to delegate.

While she still admits to having this kind of “do everything yourself” attitude, she realizes that is a vicious cycle since there is always something to be done, which means she would never stop working. She said it was amazing this summer when she felt comfortable enough to delegate responsibilities to her employees and take some time off for the Affiliate Summit in Orlando.

In the past she says she would have been in her hotel room updating her site or running from Disney World back to the hotel to check on things. This time it was a relief to know that someone else could handle all the duties. That freedom meant that she was able to have quality face-to-face contact with her peers – many of whom she’s developed longstanding email or instant message relationships with over the years.

And she’s working less as well, dropping down from about 10 hours per day, which was previously just early in the morning and then again late at night – to about four hours a day. But in that shorter workday she’s focusing on more strategic issues such as branding her site and trying to get media coverage to educate users on how to use online coupons and where to get those savings and promotional codes.

“Many customers really have no idea about online coupons. It’s astounding to me. There is a lot of work to be done to get discounts,” she says, adding that she never shops online unless there is a coupon. “It’s an annoying thing if you know someone is getting a discount and you aren’t. If I see a promotional coupon box and then can’t find a coupon, then I won’t shop there.”

The new schedule is also allowing for many things that have been neglected for years, according to Fognano, such as her daily exercise routine, things she enjoys like sewing and scrapbooking, and nine years of photos in shoe-boxes that need to be organized into albums.

In addition, she’d also like to do some writing about online shopping – maybe for business and consumer magazines. And while her experiences and success story would be good fodder for a how-to book on affiliate marketing, she says that route doesn’t immediately appeal to her.

MEASURING SUCCESS

“There are too many different factors associated with being successful in affiliate marketing. It’s all about being in the right place at the right time,” she says, recalling that when she began there were only a handful of coupon competitors. “You could count them on one hand.”

She claims that most of her visitors are type-in traffic and that she doesn’t get a lot of eyeballs from the search engines. But once people get to your site, you’ve got to give them a reason to come back. Her writing helps in that department.

She already has an email newsletter that she sends out every Thursday to her large base of subscribers. She often writes stories about her husband and kids and things that are going on in her life. These personal stories are not intended to be a marketing trick but a reason for visitors to come back to her site. She thinks getting personal has helped others identify with her on a deeper level and created loyalty.

“It’s just me being me,” she says. “About 70 percent of the time, I try to be funny and mostly I succeed. People are always writing to me to let me know they could really relate to what I was writing about.”

But there are times that she gets some negative comments and feedback on her personal tales, but those are far outweighed by the positive responses she typically receives.

She recalls a story she wrote where she mentioned waking up late one morning and rushing around trying to get the kids ready for school, while her county policeman husband was moving at a snail’s pace. Many people wrote to her saying that she should have never called out her husband in a public forum and “shame on her.” She was shocked at the response.

Regardless, she enjoys the interaction with her customers. “This business is not always about making a buck,” she says. “If I can have something that people look forward to every Thursday, that makes me happy.”

Maybe that’s because she has also far exceeded the goals she originally set for herself when she started out with her doll-house resale site: to make $1,000 a month. Many of her work friends from back then shunned her because she chose the mommy track rather than opting to climb the corporate ladder. Now she makes more money than most of them, although she declined to provide specifics on how much she earns as an affiliate.

“I don’t have to make a specific amount per year. I don’t focus on that. As long as we have our bills paid, then I’m happy with the income the site generates.”

She’s also thrilled to be able to work at home. It’s one of the best things about her job. She says that she’s not exactly the affiliate in her pajamas at the computer, or the affiliate marketer sitting out by the pool, but she’s got a lot of freedom. She can have coffee with a friend whenever she chooses. She can attend a sewing conference. She can have lunch with her husband. She can volunteer at her kids’ schools.

But working at home requires self-discipline. Much of that discipline comes from Fognano’s educational background. She paid her own way through college and graduate school, which took her 12 years since she could only take classes as she could afford them. She used to fly to Vermont for 12 days every six months and the rest of her curriculum was done as independent study. While getting her master’s degree she would drive two hours each way to attend classes. She got straight A’s all through her education because she “couldn’t bear to get a B.”

That discipline, coupled with Fognano’s desire to help people and her love of being a mom, is the driving factor in her success. She also has a strong sense of what’s right for her.

“I could not stick an offer up for a quick buck – like something for a gambling site,” she says. “What if someone got hooked on gaming? I just wouldn’t be able to sleep at night. I make sure to deal with ethical people that are not spammers. I want things to be ethical, honest and up front.”

The bottom line: “I’m just a mom doing this. I thought I’d never be in sales and never in marketing. I’m just a mom who opened a resale shop online hoping to make money and the coupon site is a fluke or should I say, a blessing. I love doing it.”

The title on her business card says it all – Mama in Charge.

Performance Marketing Prognostication

It’s that time of year again when we ask industry movers and shakers to look back at the past 12 months and forward to the next year in performance marketing. Here’s what those in the know have to say.

Looking back, what do you think were among the most significant themes to emerge in 2006 in the performance marketing space?

“There has been a huge shift in traffic sources – with two main groups – the first being PPC, which has been a major source of affiliate traffic in 2006 and has brought with it significant issues such as “Brand Bidding.” The second being blogs, which I believe will be a major driving force in the coming years.”
– Brian Littleton, founder and CEO, ShareASale

“When the situation calls for it, affiliates and affiliate managers can band together and stand their ground on an issue.”
– Scott Hazard, president, Brightside Media

“No truly new themes emerged. We saw click fraud penetrate the consciousness of the mainstream media at the same time there is a growing sense of animosity (possibly jealousy?) towards Google inside and outside our industry. Some merchants are reviewing their trademark bidding terms and looking to accommodate affiliates. Finally, you did see a lot of affiliates publicly say they were moving away from black hat and toward white hat activities.”
– Brook Schaaf, principal, Schaaf Consulting

“The desire to achieve better scale (less overhead, more revenue) drove every major corporate merger as well as CJ’s failed LMI project. It’s what makes Adwords attractive and successful.”
– Jeff Molander, CEO, Molander & Associates

“Just how vibrant and powerful the performance marketing community is. This can be seen in the response to LMI, the upward trend in budgets for performance marketing by advertisers and the growth in publications, events and forums serving the community.”
– John Grosshandler, event director, eComXpo

“The re-emergence of brand as an important part of the marketing equation after years of focus on ROI and search.”
– John Battelle, founder and chairman, Federated Media Publishing

“Google actively trying to squash private-label PPC arbitrage affiliates in the name of ‘better user search experience.'”
– Tim Ash, president, SiteTuners.com

“Cooperation. 2006 displayed greater willingness by merchants, publishers and networks alike to adopt ‘cooperative selling’ strategies.”
– Kurt Lohse, founder and CEO, KeyCode.com

“New trends such as the use of video and advertainment continued to grow in 2006 but pose challenges for strict ROI/CPA advertisers.”
– Joshua Sloan, director of online marketing, 1and1.com

“Search is a bigger part of affiliate marketing than many people thought.”
– David Lewis, president, 77 Blue

“Clearly 2006 will be marked by what some are calling ‘The Affiliate Massacre of 2006’ where Google updated their quality score rankings in Adwords and started placing penalties on affiliate landing pages. In many cases this caused minimum cost-per-click fees to go from 10 cents to $5 or $10 on many keywords. This effectively shut down PPC advertising for many affiliate landing pages. This change is causing many merchant advertisers to rethink their policies for PPC marketing since publishers who were running large-scale campaigns and linking directly to the merchant’s site using the merchant display URL and an affiliate link were largely unaffected by the recent change.”
– Adam Viener, president, imwave.com

“A few years ago, you could quickly tell whether or not an online marketer ‘got’ affiliate marketing by discussing affiliates. Those that ‘got it’ conveyed respect for the affiliates. Those that didn’t, well, they tended to use adjectives like ‘little’ or ‘questionable’ when describing their role in the model. In 2006 the performance marketing community witnessed affiliates asserting their right to be treated respectfully. It is no longer acceptable to be a participant in this space and not get it.”
– Lisa Riolo, online marketing professional

“Affiliates/publishers are in the driver’s seat now, not merchants/advertisers. Affiliates have money, power and traffic and their requirements; business practices and needs dominate the relationship. Merchants need them more than they need merchants who are unable to comply or cooperate with terms. They can deliver the goods; can merchants respond adequately to their demands? If not, NEXT!”
– Linda Woods, president, PartnerCentric

“Behavior targeting seemed to be a popular buzzword but I never heard too many real success stories. Online marketers are actually getting comfortable with the basics and are now casting an eye toward testing and optimization to squeeze out better results.”
– Greg Schraff, director of strategy and business development, Brooks Bell Interactive

What will be the ‘big thing’ that we can expect to happen in 2007 in online marketing?

