No Check, Please

Whether it is for spring to begin, for Godot or for a commission check, no one likes waiting.

The 30 to 90 days that affiliates – especially those outside the U.S. – must wait for commission checks to arrive can seem like a lifetime, and waiting in line at the bank to cash it is so 20th century.

While merchants might not be as anxious to see the money leave their accounts, replacing lost checks and answering calls about payments wastes time and money, and paper leaves an expensive trail. For recipients, being paid by check requires a trip to the bank and then waiting (there’s that word again) 24 hours or more for the check to clear.

Paper checks are also permanent – a discrepancy in the amount must be resolved by another check, or possibly returning the original draft. When merchants are issuing dozens or hundreds of checks per month, the cost of resolving disputed checks can pile up in a hurry. "Receiving a check is one of the more inconvenient payment methods," says Ron Hynes, vice president of product development of Prepaid for the Americas at MasterCard Worldwide.

Enter the electronic payment. No sitting by the window looking for a delivery person, currency exchange fees or checks that disappear into the ether. The other advantages of electronic payments – including faster processing, greater accuracy and lower transaction fees – all but guarantee that the paper check will soon become an endangered species in the online marketing space.

For the issuing party, there’s the printing (where errors occasionally happen), verifying and signing of the drafts and the stuffing of envelopes – all time-consuming tasks. Direct deposit to a recipient’s bank account is the most popular form of electronic payment, and it is increasingly being used for business-to-business transactions. B2B automated clearing house (ACH) payments grew by 10.9 percent between 2005 and 2006 to 2.3 billion transactions, according the Electronic Payments Association.

Alternative electronic payments that do not require a bank account for deposits are also on the rise, with services including PayPal and PaidByCash becoming commonly accepted methods of payment. In all, electronic payments represent more than 10 percent of online commerce transactions, and similar technology is being applied to B2B financial transactions. Adding to their attractiveness is their "green" quality, as eliminating paper checks saves trees, while fewer trips to the bank means less time behind the wheel.

Electronic payments have grown more rapidly in the consumer arena, but B2B is catching up, according to Edward Kountz, a senior analyst at JupiterResearch. "There’s more pent-up demand on the B2B side" of electronic payments, Kountz says. The lack of a unified payment standard has held back adoption, but more businesses are moving to paying electronically for the same reasons as companies accepting electronic payments – "to eliminate friction," he says.

Catching On With Networks

Performance networks are moving to electronic payments to eliminate the costs and administrative hassles of paying with paper. DoubleClick Performics began paying affiliates electronically through direct deposit in 2001, according to Ed Fleming, the company’s finance manager. DoubleClick Performics developed software that is integrated with its reporting and accounting system to streamline generating direct deposit payments. "It costs us about half the price of a stamp to process" a direct deposit payment, he says.

Currently DoubleClick Performics’ payments are split evenly between checks and electronic deposits, Fleming says. Affiliates that generate the most revenue are the most likely to participate in direct deposit. Fleming estimates that 90 percent of commission dollars are sent out electronically.

DoubleClick Performics regularly contacts affiliates to recruit more to accept being paid electronically, but some still prefer to be paid by check. Affiliates may decline to participate in direct deposit because they fear identity theft. "They don’t want to give out their banking information," Fleming says. DoubleClick Performics has had internal discussions about offering alternative electronic payment options, but there has been "no outcry or huge demand" from affiliates, according to Fleming.

Commission Junction currently offers direct deposit and is evaluating offering PayPal as an electronic payment option for affiliates, according to Dave Osman, the company’s vice president of Client Services. "There doesn’t seem to be a clear leader" in B2B electronic payments, he says. While electronic payments would save the company, "Our desire to eliminate [checks] is based on customer needs, not cost," Osman says.

LinkShare recently announced a new payment plan for publishers, which pays them weekly from the first dollar earned. By moving to a weekly payment schedule, LinkShare reduces publishers’ wait time to receive commissions and doubles the number of paydays. The new plan intends to help publishers improve their cash flow so they can invest resources in their growing businesses. LinkShare officials declined to comment for this article about its payment options.

PayPal, the eBay company that has popularized online funds transfers in the consumer realm, has developed software called MassPay for automating the processing of electronic B2B payments. MassPay can be integrated into payroll and reporting programs through a free application programming interface (API), according to Michael Oldenburg, Associate Manager of Corporate Communications for PayPal. T here are now 18 affiliate software applications that incorporate MassPay, including Affiliate Guerilla, AffiliateShop and MyAffiliateProgram.

Transaction fees for MassPay are up to 2 percent of the value of the transaction to a maximum of $1 per transaction and are paid by the issuing party, according to Oldenburg. Money can be transferred without cost from the online account to a PayPal debit card for off-line spending, he says.

Alternative Payment Options

As an alternative to direct deposit, networks are beginning to roll out debit cards that are linked to online accounts and accept electronic transfers. These cards, also known as "prepaid," "stored value," "reloadable," or "payroll" cards, do not require affiliates to provide bank account information – only a valid address is needed to initiate an account.

Prepaid cards have the same efficiencies as direct deposit without requiring a complex sign-up process, MasterCard’s Hynes says. Prepaid cards enable companies to eliminate commission checks altogether when used in combination with direct deposit, says Hynes, which works with banks and payment processing companies to distribute MasterCard-branded cards.

Payment companies Payoneer and Ecount as well as network Axill offer prepaid card services that have no start-up fees to the network, and the cards are free for the affiliates.

These cards offer the security of gift cards (if you lose the card there’s no access to a bank account) with the added benefit of third parties, such as networks being able to deposit funds electronically. Payoneer, of New York, offers MasterCard debit cards that can be used for shopping or to get cash through an ATM, according to Yuval Tal, CEO of Payoneer.

Although the cards are free to affiliates, there are fees of up to $2 for withdrawing funds through an ATM. Affiliates who are part-time workers and use commissions as discretionary income can find it advantageous to separate their earnings from their primary bank accounts.

Just as with direct deposit, the funds are available the same day of the funds transfers, Tal says. However, if a balance is kept on the card at the end of the month, Payoneer charges a fee. While paying a fee for someone to hold onto your deposit might seem counterintuitive, Tal says that the cost of tracking and administering held-over balances is more than any interest the company could make.

Electronic Payment Options

Merchants looking to accelerate their payment processing while eliminating the cost of paper and accounting hassles have several options for going electronic. Transaction fees vary to a maximum of a few dollars per transaction, but they are all superior to the cost of paper checks.

Direct Deposit It’s easy, universally understood and safe. However, it requires validating an affiliate’s bank account number. Finding international banks to participate can be costly and time-consuming.

PayPal Many affiliates already have existing accounts so they can be very comfortable in getting on board. Little to no information is required to recruit affiliates, and PayPal can pay out in 17 currencies.

Prepaid Debit Cards Ecount and Payoneer, along with many banks backed by Visa or Mastercard, offer cards linked to online accounts. With a minimal of software integration, publishers can issue payments from within their affiliate software. Affiliates can get cash through ATMs using a card with the network’s branding.

Affiliates who set up a Payoneer account can also direct funds from any network, even if Payoneer does not have a relationship with the network, according to Tal. Each Payoneer account includes a routing number that can be used for direct deposit, similar to a brick-and-mortar bank. Affiliates can also mail endorsed checks from Google, and Payoneer will deposit the funds into their debit account, Tal says.

Debit cards can be set up so that the networks pay most or all of the transaction fees. Tal says the per-transaction fee depends on the volume of funds that the network processes. Networks that use Payoneer include AmieStreet, ROI Rocket and JoeBucks. Gary McNelly, CEO of JoeBucks, a health and beauty affiliate network, chose Payoneer because the transaction fees are less expensive than implementing PayPal. Integrating Payoneer into his reporting system required just one hour of technical staff time, he says.

Ecount of Conshohocken, Pa., offers electronic payment systems that can be used by networks to compensate affiliates and for affiliates to offer rebates to consumers with minimal administrative costs. Jay Levin, senior vice president of consumer payments at Ecount, says companies can build loyalty by offering MasterCard debit cards with their branding. "Online marketers can be tough to get off-line branding," Levin says. Offering a branded card "will give them that viral feel." As an added benefit, affiliates that work with several networks are more likely to remember and positively view a network if the logo is on a debit card that they use for discretionary income.

Ecount requires a database or XML file from the network that can be submitted via FTP or email to generate electronic payments. The company creates a custom-branded website that cardholders access to check their account balances and payments.

Ecount’s debit cards can also be used as periodic rebates for signing up for a service, Levin says. Wireless phone carriers and cable companies have issued debit cards to new customers as an incentive for signing up. Part of the cost of a new phone or cable box is returned to the customer via monthly payments to a branded card, which builds consumer loyalty at a lower cost than issuing paper checks, according to Levin.

Axill, an international network located in Piscataway, N.J., has been aggressive in pursuing the expediency of electronic affiliate payouts. The company, which is a subsidiary of online marketer Northgate Technologies of India, offers same-day payouts to affiliates who sign up for the company’s Visa debit cards. However, same-day payouts are limited to affiliates that accrue a minimum of $25 in commissions. As with other debit cards, funds can be withdrawn at ATMs from the Axill-branded cards.

International Payment Options

Paying affiliates outside of the U.S. is often costly in transaction or currency exchange fees, and affiliates who are paid by check do not have immediate access to funds. Wire transfers can cost up to $50 each, and checks from U.S. banks can take up to a month to clear out of the country – if affiliates can find a local bank willing to cash them. Recipients living outside the U.S. may also be required to pay additional fees to exchange U.S. dollars for their local currency.

DoubleClick Performics’ Fleming says making payments to foreign banks "is by far the biggest issue" in using direct deposit. The fees (associated with foreign bank transfers) "are a drawback for using electronic payments" outside of the United States, he says.

PayPal’s MassPay enables publishers to issue payments in 17 currencies to 190 countries, with transaction fees of 30 cents each plus up to 2.9 percent of the balance, according to Oldenburg. A single batch of up to 250 payments can handle multiple currencies.

Since approximately 98 percent of his affiliates are outside of the U.S., JoeBucks’ McNelly says minimizing the cost and complexity of international payments was a must. Most of his new affiliates in India, Russia and Asia choose to be paid via a Payoneer account, and they like being notified by email of a funds transfer, he says. "We haven’t had many complaints [about using Payoneer], which is unusual, because [affiliates] complain about everything," he says.

Ecount can issue electronic payments to only U.S. and Canadian residents and will add three European markets in 2008.

Payment methods will continue to evolve with technology as merchants and online marketers look for ways to create efficiencies.

Crossing the Line

The roles played by each of the key parties in the affiliate marketing space are very clearly defined. Just like a well-oiled machine, each component has its job to do, each ensuring that the industry as a whole functions, if not in harmony, at least in synergy.

Affiliates should drive value added traffic and consumers to a merchant’s site.

Networks are considered to be the middlemen that track affiliates’ traffic and merchant sales.

Merchants convert that traffic and consumers into sales.

Affiliate managers are there to oil and facilitate the whole process.

Each group enters into relationships with the other parties with the presumption clear boundaries will be maintained. For the most part it works, and each group wants to keep it that way. Affiliates don’t want to see affiliate managers doing their job and merchants don’t want to see networks becoming merchants.

The only potential for crossover is the job of the affiliate manager, as they can exist with the merchant’s organization or within networks or as outsourced program managers. An affiliate manager could certainly boost their personal revenue rather nicely if they started playing all sides of the business,but at the same time they are likely to destroy trust with their affiliate partners.

Trust is the key issue in all of these roles. This complex ecosystem functions because it is based on trust. Trust is not something that people should take lightly or for granted.The presumption of trust exists within each party’s responsibilities, but still, each group needs to earn and continue to foster that trust.

One of the most complex and debated roles in the industry is that of the affiliate network. They are considered to be a trusted third party that is meant to remain neutral and ensure everyone is working in a fair field of play. That’s not an easy task given that there are widely differing opinions on various sides of what constitutes fair play.

Both LinkShare and Commission Junction have previously bought affiliates, and while this has caused concern, it didn’t raise any real alarm bells at the time. And those moves have since faded from the limelight. But let’s face it – many of the larger CPA networks are affiliates that turned into networks,and most still operate as affiliates.

The PepperJam Network has progressed through the affiliate business from merchant,to affiliate, to affiliate managers to affiliate network – presenting them with a serious challenge in how they separate and manage their industry role. The mixed reviews and acceptance PepperJam has received from the affiliate community shows it’s not an easy path to travel. It’s a very difficult journey to take while keeping all constituencies happy. And the larger a company becomes the harder it is to ensure boundaries inside the company are enforced and trust is kept in place.

So it is perplexing when a “Trusted Third Party” network such as LinkShare recently began allowing OneCause, an affiliate, to operate in violation of its’ own terms and conditions, overwriting affiliate codes without a consumer action and targeting direct-to-site traffic from organic search results.

What makes this even more upsetting to the delicate balance of affiliate marketing trust is that OneCause is owned by Rakuten, LinkShare’s parent company.

The industry has long argued whether BHOs (Browser Help Objects) should be part of the affiliate channel and how they should interact with the consumer. That debate continues to rage on. But the real question here is, why is LinkShare (or any network) now operating as an affiliate?

Extensive tests by members of the affiliate community showed that, not only is the LinkShare-owned BHO failing to follow LinkShare’s own Terms and Conditions, but it is also going beyond other BHOs, such as the ones from affiliate eBates, and overwriting affiliate tracking that is meant to be protected by the industry standard afsrc=1 code. This means LinkShare is being credited for commissions that should have gone to its own affiliates. It is wrong on all levels.

LinkShare wrote in its blog that the issues were immediately addressed, but continued testing shows the same results as prior to the fix.

LinkShare isn’t the first to do this, but as the company likes to state, it is a market leader. So, why is one of the three largest U.S. affiliate networks seemingly going out of its way to cannibalize its own affiliate base? In fact, CJ and Google Affiliate Network all cleared OneCause.

Economic conditions are tough in the U.S. market, but it’s hard to believe that business is so bad that networks can’t find other ways to increase revenue rather than undermining affiliates and slicing up their affiliates’ revenue. This is ultimately bad business for the long run because it undermines the basic rules of trust between a network and affiliates.

Merchants need to ask themselves if they want to be working hand-in-hand with networks that are cannibalizing their valuable affiliate sales channels and undermining core affiliate partners. And affiliates must consider if they want to be promoting merchants that allow their traffic to be cannibalized for someone else’s profit. The affiliate business exists because of synergy and trust between all parties. Cannibals have no place in that equation.

Chris Sanderson is the owner of AMWSO.com, an Outsourced Affiliate Management Firm, with an international team of dedicated affiliate managers supporting clients programs on a global basis.

Commission Junction: Putting the Pieces in Place

Kerri Pollard took over the helm of Commission Junction as general manager over a year ago. Pollard’s rise through the ranks – starting at BeFree back in the day and then at CJ as director of publisher services – gives her a wide variety of network experience to draw upon. Since Pollard took over, CJ has undergone some changes.

Lisa Picarille: You’ve been running Commission Junction for over a year now. What’s changed at CJ?

Kerri Pollard: It seems like a cliche, but the first order of business was to get the right people in place. Our emphasis is customer focus on the advertiser, publisher and agency side of the business. We didn’t spend a lot of time on agencies in the past. Making sure we had the right people gave us greater focus. Everyone is now aligned and focused. On the agency side, we have a support team and the resources on the sales end. I’m happy to say that coming off CJU we’ve gotten positive feedback about the increased support and partnership. Also, both the advertiser and publisher sides made alignments in the marketing and products teams. There is ownership and accountability within their teams. That is reflected in the product groups. I grew up on the publisher side of the business at BeFree and we have added more support on that side of the business. Mike Ouellette, a former BeFree-er from back in the day, has also joined us as director of publisher developments.

LP: What has resulted from the personnel changes?

KP: Those changes give us a couple of different things. In this business, it’s all about bringing in new advertisers to the CJ Marketplace and retaining them. Organizationally, we are focused on retention and acquisition. We are really trying to re-emphasize customer outreach.