“A return to the importance of new-traffic- generating affiliate marketers.”
– Brian Littleton, founder and CEO, ShareASale

“Yahoo and Microsoft will debut new products to compete with Google.”
– John Battelle, founder and chairman, Federated Media Publishing

“I expect to see many more super-affiliates stepping up to the plate and saying, look, we need to take responsibility for engaging in upright business practices. You’ll see them become open to educating newcomers in the industry. It won’t be about cutting out your competition, but developing a bigger and more powerful affiliate workforce. And I expect to see managers becoming excited about the possibilities of capturing the loyalty of those affiliates by becoming truly affiliate-friendly.”
– Anik Singal, CEO, Affiliate Classroom

“Performance models such as CPO and CPA are the main driver. Advertisers as well as networks/providers realize that success-based commission models are king and key for success. Globalization is the most important issue. Globalize or die.”
– Holger Kamin, executive account director, Zanox

“There is no doubt in my mind that user-generated content will really start to take fire – especially around video. Still, merchants will have to be innovative to get beyond the sheer volume of media – music, podcasts, pictures and now video in circulation.”
– Wayne Porter, senior director special research, Facetime Security Labs

“User-generated content such as short online videos will proliferate at an even larger scale and pace and show that it can convert as advertisements.”
– Jim Kukral, publisher, ReveNews

“Video ads will continue to grow in popularity as traditional marketing agencies attempt to maintain their grip on ‘their’ industry as they gripe all the way to Congress.”
– Todd Taylor, manager business development, TaxBrain.com

“2007 will bring far more practical offline marketing applications online. It will also signify the beginning of the ‘big shift’ to correct the disproportional ad spend on the traditional mediums.”
– Kurt Lohse, founder and CEO, KeyCode.com

“Social e-commerce will emerge with innovations focusing on peer group favorites and recommendations. The ‘wisdom of crowds’ will begin to drive serious transaction volume in niche markets.”
– Jeff Molander, CEO, Molander & Associates

“Social media marketing strategies that spawn, leverage and influence consumer- generated media are the hot thing at the moment. Companies and affiliates that create environments where their target audiences can gather, share useful information – and don’t overtly interfere with the experience – are those that will be the most successful.”
– Rob Key, founder and CEO, Converseon

“More off-line ad channels (print/radio/ TV) will wake up to the growing importance and measurability of online advertising while more online advertisers will wake up to the branding potential of online marketing despite confusion and difficulties with performance tracking.”
– Joshua Sloan, director of online marketing, 1and1.com

“I think the launch of Microsoft Vista may change the landscape of search marketing and make Microsoft AdCenter more important than it is today. I also think that Yahoo’s Panama project will be a big shift for search marketers. There will be a lot of adjustments as platforms change and traffic starts flowing more towards Microsoft.”
– Adam Viener, president, imwave.com

“The emergence of mobile phone marketing in the U.S. It’s just a matter of time before affiliates worldwide are able to promote affiliate links via digital and print signage. Consumers will then utilize their video-capable mobile phones to transact with merchants.”
– Shawn Collins, president, Shawn Collins Consulting

“I expect Google will continue to morph into other non-search areas. Under this scenario, Google will begin to offer tools that very much resemble an affiliate marketing or CPA network. This will put many traditional affiliate marketers directly in competition with Google for customers. Those non-branded entities relying solely on search will be hurt the most. Such a move is likely to trigger a rash of online mergers and acquisitions as big names and even traditional brands circumvent the search engines and buy their way into bigger pieces of the pie.”
– Mike Allen, president and chief executive shopper, Shopping-Bargains.com

“Technological innovation will become even more important in 2007. Between the growth in online video, broadband adoption and new tools for contextual advertising, behavioral marketing and detecting fraud, the gulf between those who leverage the newest trends and tools and those who rely on yesterday’s approaches will widen.”
– John Grosshandler, event director, eComXpo

“Video, video and more video.”
– Matt Ranta, affiliate manager, Vanns.com

“Continued decline in the effectiveness of current search engine optimization methods. Traffic building through social networking media will continue in effectiveness and popularity throughout 2007.”
– Rosalind Gardner, super-affiliate and author

What are the major challenges in the performance marketing space moving forward?

“Still getting online marketers beyond just keeping their heads above water, for example, just running the actual marketing< campaigns so that they have the bandwidth to concentrate on performance factors and tactics they can employ to improve performance.”
– Greg Schraff, director of strategy and business development,
Brooks Bell Interactive

“Volume. How to sift through the masses to identify the diamonds in the rough, whether they are advertisers, affiliates or partners. Emails and newsletters no longer get through, and when they do, are seldom read.”
– John Grosshandler, event director, eComXpo

“Effectively and ethically integrating the use of video ads into affiliate marketing.”
– Matt Ranta, affiliate manager, Vanns.com

“Keeping up with the speed of innovation on the Internet!”
– Linda Woods, president, PartnerCentric

“Globalization and multichannel approach to reach each and every possible market on this globe.”
– Holger Kamin, executive account director, Zanox

“It boils down to an emphasis on quality and restraint and the need to mature beyond the ‘growth at all costs’ mentality as well as adjusting merchants’ expectations and teaching them to think long term so that system pollution doesn’t kill the environment in which we all do commerce, operate and converse.”
– Wayne Porter, senior director special research, Facetime Security Labs

“Consolidation and intense competition due to a changing marketplace where search engines no longer do only search. With shareholder pressures on the ‘big 3’ engines to continually grow revenues at nontraditional paces, there will be new efforts to go after non-search money wherever it can be found.”
– Mike Allen, president and chief executive shopper, Shopping-Bargains.com

“The need for improved accountability. It’s all well and good for affiliates to have considerable discretion to find novel and creative ways to promote merchants’ offers. Indeed, that independence is the essence of affiliate marketing. But how can a merchant make sure its offer is presented appropriately, ethically, lawfully and in a way that offers fair value to the merchant as well as to users? At present many affiliates keep their methods secret, and affiliate networks don’t do as much as they could to tell merchants what their affiliates are doing. Increased transparency would improve affiliate accountability, helping merchants feel confident that affiliates’ behavior is appropriate and lawful.”
– Ben Edelman, anti-spyware consultant

“The affiliate industry can no longer rely on arbitraged search traffic. It’s a diminishing resource. Instead, it’s absolutely incumbent upon smart affiliates to morph rapidly into the new frontier of online marketing – word of mouth, viral, social media, blogging and other consumer-generated approaches that companies are only now beginning to grapple with. There are myriad opportunities for those that embrace the Web 2.0 world.”
– Rob Key, founder and CEO, Converseon

“Self-regulation is key in 2007. It’s not in our best interest to have the federal government legislate issues for us. Instead, we must band together and squash the bad actors.”
– Shawn Collins, president, Shawn Collins Consulting

“I see all the Web 2.0 trends making a huge impact on not just performance marketing, but all online marketing.”
– Anik Singal, CEO, Affiliate Classroom

“The two sides – affiliates and merchants – have different goals. It is a constant challenge for both parties to try to find a common goal which isn’t always as simple as just “sell more stuff.”
– Brian Littleton, founder and CEO, ShareASale

“Keeping links from being whacked by ad blockers and trying to set our sites apart from those in the space which
give the space a bad name.”
– Scott Hazard, president, Brightside Media

“The biggest challenge moving forward is Sarbanes Oxley and the network aggregators. There has to be absolute tracking integrity within all the affiliate networks – or the model will ultimately become extinct and be replaced with direct (and auditable) relationships.”
– Mary Beth Padian, senior director, Upromise

“Brands will attempt ‘ubiquitous messaging’ regardless of whether the focus is to increase awareness or generate sales. I think a big part of this stems from the promise of behavioral targeting. Look at the popularity of MyYahoo or Netvibes – and how, with respect to content, the users’ ability to bring preferred publishers’ material to them changes their online navigation. Users can browse in the comfort of their own home page. What does this mean for advertisers? I think you’ll see increased effort by the advertisers to create a presence within user-generated content. Subtle or otherwise, ethical or not, the marketers will not settle for a possible ad to appear over on the right margin in the Google AdSense block. No, they’ll be pushing for coverage in blog posts or a logo in a video.”
– Lisa Riolo, online marketing professional

What’s the one word you would use to describe the current state of online marketing?

“Irrelevant”
– David Lewis, president, 77 Blue

“Burgeoning”
– Greg Schraff, director of strategy and business development, Brooks Bell Interactive

“Transitory”
– Lisa Riolo, online marketing professional

“Disconnected”
– Matt Ranta, affiliate manager, Vanns.com

“Fabulous!”
– Rosalind Gardner, super-affiliate and author

“Turbulent – as always.”
– Tim Ash, president, SiteTuners.com

“Exciting”
– Joshua Sloan, director of online marketing, 1and1.com

“Evolving”
– Shawn Collins, president, Shawn Collins Consulting

“Important”
– Adam Viener, president, imwave.com

“Heretical”
– Rob Key, founder and CEO, Converseon

“Immature”
– Jeff Molander, CEO, Molander & Associates

“Vibrant”
– Todd Taylor, manager business development, TaxBrain.com

“Crowded”
– Mike Allen, president and chief executive shopper, Shopping-Bargains.com

“Momentous”
– Kurt Lohse, founder & CEO, Keycode.com

“Nascent”
– Wayne Porter, senior director special research, Facetime Security Labs

“Rocketing”
– Anik Singal, CEO, Affiliate Classroom

“Flux”
– John Battelle, founder and chairman, Federated Media Publishing

“Growing”
– Brook Schaaf, principal, Schaaf Consulting

“Fast”
– Brian Littleton, founder and CEO, ShareASale

“Dynamic”
– Scott Hazard, president, Brightside Media

We asked a wide range of industry gurus, experts, affiliates, consultants, program managers and industry watchers four seemingly simple questions about the state of online marketing.

  1. Looking back, what do you think were among the most significant themes to emerge in 2006 in the performance marketing space?
  2. What will be the big thing that we can expect to happen in 2007 in online marketing?
  3. What are the major challenges in the performance marketing space moving forward?
  4. What’s the one word you would use to describe the current state of online marketing?

Here’s a look at what each one of them had to say, in no particular order:

 

Joshua Sloan, director of online marketing, 1and1.com

  1. New trends such as the use of video and advertainment continued to grow in 2006 but pose challenges for strict ROI/CPA advertisers.
  2. More offline ad channels (print/radio/TV) will wake up to the growing importance and measurability of online advertising while more online advertisers will wake up to the branding potential of online marketing despite confusion and difficulties with performance tracking.
  3. Fighting over trademark PPC bidding continued and continues to keep advertisers and affiliates on their toes. What’s legal in one country isn’t necessarily so in others. Ethical and legal dilemmas for companies and affiliates still exist. Click fraud and other forms of online fraud do not seem to be getting better.
  4. Exciting.
 

Shawn Collins, president, Shawn Collins Consulting

  1. Affiliate 2.0, the next generation of affiliate marketing tactics and technologies, was a predominate theme in 2006.
  2. The emergence of mobile phone marketing in the U.S. It’s just a matter of time before affiliates worldwide are able to promote affiliate links via digital and print signage. Consumers will then utilize their video-capable mobile phones to transact with merchants.
  3. Self-regulation is key in 2007. It’s not in our best interest to have the federal government legislate issues for us. Instead, we must band together and squash the bad actors.
  4. Evolving.
 

Adam Viener, president, imwave.com

  1. Clearly 2006 will be marked by what some are calling “The Affiliate Massacre of 2006” where Google updated their quality score rankings in Adwords and started placing penalties on affiliate landing pages. In many cases this caused minimum cost-per-click fees to go from 10 cents to $5 or $10 on many keywords. This effectively shut down PPC advertising for many affiliate landing pages. This change is causing many merchant advertisers to rethink their policies for PPC marketing since publishers who were running large-scale campaigns and linking directly to the merchant’s site using the merchant display URL and an affiliate link were largely unaffected by the recent change.
  2. I think the launch of Microsoft Vista may change the landscape of search marketing and make Microsoft AdCenter more important than it is today. I also think that Yahoo’s Panama project will be a big shift for search marketers. There will be a lot of adjustments as platforms change and traffic starts flowing more toward Microsoft.
  3. From the affiliate’s perspective, performance marketing companies are maturing, and dealing with the growth of the business while keeping up with the constant changes in the marketplace will continue to provide major challenges for performance marketing entrepreneurs.

    Setting the right policies for their programs that will enable them to continue to attract the talented performers who can make a difference in their campaigns. To do this a good affiliate manager needs to understand the numbers, the cost per acquisition of a new customer or sale from ALL of their channels, and craft policies that will enable the company to maximize sales at the best possible cost. In today’s market the old decisions to not allow affiliates to use the company’s display URL in search engine ads needs to be reanalyzed.

  4. Important.
 

Rob Key, founder and CEO, Converseon

  1. Performance marketing is growing up and morphing, although perhaps a bit too slowly. LinkShare’s vision, ValueClick’s growth and Google’s new forays demonstrate that performance marketing is going mainstream and can no longer be seen as a stepchild of the overall media efforts. Performance marketing has always meant accountability. We’re seeing our approaches becoming increasingly adopted by more mainstream media entities. The issue for the traditional affiliate marketing world is how to play with the more mainstream media, and how to get a seat at the table so that it’s taken as seriously as possible to ensure integrated efforts and minimize channel cannibalization. Affiliates has to become fully integrated with search strategies, word-of-mouth initiatives and CPM media buys. With a few exceptions, the big media entities are still slow to embrace affiliate marketing as part of their mix. Part of this is simply terminology and lexicon. It’s time that affiliate and media started speaking more of the same language.
  2. Social media marketing strategies that spawn, leverage and influence consumer-generated media are the hot thing at the moment. They’re also the strategies that many companies are grappling with most. Consumers want to hear from consumers, not traditional marketers. Businesses want to hear from other businesses. Companies and affiliates that create environments where their target audiences can gather, share useful information – and don’t overtly interfere with the experience – are those that will be the most successful. But this world is moving fast. Discrete content communities, social networks, blogs and other CGM venues are emerging daily. These venues are becoming micro-media properties, and like much media, those that get the audience first and provide ongoing compelling content, will be difficult to dislodge. I expect a land grab for these long tail communities by companies and affiliates alike. Both have equal opportunity to spawn these communities. The question is, who will be the quickest and most effective?