LP: And the biggest changes?

KP: They’ve been on the technology side and the marketing and product sides. We are becoming better at product marketing. We hadn’t been marketing ourselves. We are also able to focus on Web Services. We launched that two years ago, but there are more opportunities for third party developers and to get traction with developers.

LP: Have the changes allowed you to attract more developers, advertisers or publishers?

KP: We tend to err a little more on the conservative side. But we continue to bring in new clients in each quarter when you look at the year-over-year numbers. It’s all about how we track it and we are also very conservative about sharing that data.

LP: Has the fact that Performics is now part of Google impacted your ability to bring in new clients?

KP: No. It’s been no different thus far. That could change. But it hasn’t impacted the sales process of anything with our existing clients. As far as we are concerned, it hasn’t changed from when they were Performics.

LP: Now, the inevitable question about the impact of the economy on your business?

KP: Because our business is tied to the online process we have been looking at the forecasting process. A lot of people are in the dark about what the holidays will bring. Analysts are all over the place with predictions – anywhere from 12 to 13 percent growth, but we’ve also seen numbers as low as just 3 percent growth for online sales. On the positive side, we are seeing that companies are definitely redirecting money from other channels into affiliate marketing because it is cost effective. Even if a company or retailer has laid off workers, they can’t shut down that channel. But they need our help on the services side of the business – especially if they don’t understand that when they pay out more to publishers, that’s a good thing. That it’s tied to increased sales. But it all comes back to the consumer. More and more consumers are coming online and shopping, and the adoption rate will continue to increase. Will that fact offset what is happening with the economy? Not sure. And we definitely won’t know for sure until a couple of weeks into 2009. We are doing what we can, but things like Citi Bank filing for bankruptcy and more consolidations at financial institutions are beyond our control and they do have an impact.

LP: What’s the impact been on affiliate marketing overall?

KP: I do know affiliate marketing is the safest business. It’s measurable and cost-effective. But businesses are also in hunker-down mode. But I think we can grow the affiliate marketing pie. We are helping our existing clients with greater education, so they can really understand performance marketing. We are also looking to areas like BtoB. People tend to take a shot and need the support for publishers. That business can be tracked and we are looking into what role we could play. We are also looking at doing more tracking retail outlets and VARs (value-added resellers). We are having conversations about how, as a business and technology platform, we can track other things within an organization.

LP: And you have the technology to do that?

KP: We have a lot of technology initiatives. We were the first to launch Web Services domestically. We are revitalizing that initiative, making it more of a community and a mashup. We want third party developers and others to make widgets. We are also working closely with some of the other ValueClick properties to leverage their technology – Media Convergence and MediaPlex. We want to move beyond the methodology. ValueClick is already doing behavioral and contextual targeting. The biggest challenge is the amount of heavy lifting involved.

LP: Are you leveraging other technologies as well?

KP: We want to make it easier for existing clients to do business with us. Publishers get excited when it comes to optimization. Big publishers have made a significant investment. We need to make things easier for the great diversity of publishers. We are looking at creating more push network features for new publishers. So, we are looking at the core fundamentals. This is a relationship-based business. There are social networks out there and communities. We also want to have more automation on the reporting side. We are open to leveraging other developers. We don’t have to build everything ourselves. We just launched a pay-per-call beta test with CallWave. It has a branded CJ look and feel.

LP: There have been issues around network compliance and those that continue to override affiliate commissions.

KP: Network quality is important to us and we are very diligent about it -maybe more than anyone else. We’ve put an increased focus on it. Jeff Randall is handling our network quality and developing that even more. Adware and spyware have been difficult and more egregious, but when it comes to adware, there are customers that are still supporting it. We will still continue to watch it and stay one step ahead. In addition, trademark bidding is a big piece to monitor. The focus for us is staying on top of it. To do that, we are adding more regulations and policies.

LP: A while back, you were expanding into countries outside the U.S. Is that something CJ will continue?

KP: ValueClick has a big global presence. CJ launched in Spain this summer. We also have offices in the U.K., France, Germany and Sweden. We are looking to continue expanding in 2009 and looking at different ideas. We are also seeing more client interest in the Asia-Pacific.

LP: What are some of the specific goals for CJ in 2009?

KP: There are economic factors in play, but we’re focusing more on what we can control. In general, we are seeing greater focus on profitability and margins for our customers. We think that by educating our clients and being focused on technology we can grow distribution beyond the scope.

LP: Are you seeing larger affiliates get bigger and the gap between the largest and smallest affiliates get wider?

KP: Large publishers – especially couponers – are having their best year ever. But double digital growth year-over-year is going to be more difficult. It’s getting more difficult to be successful in this business. The small guys are trying to compete, but it is survival of the fittest and there is a huge increase in competition. The changes to search engine policies this fall hit hard for a lot of people. Search engines determined that content was ranked higher based on what was compelling to consumers. That hit the smaller guys hardest.

LP: Do you feel pressure from the CPA networks?

KP: No. Not really. It’s just arbitrage to an extent. They have not made an investment. It’s not a relationship. I see them as here today, gone tomorrow. They are ankle-biters. I think when you think about networks it really comes down to the Big Four.

LP: What are the other major challenges for CJ over the next 12 months?

KP: It’s been an interesting year. I’m excited about all the things that we’ve been able to do. It’s like we’ve been cleaning up the stable and the horses are ready to hit the racetrack. We are making sure that we stay focused on the customers and the products and services they need the most.

Google Affiliate Network: Big-Time Backing

The performance marketing landscape changed dramatically last year when Performics, the third largest network, was sold along with its parent company DoubleClick to search giant Google. After more than a decade in the online marketing space, Performics became the Google Affiliate Network – gaining all the cachet of an association with Google, along with concerns from the privacy advocates about Google having too much information on advertisers and publishers. Chris Henger, group product manager for Google Affiliate Network, addresses those issues and talks about where GAN is headed.

Lisa Picarille: Let’s talk about the changes that have occurred since Performics was acquired by Google.

Chris Henger: We’ve moved to the Google Chicago office – three blocks from our old office. Speed and being fast is a good thing at Google. Phase One was the integration. That is done. And it was done well.

LP: So now what?

CH: I think Google brings a tremendous amount of vision, infrastructure and philosophy in their approach to market and business problems. We can apply much of Google’s core business to our business. Google is about making it simple, easy and fast and doing no evil. We have been thinking about how we can bring that to our channel. We really want to embrace that. We need to be relevant to create a great experience for our publishers, advertisers and end users – the whole ecosystem.In CPA and affiliate marketing, we are always thinking about how to convert better and what can we do that will make more money for us, advertisers and publishers. In affiliate marketing,we are continuing the integration to leverage Google’s technology infrastructure. It’s in our best interest and that of our customers (advertisers and publishers) to embed our systems into core Google software. We have access to great software. We were told by Google to engineer for the long term and not for the short term. Be smart about why you integrate into the system. Make sure you are enhancing the core platform. For example, we can use the payment and billing system of Google’s on the back end. This can benefit publishers by offering payments with more speed and transparency. We can send one, common check to AdSense and network publishers. It’s also important because we can now pay in 47 different currencies across many countries.Operationally, it’s important to understand the synergies with our publishers and advertiser and AdSense. There is overlap. There’s an opportunity there to make publishers happy. We can also centralize reporting and use Google Analytics. It’s our long-term vision to offer a centralized dashboard to their affiliate data, mobile, etc., in a single dashboard. We are leveraging Google’s focus on technology and innovation.

LP: What else is on your radar long-term?

CH: We want to make the platform easy and fast, integrate with Google and be more open for advertisers and publishers to communicate with each other. Open communication and the concept of transparency only work if the network is fully open and shares publisher information with advertisers. We think there is value from us, but that we shouldn’t stand in the way. Google has Blogger, Gtalk, Google Group, GMail, and many other communication tools.

LP: It’s great to leverage Google, but is there a downside to that?

CH: People are worried about Google having too much information. I understand the potential perception of conflict but we haven’t had any customer feedback along those lines. They don’t see it as a problem. From a long-term perspective, why would Google do things that are not in the best interest of the end user? It’s funny because the U.S. is known as a capitalistic country with an entrepreneurial spirit – the whole rags-to-riches thing – but America also loves to see the Big Guy fall. Some think Google is too powerful. It’s an unrealistic fear that is not in practice.