    Essential to success here is the ability to listen and map to this consumer-generated media conversation. New technologies, like Converseon’s Conversation Miner that scour and analyze this CGM conversation, are becoming essential elements to any online marketing campaign. After all, if you can’t understand the landscape and listen, as well as talk, you’re going to be talking past audiences, and perhaps overlook the most important constituents. Companies will indeed have to “join the conversation.”

  3. Affiliate marketing has historically been successful because it provided services and capabilities that companies themselves were either unable, unwilling or ill-prepared to tackle. But as merchants becoming increasingly sophisticated, especially with natural and paid search strategies (including long tail search, the affiliate industry can no longer rely on arbitraged search traffic. It’s a diminishing resource. Instead, it’s absolutely incumbent that smart affiliates morph rapidly into the new frontier of online marketing – word of mouth, viral, social media, blogging and other consumer-generated approaches that companies are only now beginning to grapple with. These online strategies are where search marketing was two to three years ago. My advice to affiliates who want to flourish in this environment: Evolve rapidly, now. Darwinism won’t be kind to those who rely on the same old tactics for success. On the other hand, those affiliates who do dive successfully into this new world will provide that value-added marketing dimension that companies are hungry to embrace. There are myriad opportunities for those that embrace the Web 2.0 world.
  4. Heretical. Nothing is sacred. We’re in a state of incredibly accelerated evolution. What can be demolished probably will be. And like in all evolution, there will likely be several mutated states before new stabilized species emerge.
 

Jeff Molander, CEO, Molander & Associates

  1. Scale: The desire to achieve better scale (less overhead, more revenue) drove every major corporate merger as well as ValueClick/CJ’s failed LMI project. It’s what makes Adwords so attractive and wildly successful. Reduction of inventory: Ad inventory is becoming even more scarce and prices are rising, especially in search.
  2. CPA will trump CPC pricing models. Innovative product search players like Jellyfish.com and Snap.com will cash in. Google and Yahoo Search will manage to enter the game although success will be limited and hindered by class action lawsuits focused on click fraud and “bad clicks sold” arising from failure to disclose (and reprice clicks from) low-quality distribution partners.

    Driven by the popularity of MySpace, Facebook and social media, affiliate managers will rush to tap into the long tail of affiliate-related transactions. Social e-commerce will emerge with innovations focusing on peer group favorites and recommendations. The “wisdom of crowds” will begin to drive serious transaction volume in niche markets.

  3. Scale: Retailers experienced in performance marketing are aching to figure out how affiliate marketing can be scaled upward (more leads, more transactions) while concurrently generating a better return on customer retention spending (repeat sales via affiliates) at a fair cost.
  4. Immature.
 

Todd Taylor, manager business development, TaxBrain.com

  1. Even more large companies have entered or are considering performance marketing and Revenue magazine went bimonthly and most importantly there was actually enough slush money in the industry to have a golf tourney at AS06 East – therefore, it must be real!
  2. Video ads will continue to grow in popularity as traditional marketing agencies attempt to maintain their grip on “their” industry as they gripe all the way to Congress.
  3. Second-tier advertiser merchants who enter the industry may have trouble creating affiliate brand awareness for their program, as they must compete for mind-share and visibility against the larger or more established programs.
  4. Vibrant.
 

Mike Allen, president and chief executive shopper, Shopping-Bargains.com

  1. Affiliate marketing went mainstream in 2006 in that major brands and media companies are now willing to invest in and support the pay-for-performance model. After demonstrating strong Q4 successes in 2005, many traditional retailers now see affiliate marketing as what it is – pay for performance – and a way to maximize their advertising dollars with predictable expenditures and results. No traditional media buy can deliver a guaranteed minimum ROI. In 2006, the skeptics of performance marketing began to have a change of heart.
  2. I expect Google will continue to morph into other non-search areas. Under this scenario, Google will begin to offer tools that very much resemble an affiliate marketing or CPA network. This will put many traditional affiliate marketers directly in competition with Google for customers. Those non-branded entities relying solely on search will be hurt the most. Such a move is likely to trigger a rash of online mergers and acquisitions as big names and even traditional brands circumvent the search engines and buy their way into bigger pieces of the pie.
  3. Consolidation and intense competition due to a changing marketplace where search engines no longer do only search. With shareholder pressures on the “big 3” engines to continually grow revenues at nontraditional paces, there will be new efforts to go after non-search money wherever it can be found. Google Checkout is only the beginning. I predict search engines will find new ways to become intimately involved in the performance marketing space themselves.
  4. Crowded.
 

Kurt Lohse, founder and CEO, KeyCode.com

  1. Cooperation. 2006 displayed greater willingness by merchants, publishers and networks alike to adopt cooperative selling strategies.
  2. 2007 will bring far more practical off-line marketing applications online. It will also signify the beginning of the big shift to correct the disproportional ad spend on the traditional mediums.
  3. The major short-term challenges are search engine bias against online marketers and net neutrality laws.
  4. Momentous.
 

Tim Ash, president, SiteTuners.com

  1. Google is actively trying to squash private-label PPC arbitrage affiliates in the name of better user search experience.
  2. International affiliate programs. There is now Internet critical mass in many other countries.
  3. Improving the conversion rates of offer landing pages. If you don’t, you’re dead.
  4. Turbulent – as always.
 

Ben Edelman, anti-spyware consultant

  1. What I hear most from affiliate merchants – not to mention attorneys and even regulators – is the need for improved accountability. It’s all well and good for affiliates to have considerable discretion to find novel and creative ways to promote merchants’ offers. Indeed, that independence is the essence of affiliate marketing. But how can a merchant make sure its offer is presented appropriately, ethically, lawfully and in a way that offers fair value to the merchant as well as to users? At present many affiliates keep their methods secret, and affiliate networks don’t do as much as they could, to tell merchants what their affiliates are doing. Increased transparency would improve affiliate accountability, helping merchants feel confident that affiliates’ behavior is appropriate and lawful.
 

Jim Kukral, publisher, ReveNews

  1. User-generated content such as short online videos will proliferate at an even larger scale and pace and show that it can convert as advertisements.
  2. Supercalafragalisticexpialadocious.
 

Wayne Porter, senior director special research, Facetime Security Labs

  1. Oddly enough a few years ago the answer to that question is whether or not enough people would even bother to shop online. Clearly they have no problems doing so.

    Merchants are beginning to pick up on how sophisticated the fraud issues really are. The key for the winner will be the ability to balance scalability and click/lead quality. Players like Google have relied heavily on being able to machine scale, but have had increasing trouble with quality control and rogue elements that grow more sophisticated all the time; nor are they alone. It is a bit ironic that PPCSEs are not held to as high a standard as traditional affiliate networks.

    I look for Yahoo and MSN to attack this front heavily next year as click fraud control becomes a differentiator. We should also reflect on revenue and technology risk. ValueClick via CJ had to rush the LMI issue to provide an alternative to the patent wars, and clearly from Google’s filings there is an extreme concentration risk via JavaScript, which usually is benign. However, there has been increasing hostile attacks on legitimate networks and through an array of vectors – even IM.

    If you coupled that with the frailty of cookies either through malware scanners removing them, users actively deleting them or natural cache attrition as surfers are more active – the performance marketing industry faces some severe risks on multiple fronts moving forward.

  2. There is no doubt in my mind that user-generated content (UGC) will really start to take fire – especially around video. We already see this happening with the popularity of YouTube, Google Video, click-based Revver and innovations like community-powered video such as Magnify.net which can offer large brands the messaging in a format they are accustomed to. Still, merchants will have to be innovative to get beyond the sheer volume of media – music, podcasts, pictures and now video in circulation.