LP: How much emphasis do you place in compliance, and will Google play a role in that effort?

CH: Compliance is always important and remains very important.I don’t feel a seismic shift. We believe in quality in business. We have invested in technologies and methodologies.It’s a huge differentiator for us and will be more so in the future. We are working closely with Google on this. It has many technologies for malware detection, and if you combine that with our focus on quality, we have strength. We also hand-screen all affiliates and reject 50 percent of the publishers who try to sign with us.

LP: Does GAN have specific goals set for 2009?

CH: There was a lot of marketplace momentum for us that was very strong in 2007 and 2008. We were taking shares from competitors – which can singularly be attributed to affiliate marketing. Google is committed to the affiliate business as important. Over the next year, we want to continue to grow GAN through that same single-focused effort – driving publisher and advertiser growth. We want to grow programs and have already proven that we can do that. When advertisers and publishers are happy we are ultimately all winning.

LP: Do you think growth could be challenging in this economic climate?

CH: Current economic conditions are impacting online advertisers and all advertisers in the ecosystem. But advertisers are not naive. Online marketing is a vehicle that can help them and is accessible to them in tough times. We want to let them lean on us.

LP: Does that mean you are reaching out to a more diverse group of potential advertisers?

CH: A while back, we began a program to focus on small-to-medium-sized advertisers in addition to our big brands and catalogers. Google works with every advertiser on the planet – across all verticals. At the same time, affiliate marketing works for online e-commerce objectives – leads or sales, the big verticals, retail, financial services, travel and technology. We want to work with companies in all of those areas. It’s important to us to be diverse. For example, we know that in these times, in affiliate marketing and offer-driven channels, advertisers retreat on offers because of margin pressures. It could be right for one or two companies. But offers that are properly structured when the customer is price sensitive or ticket-size sensitive and consider the price point that consumers are fearful of, can work – and work well. So let’s put offers out there that are attractive. We should be talking.

LP: Google has a large global presence. Are there more expansion plans for GAN?

CH: GAN is ultimately a global business but right now we are going through a prioritization process to decide about further expansion. We are evaluating that.

LP: Where will GAN be in a year?

CH: We think that over the long-term we can bring about a real, fundamental change in the industry to make it easier and faster to do what is right for advertisers, consumers and publishers. Give us time. Google’s not out to hurt the affiliate marketing industry. Let us operate with these good intentions.We are part of a big company and things could take a little longer. But there is excitement, enthusiasm and support. The right things are in place. My team is 110 percent committed to do the right thing by customers and good things are going to happen.

LinkShare: Leveraging Technology and Global Markets

Nearly a year ago, LinkShare president Steve Denton stepped down. The company named co-presidents. Jonathan Levine and Yasuhisa “Yaz” Iida are both veterans of LinkShare’s parent company Rakuten.

Lisa Picarille: LinkShare is the only major network to have co-presidents. Give me the break down of your duties.

Jonathan Levine: I used to be the chief technology officer at LinkShare. My primary focus is still product and technology development and to work with our chief marketing officer. I make sure we track, report and pay out commission – basically the nuts and bolts of the technology operations.

Yasuhisa Iida: I came from LinkShare’s parent company Rakuten. My role with LinkShare is just five months old, but I have been with Rakuten for 10 and a half years. My role is the business side – mainly client facing. I’m looking at sales and client development.

LP: When there are two people making critical decisions, can’t that be problematic since there is no real “the buck stops here” ruling?

JL: The benefit of having co-presidents is that two brains are better than one. Yaz and I came from Rakuten at different times and my background is products and technology with some business development.

YI: I was heading up the sales organization. I can bring the best practices from our parent company.

JL: Also, I think Yaz and I are in sync on most things. We are pretty careful when decisions overlap that we have time to have discussions and come to consensus. We are co-presidents of a bigger company. The buck stops with our board of directors and the CEO of Rakuten. Were there to be a case that was perceived as passing the buck, there would be no tolerance for that at Rakuten.

LP: What’s changed at LinkShare since you two took over?

JL: I think the world has changed since we have become co-presidents. LinkShare is still a great company, but I think the U.S. economy is really difficult right now. Retail sales are challenging and lead generation is challenging. We are still profitable and a great company, but we are going through the same issues as the retail and financial sectors.

YI: Rakuten is a very successful company that constantly brings best practices. LinkShare is not one company. It is part of a very strong Internet company. That gives LinkShare employees comfort and confidence. And because Rakuten is in other markets outside the U.S., we have a broad international perspective. We are in a good position.

LP: Is performance marketing poised to withstand a recession?

JL: In a world where things are not certain, for advertisers they want to know whether or not their dollars will be effective and they want the lowest risk possible. If you are a direct marketer you can measure on a performance basis. It will minimize the risk. We have started to see among the big advertisers that they are using comparison shopping engines. There is now more power for advertisers. They are pushing comparison shopping engines back to CPA from CPC. That trend is pushing the risk back to the publishers. Advertisers are in the driver’s seat right now. We do see an overall trend away from CPC and CPM to CPA – it mirrors what we are seeing in the economy as a whole. Credit cards are down. Loan and debt counseling are way up. The retail side is trending lower as consumers are seeking deals to save money. Cash back is attractive to consumers this year.

LP: Given those factors, what are LinkShare’s plans for this year?

JL: We will continue to do in 2009 what we did in 2008. We are continuing to lay the foundation for a broader variety of distribution tools to make performance marketing practical for a wider array of publishers – like those in social media. We are also working with outside companies as vendors to build WordPress plug-ins. We are enhancing our Web Services that syndicate out to ToldYa and Yahoo. Also, using an API to pull URLs for CPA distribution. There will be more interactive links. We will keep enhancing our Flex Links. It’s not just for video and can be used for other things. My roots are in writing code, so we want to develop an ecosystem around a critical mass of products for other developers as well. To be fair to the other networks, Google is also very technology focused as well. They have an army of people writing widgets and they are opening up APIs to the network. Time and again we see that folks who build a platform and open it up to others create a robust, survivable ecosystem for everyone.

LP: Since you brought up Google…

YI: We feel like we have superior service over all of our competitors. We are focused on what we do best, what we can do for clients and what makes us different. Our differentiator is superior service.

LP: What are some of the biggest challenges for LinkShare and the industry at large?

JL: For us, I think as a smaller company, there is always more stuff you want to do. Your reach often exceeds our grasp. That’s nice and natural. You always want that desire to do more. It’s nice to have a parent company like Rakuten. They are the largest e-commerce company in Japan and extremely profitable. They are making investments in areas where we need to be. That helps since it’s going to be a big storm in retail and financial services this year.

LP: LinkShare has gone from a privately-owned family company started by Steve and Heidi Messer to be part of huge Japanese company. How has that impacted business and the LinkShare corporate culture?

JL: One of Rakuten’s biggest distinguishing factors is that everything is fact-based and transparent. If something is good, they say so. If it’s bad, they say so. Rakuten’s founder, Hiroshi Mikitani, has founded the company on five corporate principles that guide the culture of Rakuten and LinkShare including; be professional at all times; it’s not about personal opinions; what matters is the data. That makes for an egalitarian culture. It’s the kind of place I like to work.

YI: We are good at building a strategy. It’s fact based. We have good management and skills and can execute. It’s not all talk and no action. We think, and then we act. We think, act and then make everything into a system. That makes us stronger.

LP: How will you apply those principles this year?

JL: Products and markets continue to diversify outside the U.S. We have a growing U.K. network and there are other markets to get into. We will continue to work on distribution tools and realizing the power of APIs. We feel that we will make the network more useful for a wider range of publishers.

YI: The U.S. economy is tough. We will continue to help clients grow on the retail side – online and offline. We will stay closely working with existing customers and gain new customers by expanding our global footprint outside the U.S.

LP: Any plans to leverage different technologies to facilitate better communications between advertisers and publishers?

JL: It’s all about relationship building. We have our LinkShare Symposiums – East and West. Like the other networks, we use events to effectively put advertisers and publishers together and let them do deals. We are trying to expand the deal-making parts over time to help drive revenue for all parties. The traditional method of a network development sales organization is reliable for relationships. We believe in that and want to expand it. We have a lot of data that we can mine and make those network development people more successful at getting good publishers. Technology can help us with the matchmaking side of things. There are social media tools. We have a joint venture with LinkShare Japan that has been successful in using social networking to connect publishers and advertisers. We like the idea that we are already seeing Facebook and LinkedIn data in the network.

LP: So what does 2009 hold for LinkShare?

JL: I’m excited about 2009. I think it’ll be a challenge. I think we can build a number of new, compelling products and services. Some that are completely new and then also build on existing technology – like out Easy Links and Merchandiser APIs. I’m also excited about bringing on some smaller advertisers. Historically we have done a good job of serving big advertisers and publishers. But some of our new processes will help us handle everyone from Best Buy to small companies like Peet’s Coffee & Tea. 2009 is going to be a good year.

ShareASale: Size Doesn’t Matter

ShareASale.com founder and CEO Brian Littleton runs what is considered to be the fourth largest performance network in the United States. Littleton has earned the respect of the industry and garnered a dedicated following of merchants and affiliates by taking a firm stand on issues. His company is the only network that does not allow downloadable applications of any kind. His personal style and outspoken views on important issues are reflected in this wide-ranging interview.

LP: How does that impact the company?

BL: We want to be very approachable to clients, merchants and affiliates. The feedback has been that everyone wants to be able get a hold of a real person to get their questions and concerns answered. We want to serve everyone and not just those that are making super-affiliate type of revenue. Even if an affiliate is making a few hundred dollars, we want to be able to answer their questions. Now we have beefed up and are able to do that. It is a core thing that is very important to me.

LP: What about the growth of the sales team?

BL: We are working to grow our base of merchants and need sales people to handle that. Right now we are at 2,588 merchants. Getting over the 2,500 mark was a big milestone for us and we are looking to continue that growth. Of those, 2,435 are retail pay-per-sales commission-based merchant programs. We are a retail-focused network, which is very different from the large variety of CPA networks dealing with lead-based offers. We have 244 lead-gen merchants. They are not the core of what we do. We are adding nearly 100 merchants every month – of course, there is always some churn in the math. But unlike the other networks, we are targeting a different type of merchant. They are smaller, non-Fortune 100 companies. We want to help anyone, no matter what size, that wants to take a shot at performance-based marketing. It’s not easy to provide a system that works for everyone – whether it’s a Fortune 500 company or a two-person company.

LP: Are you leveraging technology to help with that scalability issue?

BL: One of our main focuses is technology. It’s a big differentiator for us in the space. We are always coming up with new ways for merchants and affiliates to leverage technology – like our widgets for video. They are unique across the board.

LP: What are some of the goals for SAS in 2009?

BL: We are very focused on networking. We are always trying to find a better way for affiliates and merchants to talk to each other. It’s difficult in the network model. Often, merchants are over-eager. Merchants tend to think their offers are the best. Affiliates are more selective. They don’t want offers all the time. We are looking at better ways to make that happen. We want to let the merchants interact more without so much material that it’s impossible for affiliates to read it all. It’s a big thing for us to get it right.

LP: What are some of your challenges over the next 12 months?

BL: I think the industry will be faced with many more complex compliance issues in 2009. There will be more toolbars in 2009. Merchants are looking at a lot of different types of affiliates – coupon affiliates, PPC affiliates and loyalty affiliates. As a whole, questions will be answered as the individual networks take their own routes. We are working on PPC issues. We introduced a PPC Violation Report which allows merchants to upload a screenshot of those they feel are in violation. We then do more research into the allegation. Because merchants don’t always know if an affiliate is really bidding. We dig deep and decide if there has been a violation. We have a three strikes and you’re out policy. If the affiliate is in violation of a merchant’s PPC policy, then we remove them from the network. We give the affiliate a three month grace period to get in compliance, but if, after that, they have are not in compliance, they are out. The goal is not to cut out those that made an honest mistake but those that are continually abusing the rules and praying on merchants that have difficultly policing that activity. Toolbars and loyalty go together. More and more toolbars are coming out. It’s like everyone is seeing their competitors doing it, so they do. More are popping up. Whatever has been the position of those in the past, adware and toolbars present a unique set of challenges because they all do different things – notifications, pop-ups, etc. We feel that we need to look at each one.

LP: That sounds like a Herculean effort.

BL: There is not an easy way around that, to maintain quality inside a network. You have to make sure a toolbar’s behavior doesn’t violate the rules you have. It’s not something typically that individual merchants can keep up with. Maintaining compliance is on the network side, because we have the data. We allow the merchant to have a say, but the network should be handling those issues. It’s a lot of work, but it’s part of the network role to keep on top of emerging technologies. It happened with PPC and coupons, and happened with toolbars as well. They’ve been around for years. It’s nothing new, but there seems to have been an explosion. I’m basing that on the number we’ve seen lately and the perceived success merchants see with competitors’ toolbars. They see them working for others, so they want them. I think it will be a huge challenge in 2009.

LP: What impact have you seen on the performance marketing space because of the current economic conditions?

BL: I think affiliate marketing will increase in profile because of the depression of the CPM or ad marketing. We won’t know for sure for a while. Some merchants will look to affiliate marketing to fill gaps. That’s traditionally what affiliate marketing has been best at. That’s been a strong point of the affiliate marketing industry since the beginning.

LP: Do you have any specific goals for SAS that you can share?

BL: We don’t have any specific goals as of yet. We set our goals more broadly. It’s a personal style of mine. I prefer to say things like, “we like to get closer to our publisher base, rather than we are going to do X a specific number of times.” The main thing we will be doing is continual work on the technology; it is at the core of what we do. We want to come up with new tools and technology for not only those who have a greater understanding, but for the first-timers who join the network. We want to make it simple for newer merchants and affiliates to understand. It’s a back-to-basics approach. I think that will make us more attractive. On the relationship side, we are looking to get closer to our affiliate base. We are targeting affiliates that we feel historically have been aligned with other networks. We are also letting our existing base of affiliates know that we have even more stuff they might be interested in.

LP: Has style been a big differentiator for the company?

BL: I don’t know. I don’t like to make presumptions. I like to highlight what I think we do the best. Certainly, there are clients on every network that are happy as clams. But we do focus on the results and quality of what a merchant is getting out of their relationship with us. This shows in the adware discussion. We are the only network that doesn’t allow adware. I know it’s a loaded works and there are discrepancies over exactly what adware is. Years have been spent hashing that out in the industry. But for me, it comes down to making sure that the quality of sale is just as important as the volume of sales. Sales tied to adware are not true growth. It’s important to report these activities to the networks and that the networks do something about it. But that’s a choice that’s being made by each network. Not keeping up with compliance is detrimental to the industry as a whole, over the short and long term. That’s our stance.

LP: By not accepting certain types of merchants, ShareASale hasn’t grown to the same size as the some of the other networks.

BL: The size issue has forced us to be good, if not better, with our technology. You can’t be the small size we are and have that number of merchants with bad technology. You need automation. Our datafeeds are automated and registration is automated. You can’t have bad technology. Everything needs to be smooth to support that volume of merchants. We are doing things faster. We are a different type of company. There is a big difference between us, a small company, and a privately-held company.

LP: But you are competing against companies with huge resources. Have things changed for your company since Performics was bought by Google?

BL: Not really. It’s business as usual. I know people there and we have a good relationship with them. Of course, it’s important for any company to know what’s going on with their competitors. People brought up the possibility of conflict, but Google sold off Performics’ search division. The name and backing of Google may help them, but in the end I think it’s a positive for everyone in the industry – especially if the largest brands get interested in joining the performance marketing space.

LP: Would you consider offers to buy SAS?

BL: Our technology is built inside the company. I would rather build in-house. We get more value that way and so far we have built everything we have. There could be minor exceptions – if there is new technology we could get faster through an acquisition – but I like to think that building it in house gives us long-term value. I’m conservative with our assets. We have grown organically and we are profitable. I’m not going to put that at risk for a new technology.