    The indie film thought shapers have been waiting for this inflection point for a long time and they are poised and ready with rifles raised. The traditional gatekeepers still remain in place, but there are now powerful forces to be reckoned with in terms of UGC disrupting the traditional top-down communication stream – much like blogs have done. In addition the emphasis will be on interactive, immersive ad campaigns that cross between the real world and the virtual one. From Second Life grids to the Web to a dead drop on a country road. Users want to be entertained and they want it to be sophisticated.

    This does provide an opportunity for enterprising affiliates who often have better creative DNA than merchants if they can move away from the myopia of simplistic deal structures. Smaller affiliates will continue to feel the squeeze of the powerhouses, but should do OK by dominating niches and working with mid-tier or emerging brands.

  3. The problems are myriad and affect different groups. The erosion of the once-fertile CPA space will happen as the market has become super-saturated with dozens of networks and they must start to shrink unless they too specialize. Co-registration, another once-lucrative market, will suffer. Most “thin” arbitrage players will also get knocked out of the game and affiliates will rise up and realize it really is about being unique and having content. Controlling partner sprawl and the problems inherent with this phenomenon will continue to plague large affiliate networks and PPCSEs. Advertising powerhouses will be forced to provide more visibility into their networks as premium merchants demand to know where and how their brand is being presented. Some are starting to care.

    Once again the rise of a tough and well-funded rogue element is looming – the mass tide of botnets, experienced fraud rings, rampant content theft, aggressive Web agents and the lot are rapidly gaining contextual marketing skills and sociological and technical sophistication. If the e-commerce industry in general ­ – both PPCSE, merchants and network aggregators – do not rise up and clean things up, security companies or perhaps legislation and litigation will do it for them. I am not bullish on this cooperation based on past experience, but it is possible. If security firms, e-commerce firms and law enforcement worked in tandem, the tide could be turned.

    It boils down to an emphasis on quality and restraint and the need to mature beyond the “growth at all costs” mentality as well as adjusting merchants’ expectations and teaching them to think long term so that system pollution doesn’t kill the environment in which we all do commerce, operate and converse.

  4. Nascent.
 

Holger Kamin, executive account director, Zanox

  1. MSN Search Launched; MySpace working with Google; eBay and Yahoo; Web communities and blogs are on the rise. Big mergers are changing the landscape of this industry.
  2. Performance models such as CPO and CPA are the main driver. Advertisers as well as networks/providers realize that success-based commission models are king and key for success. Globalization is the most important issue – globalize or die.
  3. Globalization and multichannel approach to reach each and every possible market on this globe.
  4. Paradigm Shift.
 

Anik Singal, CEO, Affiliate Classroom

  1. Two themes jump out at me, and they are intimately related to each other: transparency and professionalism. The entire industry seems to be waking up to the fact that both sides of the affiliate marketing equation – merchants and affiliates – need to open up to each other about their business practices.

    Every day I talk to forward-looking merchants and managers who are eager to hold themselves to the same standards of transparency that mainstream bricks-and-mortar businesses do. They’re also actively seeking affiliates who are willing to play by the rules of fair business practices. They want affiliates who are well-versed in best practices, diversified marketing methods, compliance and good old-fashioned ethics.

    Which ties into the theme of professionalizing affiliate marketing. The history of business has proven that you can’t have transparency without professionalism. I see merchants and affiliates literally thirsting for professionalism in every aspect of affiliate marketing. They want to raise the bar and see those professional standards become part of their online careers.

    More and more affiliates and managers tell me they actually view the affiliate marketing industry as a lifetime career . To me, that says professionalism will become one of the most talked-about ideas in our industry in 2007.

  2. As an entrepreneur in the field of affiliate education and training, I believe 2007 will be the year in which merchants and affiliates both realize affiliate marketing has been a very lucky industry. We’ve seen massive growth in spite of the fact that all the players have been learning the game – even developing the rules – on the playing field. It’s been very rough and tumble and a wild ride, yet we’ve evolved our own business models, practices, culture and conventions while learning on the job.

    But with that growth – and all that money at stake – all of us, including the biggest players, now need to hold ourselves to higher standards. We must do that if we want our revenue to grow without interference from the outside. That’s why transparency and professionalism will literally force themselves upon us in 2007. The stakes keep getting higher.

    So I expect to see many more super-affiliates stepping up to the plate and saying look, we need to take responsibility for engaging in upright business practices. You’ll see them become open to educating newcomers in the industry. It won’t be about cutting out your competition, but developing a bigger and more powerful affiliate workforce.

    And I expect to see managers becoming excited about the possibilities of capturing the loyalty of those affiliates by becoming truly affiliate-friendly. They’ll be doing that through innovative and humane management practices, such as offering comprehensive and innovative training and development programs.

  3. Many people will disagree with me, but as I work with affiliates in the trenches I see all the Web 2.0 trends making a huge impact on not just performance marketing, but all online marketing. Interactive communities and “spaces,” social bookmarking and social search – those are grassroots trends being developed by audiences that spend lots of time and money online.

    Web 2.0 is not just about teens and college kids any more. Research by organizations like Pew has shown that a significant percentage of grown-up people with grown-up incomes could live without search engines. Who can blame them when the results are relevant one day but off-kilter the next? Spam is also making email a less-reliable form of communication.

    But people have realized that Web 2.0 can satisfy your need for self-expression plus help you build and communicate with a whole network of like-minded friends. That’s why all kinds of people today are blogging, sharing their favorite links and shout-boxing their ideas about everything, including products. While I might be too young to have experienced it, I’m told this is a trend back to the early days of the Web.

    That’s when a list of links on a Web page wasn’t scraped with automated software, but handpicked with care. People want to be able to have that kind of trust in websites. And they are realizing that the only way to reclaim that trust is by finding which sites their online neighbors turn to.

    For the smartest people in performance marketing today, those Web 2.0 micromarkets represent a massive opportunity. Yes, reaching them is not just a challenge, but probably impossible through traditional marketing channels. But it’s the perfect fit for affiliates, especially affiliates who are well-versed in those spaces.

  4. Can I make up a word? Rocketing.
 

Brian Littleton, founder and CEO, ShareASale

  1. There has been a huge shift in traffic sources – with two main groups. The first is PPC, which has been a major source of affiliate traffic in 2006 and has brought with it significant issues such as “brand bidding.” The second is blogs – which I believe will be a major driving force in the coming years as well.
  2. A return to the importance of new-traffic-generating affiliate marketers.
  3. The two sides, affiliates and merchants, have different goals. It is a constant challenge for both parties to try to find a common goal, which isn’t always as simple as just “sell more stuff.”
  4. Fast.
 

Brook Schaaf, principal, Schaaf Consulting

  1. No truly new themes emerged. We saw click fraud penetrate the consciousness of the mainstream media at the same time there is a growing sense of animosity (possibly jealousy?) toward Google inside and outside our industry. Some merchants are reviewing their trademark bidding terms and looking to accommodate affiliates. Finally, you did see a lot of affiliates publicly say they were moving away from black-hat and toward white-hat activities.
  2. I don’t see as much of a buzz around an idea like RSS or rich media as the continued entry into the marketplace of more content and paid search publishers. For their part, merchants will continue to experiment with new channels and partners.
  3. This is a competitive marketplace. Publishers must continue to adapt in order to perform and marketers must manage more and more relationships.
  4. Growing.
 

John Battelle, founder and chairman, Federated Media Publishing

  1. The re-emergence of brand as an important part of the marketing equation after years of focus on ROI/DR/search.
  2. Yahoo and Microsoft will debut new products to compete with Google.
  3. Understanding how to integrate with conversational marketing online, and learning the new “hybrid” model of both performance and creative/branding-driven marketing.
  4. Flux.
 

Scott Hazard, president, Brightside Media

  1. When the situation calls for it, affiliates and affiliate managers can band together and stand their ground on an issue.
  2. Not sure, but I’m afraid it will center around Google.
  3. Keeping links from being whacked by ad blockers and trying to set our sites apart from those in the space, which give the space a bad name.
  4. Dynamic.
 

Mary Beth Padian, senior director, Upromise

  1. Confirmation yet again of the value of relationships.
  2. RSS feeds for special offers and coupons becoming more commonplace on affiliate sites – even loyalty sites!
  3. The biggest challenge moving forward is Sarbanes-Oxley and the network aggregators. There has to be absolute tracking integrity within all the affiliate networks – or the model will ultimately become extinct and be replaced with direct (and auditable) relationships.
  4. Nascent.
 

Linda Woods, president, PartnerCentric

  1. Affiliates/publishers are in the driver’s seat now, not merchants/advertisers. Affiliates have money, power and traffic, and their requirements ­ – business practices and needs – dominate the relationship. Merchants need them more than they need merchants, who are unable to comply or cooperate with terms. They can deliver the goods; can merchants respond adequately to their demands? If not, NEXT!
  2. Tools, tools and more tools for affiliates. With the announcement of CJ’s Web services and many other players creating technology tools to either improve reporting, functionality or efficiency, the next “big thing” is, who can provide what to better service affiliates’ growing hunger for technology tools?
  3. Keeping up with the speed of innovation on the Internet!
  4. Exciting!
 

David Lewis, president, 77 Blue

  1. Search is a bigger part of affiliate marketing than many people thought.
  2. A shift to the extremes. Merchants will begin to completely embrace or flat out reject publishers utilizing search. Past decisions will not be factored in. New decisions will be made and there will be no way to predict where anyone will stand on the issue on December 31, 2007.
  3. Trust. People do not pick their partners wisely and misjudge “the other side.”
  4. Irrelevant.
 

Rosalind Gardner, super-affiliate and author

  1. White hats came into style in a big way, and were even more prevalent after Labor Day.
  2. Content authority and visitor-optimized sites are now all the rage … and everything old is new again as the meaning of “value-added” gains ground amongst the gray-hat set.
  3. Continued decline in the effectiveness of current search engine optimization methods.
  4. Traffic building through social networking media will continue in effectiveness and popularity throughout 2007.
  5. No change here. Getting heard and getting seen. Affiliate managers and merchants will have to work increasingly harder and smarter to put their products in front of affiliates who will actually promote them. Rewards and incentives for top affiliates will increase while commission rates for less-productive affiliates will decrease.
  6. Fabulous!
 

Matt Ranta, affiliate manager, Vanns.com

  1. Video, video and more video.
  2. Effectively and ethically integrating the use of video ads into affiliate marketing.
  3. Disconnected.
 

John Grosshandler, event director, eComXpo

  1. Just how vibrant and powerful the performance marketing community is. This can be seen in the response to LMI, the upward trend in budgets for performance marketing by advertisers and the growth in publications, events and forums serving the community.
  2. Technological innovation will become even more important in 2007. Between the growth in online video, broadband adoption and new tools for contextual advertising, behavioral marketing and detecting fraud, the gulf between those who leverage the newest trends and tools and those who rely on yesterday’s approaches will widen.
  3. Volume. How to sift through the masses to identify the diamonds in the rough, whether they are advertisers, affiliates or partners. Emails and newsletters no longer get through, and when they do, are seldom read.
  4. As President Bush likes to say, “Strategery.”
 

Lisa Riolo, online marketing professional

  1. A few years ago, you could quickly tell whether or not an online marketer “got” affiliate marketing by discussing affiliates. Those that got it conveyed respect for the affiliates. Those that didn’t, well, they tended to use adjectives like “little” or “questionable” when describing their role in the model. In 2006 the performance marketing community witnessed affiliates asserting their right to be treated respectfully. It is no longer acceptable to be a participant in this space and not get it.
  2. Brands will attempt “ubiquitous messaging” regardless of whether the focus is to increase awareness or generate sales. I think a big part of this stems from the promise of behavioral targeting.

    Look at the popularity of MyYahoo or Netvibes – and how, with respect to content, the users’ ability to bring preferred publishers’ material to them changes their online navigation. Users can browse in the comfort of their own home page. What does this mean for advertisers? I think you’ll see increased effort by the advertisers to create a presence within user-generated content. Subtle or otherwise, ethical or not, the marketers will not settle for a possible ad to appear over on the right margin in the Google AdSense block. No, they’ll be pushing for coverage in blog posts or a logo in a video.

  3. Revenue Science, Tacoda and BlueLithium represent a possible disruption for performance marketers. The assumption of many is that the budgets will shift away from other display ads. I think behavioral targeting may also disrupt search and affiliate because it is equally data-driven and ROI-focused. The advantage of behavioral targeting is that it focuses on all aspects of the consumer’s buying behaviors, not just the research and purchase decision phases typically pursued by the performance marketers.
  4. Transitory.
 

Greg Schraff, director of strategy and business development, Brooks Bell Interactive

  1. BT seemed to be a popular buzzword but I never really heard too many real success stories. My observation is that online marketers are actually getting comfortable with the basics and are now casting an eye toward testing and optimization in order to squeeze out better results.
  2. Following my comments above, more structured and strategic testing and optimization efforts. A/B, multivariate and companies that provide these services.
  3. Still getting online marketers beyond just keeping their heads above water, i.e., just running the actual marketing campaigns so that they have the bandwidth to concentrate on performance factors and tactics they can employ to improve performance.
  4. Burgeoning.

The Mobile Marketing Monster

Tony Phillip will tell you the exact moment he knew that mobile marketing and advertising – predominantly via cell phones – had crossed over into the mainstream.

It was when American Idol, the extremely popular TV singing contest, allowed viewers to vote for their favorite singer via text message – and more than 50 million did in 2005 versus 21 million in 2004, according to the CTIA – The Wireless Association. Also in 2004, 46 percent of text messaging votes for a new pop star sent in was from wireless subscribers using text messaging for the first time, CTIA figures state.

Less than a year before, UpSNAP had a deal with ABC to allow text-message voting during the Academy Awards. It was basically a disaster, according to UpSNAP CEO Phillip, who notes, “If viewers didn’t have text messaging, they weren’t going to use it.”

What a difference a year makes. There is little doubt that mobile marketing – that including text-message ads displayed with a mobile search or via opt-in, coupons sent via cell phone, video and display ads interwoven with downloads or streaming from cell phones or other handheld device connected to the Internet – has arrived.

More major brands, agencies and start-up companies are putting their energy and dollars into exclusive campaigns and technologies aimed at mobile marketing, and for some it is already big, big business.

As people in the U.S. become more reliant on their cell phones, mobile services such as mobile search and Web surfing will become commonplace. Consider the following facts according to The Pew Internet & American Life Project:

  • 52 percent of adults have their cell phones turned on 24/7.
  • 30 percent of adults say they want to Web-surf from their cell phones.
  • 47 percent say that mobile maps and driving directions are a must on the next phones they plan to purchase.

MOBILE IS GLOBAL

Mobile marketing adoption is shooting through the roof. Worldwide mobile ad spending is expected to top $870 million by the end of this year, according to Informa Telecoms & Media. Meanwhile, The Shosteck Group predicts mobile marketing will be worth $10 billion in the U.S. by 2010.

Furthermore, 43 percent of U.S. marketers are using or about to use mobile marketing in the next 12 months, according to Forrester Research. And nearly 90 percent of major brands plan to market to mobile phones by 2008, according to a survey by Airwide Solutions.

“It’s happening faster than anyone expected,” Laura Marriott, executive director of the Mobile Marketing Association (MMA), says. “2006 is certainly a year that more and more brands are getting involved but so much more can happen. Response rates from mobile are very high. There’s great engagement from the consumer.”