Key Cogs in the Affiliate Machine

In May 2008, JupiterResearch analyst Patti Freeman Evans published a study on affiliate marketing that indicates online marketers will spend $2.1 billion on affiliate marketing fees, with U.S. online affiliate marketing spending reaching $3.3 billion in 2012. That figure includes the aggregate cost of running an affiliate program: affiliate network fees and affiliate commissions. Evans estimates that the affiliate space is growing at 9 percent.

A report from Evans in December 2008 says a growing number of retailers will increase spending on holiday sales-driving tactics like promotions and online advertising. Twenty-seven percent of online retailers will increase spending on affiliate marketing (a 14 percent increase over the previous year) whereas 18 percent will increase spending on banner advertising.

Sitting smack-dab in the middle of that affiliate equation are the networks. The networks’ job as trusted third party means they are acting as an intermediary between advertisers and publishers. Serving multiple constituencies requires being a lot of things to a lot of parties. The networks are partners, matchmakers, facilitators, data keepers and more.

The major networks have many things in common and perform most of the same basic functions, including tracking technology, reporting tools, payment processing and payment aggregation.

The networks each use slightly different terminology to deal with e-tailers selling products and those that receive the commissions as part of the programs. Commission Junction, LinkShare and Google Affiliate Network all refer to them as advertisers and publishers, while ShareASale calls them merchants and affiliates. All of the terms are acceptable and interchangeable within the industry.

While each network also has its own specific terms and conditions that must be adhered to by advertisers and publishers, most of the networks have agreed to some basic rules about overriding affiliate commissions and what constitutes flagrant violations of the basic tenants of affiliate marketing.

However, each of the major networks has developed a slightly different flavor. Some are geared towards big e-tailers, others focus on lead generation and still others tend to work with major catalogers. The reasons why an advertiser or publisher chooses a specific network can depend on a variety of factors.

It’s like having a choice, between Pepsi, Coke, and RC Cola – and in some cases, Fresca.

For advertisers, the choice to work with one network over another can depend on a range of factors, including additional services offered, the technology platform used, the cost of setting up a program, the customer service and the quality of publishers in the network.

Each network has its share of loyal advertisers – large and small. Although there is some amount of churn, where merchants switch their programs from one network to another, that process can be complicated, disruptive and time consuming, so it’s not all that common (like customers switching mobile phone carriers). Some advertisers run programs on multiple networks, but in most of those cases one of the networks seems to act as the primary one. LinkShare is the only major network that requires merchants to sign an exclusivity contract and work only with them.

Most affiliates tend to maximize their earning potential and work with several, if not all, of the major networks. Some affiliates work with just one or two based on preference about payments, advertisers in the network and commission rates.

One of the biggest jobs of the networks is to facilitate relationships between advertisers and affiliates. All of the Big Four networks do that in some form through annual face-to-face gatherings, and most have facilities within their respective platforms to allow contact between those two parties. Commission Junction is the only big network that does not provide merchants with the names and contact information of their affiliates. While merchants can use a variety of techniques to get around that and also have contact with publishers, they are not given direct access through the CJ platform.

Some of the other differences – and the most hotly debated – often surround the issue of network compliance.The major networks have teams of various sizes that work to ensure advertisers and publishers are not in violation of their respective terms and conditions. However, those levels of policing infractions and ejection from the network varies widely. In addition, each network seems to have its own ideas about what activities are acceptable within the network. ShareASale stands alone as the only network that forbids merchants from offering any type of downloadable applications or software. That stance means affinity and loyalty merchants are not allowed within ShareASale. It also means that the company has greater control over ensuring that its affiliates are being fairly credited for commissions.

Increased competition from ad networks and vertical networks are forcing the major networks to step it up with their offerings, which is likely to result in increased innovation and better service for advertisers and publishers. That should be a boon for the entire industry.

Merchant Advantage: eBay Partner Network

In mid-March of 2008, eBay announced it would be transitioning away from having its massive affiliate program run by a network and instead they would take it in-house.

eBay began its affiliate program in 2001 and had since grown it to the second largest affiliate program in the world, behind Amazon.com’s Associate Program.

The eBay Partner Network launched on April 1, and the company started to transition its affiliate program away from Commission Junction. eBay also brought Half.com over to the new network.

Speculation that eBay might be thinking of a transition began back in September 2006, when it announced the launch of their own affiliate linking infrastructure called Project Rover. At that time, eBay claimed the new linking structure would provide a variety of improvements, including reduced ad and cookie blocking by using an eBay hosted domain; limited redirects, thus reducing the risk of user drop-off and improving speed and performance; and global infrastructure improvements by enabling eBay and Commission Junction to develop increased global tracking capabilities, allowing for more seamless international affiliate promotions.

That migration, which angered some affiliates who had to swap out links, was the start of eBay’s transition to bring its program in-house.

Senior Manager of the eBay affiliate program, Will Martin-Gill, emphasized the move had nothing to do with a dissatisfaction with CJ or ValueClick.

“CJ was great when the program was with them. They also were really helpful with the transition – from talking us through the public announcement, to helping with the messaging to the affiliates, to transitioning the team. Once they understood where we were going, that gave us the support to get there,” he says.

More Control Over Data

For eBay, according to Martin-Gill, it was simply time to bring the affiliate program in-house the same way eBay brought their search services in-house three years ago.

“When we did that, we were able to do more things than SEM agencies and use our internal conversion data,” Martin-Gill says. “We were able to determine the value of a click and what constitutes a good click. We learned so much from the data. That helps us make more informed decisions and is a tremendous advantage. We wanted to do the same for our affiliate program.”

Martin-Gill also noted that eBay was looking to build more flexibility and innovation into their program, to reach and sustain the more diverse crowd of affiliates and publishers on the Web today, and to have a direct relationship with those affiliates. Thus, it gave the company increased control over data across various marketing channels.

Martin-Will comes at this with some insight given that, prior to leading this effort, he was responsible for leading key advertising and search engine marketing initiatives for eBay. Before that, he was senior manager of corporate strategy, which being responsible for strategy development,mergers and acquisitions and various projects across Marketplaces, PayPal and Skype, including Internet marketing strategy.

eBay’s massive worldwide affiliate base was also a factor in the move. eBay was looking to turn its program into a global platform where publishers and affiliates can sign up to all the various country-specific programs at once, through the same interface.

eBay didn’t completely move away from ValueClick and is using MediaPlex’s tracking solution for the eBay Publisher Network. In addition, Tradera AB, ProStores, Reseller Marketplace, Media Marketplace, eBay Stores and StubHub continue to be on CJ’s platform.

There was a two-month overlap between the two platforms during April and May so that affiliates could make all the necessary changes to their links. eBay also paid an extra 5 percent commission to affiliates that transitioned their links and ID to eBay Partner Network by May 1. The company claims that by the end of May over 90 percent of its active affiliates had followed them to the eBay Partner Network, and eBay’s program also retained 90 percent of its volume.

“This was a big effort. It was an undertaking that required a huge effort that we didn’t take lightly,” Martin-Gill says.

He adds that it took over a year to put together all the technical and organizational elements required to get up and running. It required creating groups and systems to handle customer service, network quality and fraud detection,finance and payment, and account management. Martin-Gill won’t disclose the exact size of the team running the network, but did note that it has tripled since bringing the program in-house. The technology group responsible for the infrastructure and development is a shared group at eBay.

So far the biggest challenge for the network, according to Martin-Gill, was the volume of initial customer service inquires. “People have lots of questions,” he says. “This was a big growing pain for us in the first three to four months to get customer service up to speed. I don’t think we did too badly.”

To get its message out there, eBay launched a blog, relaunched the affiliate discussion boards, had a booth at both the Affiliate Summit and Ad:Tech conferences. The Partner Network also gave a presentation to a large group of eBay sellers recently.

Turning a Corner

Martin-Gill says that it wasn’t until October that the entire EPN team began to feel really comfortable. “We felt like we turned corner,” he says.

Early on in the program’s history there were some affiliates that questioned if tracking discrepancies had occurred in the transition, as some affiliate experienced a drop in commissions. Ironically, tracking was not one of the core infrastructures that changed the move. MediaPlex,which is owned by CJ’s parent company ValueClick, continued to handle all the tracking.