That sounds like a giant wellspring ready to gush, but the U.S. is not even in the lead here. Most of Europe is slightly ahead in the adoption of text messaging because of the availability of cheaper cell phones. In March, mobile phone users in Britain sent more text messages than they ever had before – 3.19 billion or about 103 million per day. That’s a region with only about 60 million people in it.

In Japan, NTT DoCoMo recently pulled in $2.5 billion in the first quarter of 2006 in non-voice revenue. About 35 billion text messages are sent each month in China, where about 426 million people have cell phones – that’s like giving one and a half phones to every person in the U.S.

Pay per text has also taken hold in the U.K., where users can request a text message of a phone number when calling directory assistance or have directory assistance send the number automatically. Phone numbers and special-offer text ads are sent when directory assistance is asked for a keyword such as “travel.”

“[Mobile marketing] can be a big cash cow for any company,” Holger Kamin, country manager USA for Germany-based Zanox, a multichannel commerce provider, says.

The ease with which so much of the world outside the U.S. has embraced handsets to communicate in ways other than phone calls means the choice for advertisers is simply how to reach out to them. Of cell phone functions available, the surprising choice for marketers so far has been the simple text message.

“We always go back to what the consumer knows,” says Marriott of the MMA, “and what is already available in handsets.” She says text messaging has made a pretty natural rise to the top, but also wants to make sure “we don’t get ahead of ourselves in technology.”

While Americans may own 200 million cell phones, marketers wonder if all these people are using even the simple functions on their phones. While 75 percent of U.S. teens (age 15 to 17) own a cell phone, according to eMarketer, only 36 percent ever send or receive a text message. These conflicting statistics are what may be holding back the really big advertisers from designing campaigns for mobile en masse.

It was only two years ago the CTIA – The Wireless Association introduced cell phone short codes, which are 5-digit numbers that text-messagers use to send their message instead of a standard 10- digit phone number. The short codes were designed to help marketers reach out to brand customers via mobile phones. Anheuser-Busch, Dove soap and Daimler-Chrysler are just a few of the major brands that ran successful short code campaigns to get customer feedback via cell phones.

CAMPAIGNS TO GO

That will not stop the innumerable mobile ad companies from vying for your attention.

MobileLime CEO Bob Wesley, for example, thinks of it as developing a one-to-one relationship. “This is all viral now,” he says. So far MobileLime has used radio ads to get opt-ins and serve coupons to cell phones. It is not only paving the way for m-commerce (paying for an item through your cell phone), but gathers rich data for the advertisers, such as if recipients opened the coupon, when they did, what they used it for and for how much, Wesley says.

Currently, some companies such as Bango enable payment via mobile phones through a deal with PayPal, but the selling merchant must sign up for Bango’s service to allow the capability. Other companies such as JumpTap aim at launching a mobile search index to challenge Google. Carriers join the search index and online auction platform and serve it to their customers.

Of course, in the online world, coupons are big business and they are not being left behind in the mobile arena. Mobile coupons are making great inroads to the electronic platform because of the “sheer inefficiency of paper coupons,” says Peter Sealey, CEO of consulting firm The Sausalito Group. He says with redemption rates for paper coupons at only 3 percent, advertisers realize they save more cash going electronic. The marketer pays only when someone prints a coupon, eliminating distribution costs. “Marketers after the 2000 dot-com crash said, ‘Thank God that’s over,'” Sealy says. “We can go back to TV and radio.” Now, mainstream marketers are embracing the full bloom of mobile marketing again, he adds.

Sealey predicts that within five years, the paper coupon will be as good as dead. Search giant Google recently said it would start to offer local coupons in conjunction with using Google Maps. Online coupons in general have already taken hold with as much as 50 percent of online coupons being redeemed, according to some estimates. Companies such as CoolSaving, Coupons, Inc. and Zixxo do well marketing coupons over the Internet. Sealey says as more marketers accept electronic devices as a viable vehicle, the better adoption rates will get.

Some mainstream advertisers and companies are already rolling out robust campaigns to cell phones. Strawberry music stores on the East Coast are text-messaging promotions and deals to mobile handset users who sign up to receive alerts and geographic-based special deals. While Strawberry has relatively few stores in its network, Starbucks with thousands of locations has run a scavenger-hunt-style loyalty promotion where cell phone users signed up to get questions via text messages, the solving of which could send five chosen players on a vacation to Costa Rica.

Recently named No. 2 carmaker Toyota spent $10 million on a mobile campaign targeting Hispanic cell phone owners to watch funny hidden camera clips on their phones featuring the 2007 Camry. And Google is undertaking significant testing for its own mobile ads on its mobile search results and to launch a version of AdWords for mobile. Google is testing the search ad in the U.S., the U.K. and Germany.

Popular eateries McDonald’s and Subway are also getting their feet wet by offering some promotions via mobile phones. Even Net vet AOL has had its Mobile Search Services up since December 2005 with search, a shopping comparison module and a Yellow Pages feature.

MOBILE ON TARGET

Firms with mobile technology know-how are not the only ones seeking to cash in on mobile marketing. AirG, for example, sets up social networks on its platform and has found great success in sending mobile promotions to its base of users. They worked five years to get 5 million users and in the last eight months that has bounded up to 10 million. AirG’s display ads and ad-sponsored games for handsets capture detailed demographics and consistently get a more than 28 percent response rate. Receiving the ads can be turned off and on at will and are all opt-in.

Along the way, AirG discovered they had a significant Hispanic demographic, so they customize certain promotions to target only those groups. Frederick Ghahramani, AirG co-founder, says he can find the Latino males in New York City who are single and send only them an appropriate promotion or coupon electronically.

“What’s been lacking isn’t the enthusiasm [for mobile marketing],” he says, “but the ability to target the active base of customers.” They share personal information with each other and find like-minded people. AirG brings relevant targeting to the table, he says, noting, “The industry has had the ambition but now is waking up.”

There is nearly universal agreement that the key element for the continued success of mobile marketing is targeting. Third Screen, the largest U.S. mobile ad network, got the jump on everyone when it started four years ago and has only recently said that targeting mobile ads has finally reached a kind of maturity. The company has stated that the next achievements in mobile marketing will be privacy standards for all carriers, predicting more detailed demographics from broad information and more and better mobile ads based on real-time location of the handset user.

With the popularity of buying and downloading ringtones and entering online auctions via cell, companies like Ad Mob want to make sure you can reach users based on their region, platform, device capabilities and even manufacturer. If you want ads to reach only Nokia users on MIDP 2.0 devices in Europe, AdMob, who also has polyphonic ringtone support, states they can do that. Of the many companies that now have a mobile marketing component, better targeting is their crown jewel, the company claims.

Some companies have come up with original ways to engage people via cell phones. Vibes Media has its Text-2- Screen that invites concert-goers to text to the Jumbotron screens at stadium-sized pop concerts. The text they send to the screen is displayed on the branded screens with messages such as “Get ready 2 rock!” and “Happy birthday, Sarah J.” Irvine, Calif., company go2 recently launched go2 SpeedPoll, which conducts surveys sent via cell phone that ask about attitudes toward certain brands – with results viewable in real time.

MOBILE PERFORMANCE

Affiliate marketing powerhouse LinkShare won’t be left behind. President of LinkShare Steve Denton says its parent company Rakuten of Japan is having considerable success with mobile commerce. He says that at LinkShare Japan, a significant percentage of affiliate purchases are coming from mobile commerce.

“Our customers live and work and play in a world without boundaries,” Denton says, “and we must find ways to exchange with our customers, and then we need a platform for that; then mobilize.”

Japanese m-commerce is exemplified by someone shopping in a mall who finds a cool jacket, takes a picture of the UPC code on the tag, sends that to a browser and makes the purchase via cell. In addition, that customer can mobile email the code and a picture of the jacket to as many friends as he or she thinks would also like to buy it.