Martin-Gill says that EPN conducted audits both internally and by hiring third party firms, and in same cases issued “make goods” to affiliates.”We take tracking really seriously,” he says. Now he’s confident that after an exhaustive three month study, everything is on track.

The other thing EPN has learned over the last nine months is that a lead is not a lead is not a lead, according to Martin-Gill. “Some leads are more valuable than others,” he says.

Under CJ, eBay was paying $25 to $35 for each new user registration. He claims that there were those affiliates attempting to game the system by getting a customer to sign up and then buy a $2 piece of plastic jewelry – and then collecting a $25 commission.

To curb that behavior EPN created an algorithm that accounts for the lifetime value of a customer and pays the affiliate accordingly. In August, eBay moved to a value-based pricing plan for Active New Registered Users. The move was intended to better reward top affiliates,provide incentives for other affiliates to improve the quality of their traffic, and pay fair compensation for users who have low lifetime value to eBay. Under the new arrangement, they pay affiliates $1 to $50 per new user.

The new pricing structure took effect on August 1 for new affiliates and November 1 for all existing affiliates. At press time, more than one-third of their active affiliates are now earning $28 or more for every new user they drive to eBay, while several hundred affiliates are qualifying for the new $40 and $50 tiers.

Other enhancements since the transition include providing additional data to affiliates including a campaign quality report that shows affiliates which of their tactics and campaigns are driving the most engaged users. There is also a new report showing affiliates which categories of products their users convert, so they can improve targeting.

In addition, eBay has added tools for customer banners, as well as special creatives associated with particular deals and holidays.

“We want to give affiliates more tools and better ways to promote us, such as the customer banner where affiliates can specify pixel length and width. For 2009, EPN is also planning to roll out coupons in the banners. Martin-Gill says that they will build-in unique coupons that are offered to high-frequency users. In addition, EPN is looking to offer affiliates more product feeds.

“We are making a push toward finding highly valuable publishers – we are not just about volume.”

Show me the Money

Currently, looking for the money in social media marketing is like asking directions in a foreign land when you don’t speak the language and don’t know how the locals connect and communicate.

Social media is commonly defined as comprising “primarily Internet-based tools for sharing and discussing information among human beings.”

As an online marketer you want to hear about ad copy and conversions. Everyone – your audience, customers, and your employees – wants you to listen, connect, and collaborate. You want to control the conversation so people click. They want you to understand there is so much more – including profits.

Here are three models that are working and speak to business in terms it can understand – cost savings, marketing, advertising, customer service, and lead generation – as well as terms it may not yet understand like passion, heart, transparency, sharing, not controlling, and being there for your customers. These are business models that go beyond mere advertising.

Business Model 1 – Social Product Development

Why hire employees to develop new products when you can have the audience do it with you, and both of you get paid? Even better, what if you could involve all of your audience to share, participate, and spread the word, and get them paid as well?

This is the new world of virtual currency or creating value out of traditional points systems. T-shirt maker Threadless.com allows people to judge, promote, and even get their picture taken wearing a t-shirt, and rewards them with points each step of the way. Points can be redeemed for cash.

While MetaCafe and others have tried to incentivize content creators by paying them a fee based on ads, Threadless.com takes it to a new level where the creators and fans of their T-shirts can help spread the word and generate sales.

How They Do It

Designs are submitted to the community and printed by Threadless, who shares some of the revenue with the creator. Each action is tied to some form of currency; some of it is monetary, yet in social networks much of the social currency is how people view your reviews, your creativity, and support it.

By incentivizing certain actions and maintaining an active community, they unleash the genius of their audience and profi t.

Incentivize the product creators: they invite people to submit T-shirt designs. If it is selected, the person can win up to $2500, or maybe even $10,000 if it is selected one of the Best.
Pay the slogan creators: submit a slogan and win up to $200, so you don’t have to be able to draw to win.
Incentivize consumers to spread the word: Members of this social community can recommend t-shirts via email, or traditional affiliate links, and earn two credits (about $3) per sale. If they get their picture taken with their favorite T-shirt and submit it, they get one credit ($1.50). If the picture is used in the main site for promotion, they get 10 credits ($15.00). Considering t-shirts run $9-$30, that is a significant bounty for a small action.
Reward people for taking action: The key to Threadless is the fun community. Just paying people to promote and create is one thing; rewarding them for good behavior and excellence is the new way of product development.

Business Model 2 – Direct Response Media: Ads and Performance Marketing

This is the most common model in use, with businesses basically trying to fit the traditional marketing world onto social media with mixed results. When matched to the right audience, this can be very effective. Still, targeting will almost always decrease the overall size of the audience you are reaching, so numbers are not off the charts.

Direct media is the evolution of traditional direct response media (direct mail, DRTV, etc.) and Internet direct response like pay per click and affiliate programs into the social media space. The goal is to get a sale, and these folks have been posting ads, manipulating search engines, and building links.

How They Do It

Use personality to create buzz: Create buzz about product by using audio and video-driven business personalities, driving people from social media portals like Facebook and MySpace to their own sites, and even social networks, to create ongoing business.

Gary Vaynerchuk, WineLibrary.TV: Gary combines a video show about tasting wine with ongoing presence in many social networks. He drives people from these networks to his own Wine social network, Corkd.com (he bought it after being successful) and drives retail sales through WineLibrary.com, among other sites.

Gary’s personality plays against traditional wine snobbery and drives sales. Personality is essential, because in social media, how they remember you is the most important thing”and if they remember you. For retailers,this means driving repeat visits, which the video, social networking and marketing continually generate.

Develop new direct response ads: Allow people to interact, watch, and make selections within the advertising itself. Instead of an ad inciting people to click and leave the space they are at, these ads invite people to stay where they are, browse, and buy.

MyWeddingFavors.com has an affiliate program that uses video and a special video widget from Qoof.com. Affiliates place these ads in social media spaces, where videos can be played right on the page.

People can choose, watch, and explore while they are in the middle of their own social media experience. Basically the performance based marketing invites them to engage and interact with the ad, and pulls them away from what they are doing BEFORE sending them to the eventual site to buy the product.

Other tactics include:

Buying low cost advertising ($0.50 – $20 CPM) space on a variety of social media through ad networks. Ad buys are mostly based on straight ROI. Clickthroughs are very low. Branding ads are rarely successful.

Posting consistently to blogs, social bookmarking sites, video sites, and tag these posts with keywords in the title, tags, and description to drive search traffic.

Do performance marketing deals and pay others to promote and pay a bounty for a lead or sale. If the ad does not perform, no one gets paid. Lead generation is dominant here, especially to targeted audiences where it works best; because people are often more open to inquiring than to buying.

Business Model 3 – Customer Relationship Management and Employ Retention Management as Social Support Media

Many smart companies are using social media to better engage with their customers, and some to better engage with their employees. But social media canal so be used to manage customer relationships as well.The social media business model is very simple. Your content is your marketing tool. Sois your contact with people, either directly or watching over the discussions, questions, and interactions around your product, your brand or inside your company.

How They Do It

Zappos empowers its employees through an innovative training program which allows them to go out, via Twitter, and be available to answer questions from people and customers. A whole book could be written about Zappos customer service, and in fact it has, by the employees of Zappos (you can find it on their website). Giving employees technology will not solve your problems; inviting them to be passionate about your business does!

The key issue is trust; good employees find good customers if you teach them. Zappos sees employees as assets and ambassadors, not as a cost of doing business, and it shows. They are not afraid of how powerful their employees can become, and in fact, encourage it.

Many smart companies are improving communication and efficiency within their own company with social media, as a way to improve communication internally. Social media technologies like microblogging enable employees to follow each other for specific projects, and gives management an excellent tool to keep an eye on the growth of the business.

Best Buy claims it has drastically improved employee retention with social media. Technical firms like Cisco and Intel swear by their internal social media initiatives that foster ideas and feedback, while saving money and time. Financial firms like Wells Fargo are seeing better production by employing some social media within the company.

As you can see, there is money in terms of sales, yet also in terms of savings in social media. It is not just an advertising game, and it is one that can change business.