Denton says he has no doubt that “affiliates could plug this into their business models very quickly. But the infrastructure is not there yet.” He adds that publishers have great house lists but are not using text or cell phone numbers from their customers. “Cell phone numbers will be more valuable than email addresses in five years,” he says, adding that LinkShare in the U.S. will have some key additions to mobile in the near future.

But even as the adoption numbers keep steadily rising, there are still some gray clouds out there. For example, for a country with so much Internet usage, only 16 percent of U.S. mobile phone subscribers use their Web-enabled phones for the Internet. Some ad networks only work with certain brands of cell phones and even companies that say their platforms work across all brands and telecom networks can’t guarantee that the service will work for consumers consistently.

While marketers are very eager to reap the financial benefits mobile promises, some critics have said that not enough is being done to erect coherent marketing strategies. In the rush to go mobile, some companies are grabbing whatever firms are offering and not building their own goals, figuring out how to follow the metrics, putting up privacy standards or discovering a solid plan to get people to opt in. “Some companies are so decentralized,” says Zanox’s Kamin, “that they don’t even know they have [offices] in Europe.”

Other critics say a patchwork of partnerships keeps true standards from emerging. In the realm of mobile search, a giant like Google can go out on its own with few partnerships because most go to Google anyway, but other search companies (Yahoo, MSN and others) must become allies with a carrier to get the best traffic. These kinds of deals can shut out some cell phone owners from getting the right information when they want it. There are also bandwidth inconsistencies as there are with general cell phone reception depending on location and interference. SEO firm Oneupweb has noted that the myriad of technical issues with mobile commerce and advertising will smooth out for the next generation of mobile surfers and searchers because the interfaces will gradually become less technical. It will be like operating your TiVo or your iPod.

“Unlike a year ago – the early days,” says Phillip of UpSNAP, “search [via mobile] didn’t make a lot of sense, but now they will do what is relevant to their mobile lifestyle – comparison shopping, for example, before you get into your car.”

Marketers are also just beginning to realize that the mobile lifestyle cuts across socioeconomic barriers. Most people in the U.S. – even some of the most poor – have a cell phone. With 200 million handsets out there and growing, the young and old and rich and poor and racially diverse pretty much covers everyone who can participate in mobile marketing.

Hybrid Auctions Are Taking Over

As author Robert C. Gallagher observes, “Change is inevitable – except from a vending machine.” And so it comes as no surprise that paid search engines are changing too. The biggest change is one of the most fundamental, affecting which paid ads are shown first in the results. The tried-and-true high bidder auctions, pioneered by Overture (later acquired by Yahoo), are being phased out in favor of hybrid auctions, introduced by Google.

High-bidder auctions are just what they sound like – the search marketer who bids the highest per-click amount for each search keyword gets the top spot in the paid search rankings. But high-bidder auctions are starting to seem so 20th century.

The new thing is hybrid auctions, which set the paid search rankings based on a combination of the bid, the clickthrough rate and sometimes other factors. For example, if one search marketer bids $2 per click to show an ad with a 1 percent clickthrough rate, another bidder could outrank the first with a lower bid – perhaps by bidding $1 for an ad with a 3 percent clickthrough rate. In a high-bidder auction, the $2 bidder would always rank higher than the $1 bidder.

Google has been using hybrid auctions for years, but until recently, all other paid search engines were the high-bidder type. That’s all changing now. Earlier this year, MSN Search introduced new paid search technology that uses a hybrid auction. Yahoo has announced plans to follow suit late this year or early next year. Given Google’s longstanding use of hybrid auctions, the changes at MSN and Yahoo will transform the paid search industry, and nearly a whopping 97 percent of all paid search queries will use hybrid auctions.

Hybrid auctions usually provide more relevant results to searchers, because the most-clicked ads tend to rise to the top of the rankings. And hybrid auctions make the search engines more money, because the combination of clickthrough rate and bid price maximizes the total fees paid by search marketers.

More Complex Planning

If you’re a search marketer accustomed to planning paid search campaigns for high-bidder auctions, hybrid ones bring you some new challenges. With a high-bidder auction, you can see what your competitors are bidding at all times, and can take an educated guess as to what bid could get you ranked No. 1, for example.

Hybrid auctions, however, demand pure guesswork; not only don’t you know your competitors’ clickthrough rate, but you don’t even know your own, so you can’t predict where your ad will land no matter what the bid. Without that information, you can neither project the number of clicks your campaign will get, nor the amount you’ll pay in total, which hamstrings your ability to plan your paid search campaigns.

Google and MSN could help predict the number of clicks you’ll get with your bid, but they don’t, instead merely projecting the number of clicks to expect with an average bid. If your bid is higher (or lower) than average, you’re out of luck.

In contrast, Yahoo has publicly stated that they will provide predictive information based on your bid when they convert to a hybrid system, so we may be able to use Yahoo to help plan campaigns.

Simpler Operations

While hybrid auctions can pose new campaign planning issues, they also make operating your paid search campaigns far easier than high-bidder systems do.

To understand how much is changing, we need to remind ourselves of the work required to manage high-bidder campaigns. The very predictability of high-bidder auctions that aids campaign planning also makes operations tougher than with hybrid approaches. Because changing your bid in a high-bidder auction directly changes the search rankings, search marketers can use bidding tricks against their competitors to manipulate those rankings.

These high-bidder tricks include bid jamming (intentionally bidding 1 cent below a competitor’s bid to force them to spend as much as possible); gap surfing (bidding 1 cent more than a competitor to steal a higher spot); and friendly URL (bidding just under a specific opponent to avoid a bidding war).

Search marketers managing campaigns in high-bidder auctions must be aware of these techniques and must use them for highly competitive keywords. These techniques require constant monitoring and tinkering, raising operational costs for high-bidder campaigns.

In contrast, none of these tactics are needed for hybrid auctions, because the rankings can’t be changed simply with a new bid. And because clickthrough rates can’t be adjusted at will the way a bid can be, hybrid auctions are far less volatile than high-bidder auctions. The combination of fewer bidding tactics and less volatility means that search marketers can spend less time monitoring every ranking fluctuation.

A New Fraud

But all is not rosy. Search marketers are familiar with click fraud, but hybrid auctions have spawned a new kind of fraud, called impression fraud.

Impression fraud is almost the opposite of click fraud. With click fraud, competitors or unscrupulous search partners use low-paid workers or automated bots to click on paid search ads, draining the victim’s search marketing budget. Impression fraud occurs when competitors enter search terms to display your ads and then don’t click on them.

Confused? Stay with me now, because this is a bit tricky. Because hybrid auctions consider clickthrough rate in their rankings, anything that lowers your clickthrough rate helps your competitors. So, when they cause your ad to be shown and then don’t click on it, your clickthrough rate declines, which lowers your rankings (or forces you to bid higher to retain your ranking). It may scare you that some folks have nothing better to do with their time than to dream up such schemes, but it’s apparently the case.

While some observers estimate click fraud to affect as much as 20 percent of all paid search clicks, no one knows how rampant impression fraud may be. Because impression fraud cannot enrich anyone, it is likely less prevalent than click fraud, but its rise demonstrates how every change in search technology has unintended effects.

Despite the specter of impression fraud, the shift to hybrid auctions is generally a boon to search marketers, by making campaigns less work to monitor and operate, even if they are more difficult to plan for. The less time you spend in short-term bidding tactics, the more effort you can devote to improving your clickthrough and conversion rates and finding new keywords your competitors have not yet discovered. It’s better to focus on being more effective than more efficient, and hybrid auctions help you do that.

MIKE MORAN is an IBM Distinguished Engineer and the Manager of ibm.com Web Experience. Mike is also the co-author of the book Search Engine Marketing, Inc. and can be reached through his website (MikeMoran.com).