Be Unique

If you want to find the money you have to create your own business model. One that deals with your goals while building a relationship with your audience (and employees) that can reduce expenses and build sales year after year if you manage it right…or better yet, moderate it instead of manage it.

Social media demands a blend of heart and business savvy. You cannot have one without the other; if there’s no business, we should all ignore social media right now (like most of you, right?). If there’s no heart, if no one shows up as customers and employees get bored being employees,nothing really happens. Put the two together and you may find the magic, and profits, you are looking for… because it is the new game and it is happening right now.

Taxing Issues

“I love NY” may be the famous motto of the Big Apple, but as of late, it’s not the mantra of any New York-based affiliates.

That’s because in April New York Governor David Paterson (D-NY) signed into law the state’s 2008 – 2009 fiscal year budget that included a provision – initiated last fall by former NY governor Eliot Spitzer – requiring out-of-state Internet retailers to collect sales tax on deliveries made into New York, based solely on a link to a marketer’s website.Called the New York Internet Sales Tax, the law went into effect on June 1, 2008 and is expected to raise $50 million in revenue each year for the state of New York.

The new regulation is causing consternation among the community of online marketers and affiliates. Because the tax laws are complicated and it’s still unclear about the full implications of the New York State Internet Sales tax, many skittish merchants are opting to drop all their New York-based affiliates in an effort to avoid any hassles and taxes. Most U.S. states already require online retailers to collect sales tax if they have a physical presence in the state that the customer is from – it is called nexus. Therefore, if an online retailer has a physical store in New York, or even an office or warehouse, they must collect sales tax from a customer in New York.

However, this new law is broadening the scope of that to say that a business having any affiliate presence in the state of New York is akin to having “an agent or a representative,”thus establishing a physical presence or nexus in New York, which requires taxation.

Merchant Confusion

Prior to the law going into effect, Amazon immediately filed a lawsuit against the State of New York. The online retailer claims the new rules violate the equal protection clause of the constitution because it specifically targets Amazon. “It was carefully crafted to increase state tax revenues by forcing Amazon to collect sales and use taxes,” the complaint says, noting that “state officials have described the statute as the ‘Amazon Tax.'”

Other merchants simply deactivated their affiliates based in New York – many without notice or explanation. Melanie Seery, a New York affiliate, was so outraged by being dropped by merchants that in June she started a blog called NYAffiliateVoice.com to speak out about the taxation issue and its implications for affiliates.

Overstock, which has a large affiliate program that brings in over $100 million annually, was among the first wave of high-profile merchants to unceremoniously drop its NY-based affiliates.

“We had to drop the affiliates because of the risk of not collecting the affiliate tax and then someday having New York win,” Patrick Byrne, CEO, Overstock.com, says. “We would get dinged for that. So we had to drop the affiliates immediately.”

However, Overstock did a quick turnaround and less than a month after deactivating affiliates; they followed Amazon’s lead by filing a suit against New York State.

According Byrne, the Supreme Court has previously ruled – as it related to catalog retailers – that the burden of collecting taxes cannot be put on the out-of-state retailer. “Therefore, I think New York’s law is directly unconstitutional,” Byrne says. “We’re not suing the state for any money. We’re suing to enjoin them from ever acting upon this law, and we’re trying to get the Court to throw out the law.”

He says that decision to seek an injunction is the right, long-term thing to do and that Overstock is putting hundreds of thousands of dollars into this lawsuit. Byrne has suggested that affiliates write a letter to their state legislators claiming that such grassroots campaigns can really make a difference.

Affiliates Take a Stand

That’s what the large community of vocal affiliates on ABestWeb.com is aiming for. Many affiliates at ABW are getting together in New York to examine the issue. At the meeting, to be held on July 28 (after press time), they will discuss the tax issue and talk about obtaining legal services to help better understand the issue and the potential recourses for affiliates. Several ABW affiliates are also participating in a special panel session at the Affiliate Summit East in Boston in mid-August to discuss the issue.

And it’s not just affiliates in New York that are watching this closely. Both affiliates and merchants are concerned that large states seeking to generate additional revenue by collecting similar taxes may follow if New York is successful.

“We just think it’s a bad idea for New York. Additionally, other jurisdictions are going to watch us fight this in New York. Based on how it plays out in the Courts there, they’ll then decide whether or not to go ahead with it as well,” Byrne says.

Affiliate Scott Jangro, CEO of MechMedia, based in Massachusetts, recently gave $250 to a group of New York affiliates to help cover the costs of meeting and legal services.

“I’m not from NY, but these guys are taking it on the chin for the rest of us,” Jangro wrote on his blog. “There’s a lot of money in this industry and I hope that many of us will consider helping out.” You can donate at NYAffiliateVoice.com.

Currently, two Technical Service Bulletins (TSB) related to the law have been released. The latest was issued on the June 30, 2008. The TSB, titled” Additional Information on How Sellers May Rebut the New Presumption Applicable to the Definition of Sales Tax Vendor as Described in TSB-M 08(3)S,” imposes additional requirements that a remote seller must satisfy to rebut the presumption of “vendor” status.

It is no longer sufficient for merchants and networks simply changes the terminology of their contracts with affiliates to include explicate language barring them from activities other than direct linking to websites, according to the Direct Marketing Association’s (DMA) Tax Counsel George Isaacson.

The new TSB says that “each resident representative must submit to the seller, on an annual basis, a signed certification stating that the resident has not engaged in any prohibited solicitation activities in New York State, as described above, at any time during the previous year.”

These activities are listed in the TSB as “distributing flyers, coupons,newsletters, and other printed materials or electronic equivalents; verbal solicitation (e.g., in-personal referrals); initiating telephone calls and sending emails.”

The prior TSB noted that direct marketers could defeat the presumption of nexus if that marketer is not engaged in other solicitation activity on behalf of a company beyond a Web link. “A pure vanilla affiliate marketing arrangement” with only a referral link will be sufficient to defeat the presumption of nexus. Many suggested that networks and vendors simply changed their terms and conditions to reflect this.

Observers say that PPC marketing will not give rise to the presumption of nexus because it is a set fee based on the number of clicks, therefore, falling under the heading of advertising, which is not subject to taxation. Lead generation activities appear to be closer to the definition of advertising under the new law and would not be subject to nexus.

The Networks

Thus far, the networks have mostly been mum – issuing only basic information about the law and instead advising their merchants to seek legal counsel to sort things out. LinkShare held a conference call in conjunction with the DMA to have the DMA’s legal team interpret the regulations. Commission Junction issued a notice to its affiliates, “We are actively monitoring the law and will use reasonable efforts to protect ourselves and our publishers as we deem appropriate. The application of the law is dependent on particular business and factual circumstances, and Commission Junction is not in a position to provide legal and tax advice regarding this law. However, we encourage you to perform the appropriate due diligence as it relates to your business.”

However, ShareASale President and CEO Brian Littleton wrote a little more in depth in his blog, “our first response to this will be to provide this report which will allow merchants to know where they stand regarding the law. Our plan at this time is to treat any case where a merchant wishes to terminate NY affiliates with great care and caution. If a merchant requests to do this, there is little we can do to stop them – but ShareASale will be performing the task so that merchants aren’t accessing information which traditionally is considered private within the network.”

Littleton went on to say, “There is a chance that this plan will not work. My hope is that we can warn merchants that terminating NY is a bad plan – and one that needs rethinking. If our plan doesn’t work – and we end up needing to provide more information to merchants, we may end up having to do so. I say this as a heads up to affiliates because while we don’t like to give out info, we also don’t want to put merchants in a place that makes it difficult to adhere to the laws of their state or others.

We can’t offer legal advice to merchants and/or affiliates regarding these laws. But I can offer my extreme dissatisfaction with the State of NY for their short term thinking and complete disregard for their citizens. I am personally confident that this will all be reversed and I am hopeful that for those affiliates in NY – it comes sooner rather than later.”

Meanwhile, it’s a game of wait-and-see for affiliates and merchants as the legal wheels slowly turn. Many observers say it will be a while before we find out if this law is declared unconstitutional or is upheld and other states begin adopting similar regulations as a means of generating state revenue.