What is affiliate marketing?
Affiliate marketing occurs where one website, “affiliate”, places a link, e.g. text, button, image link or discount code, on a website to direct traffic to another site, e.g. retailer or publisher. The affiliate then receives payment if that visitor consequently purchases the good, signs up for a trial, service etc. (lead generation), or downloads an app. The relationship between merchants and publishers is facilitated by an associate network.
This might sound a bit like digital display ads, and they will often be found side-by-side on a web page (as seen in the screenshot of TechRadar below) but affiliate marketing is a different world that has grown up in parallel to traditional internet ads, and it plays by different rules.
Affiliate ads do not often look like a display ad, rarely are they marked as “ads” or “sponsored” or declare that commission is received (though recent FTC and CAP guidance suggests this should happen).
Affiliate activity does not get caught by ad-blocking software, and, if the stats are to be believed, affiliate ads deliver better results than banner ads (more on those stats later).
So what did Robertson actually say? Reportedly, he told New Media Age:
Next year we’ll reintroduce affiliate marketing, but as it should be. No silly commissions being paid to grubby little people in grubby studios growing income at our expense, getting in the way of genuine sales.
What did he mean by this? Robertson later explained that his beef was with affiliates that offered discounts on ASOS purchases – particularly those that would harvest coupons/discount codes from one affiliate (e.g. glamour mag Grazia) and republish them on their own sites. ASOS’ concern, understandably, was that discounts on smaller purchases meant they lost money on the sale.
Robertson’s outburst – dubbed ‘Grubbygate’ – was symptomatic of a disquiet at the time among retailers and advertisers generally with the affiliate business.
Firstly, there was a general suspicion (merited or not) that unscrupulous members of the affiliate business participated in unlawful practices, including click fraud, which is faking online customer activity to collect commissions; cookie stuffing where one website drops a variety of retailer cookies on a visitor’s browser, in an attempt to steel a commission from another affiliate; and voucher fraud (as mentioned in the ASOS example).
Secondly, there was a concern the growing dominance of incentive companies offering coupons, money-off, and money back and price comparison engines would squeeze retailers’ margins and take a cut of what’s left.
Called to order
By voicing his concerns, while other retailers kept their worries, concerns (and budgets) to themselves, Robertson, in many ways did the industry a favour. It encouraged the business to get its house in order and make itself more attractive to clients that were hitherto directing their entire digital media budgets into display and search ads.
So would Robertson, and the retailers/publishers of his era – be happier with the state of the affiliate nation 10 years on?
Jules Bazley, vice president, commercial development (EU), for US-based affiliate network, CJ Affiliate:
In the past, some marketers did look down on the affiliate channel as somehow being less reputable, but those connotations have, to a large extent disappeared now. In part, that’s thanks to the status of reputable brands getting involved in the channel, and of course the incentives for them are there. Today, affiliate marketing is a relevant part of almost every major retail brand’s marketing mix.
A recent survey by Viglink (May 2017) suggests a much wider acceptance of affiliate marketing than there was even five years ago. Forty percent of larger merchants and 49% of larger publishers using affiliate marketing today were not doing so five years ago.
Affiliate marketing has quietly become a substantial business and is driving good returns for advertisers and publishers. In the UK advertisers spent £1.39 billion ($1.77 billion) in 2016, according to the IAB / PwC Online Performance Marketing (OPM) Study (April 2017), creating £17.6 billion in ecommerce revenue.
10 years ago, at the time of Robertson’s comments, Econsultancy estimated the affiliate marketing industry drove just £2 billion in ecommerce revenue.
The US market isn’t as closely monitored. But a report by Forrester / Rakuten (Feb 2016), reported by eMarketer, predicted US advertisers would spend $4.78 billion (£3.75 billion) on affiliate marketing in 2016, about 7% of total ad spend.
So how does affiliate marketing performance compare to other digital marketing channels?
Analysis by Custora Q3 2016 of its US clients’ traffic found that affiliate marketing drove 11.4% of ecommerce orders, down from 16.7% a year previously. This was a magnitude higher than ecommerce orders attributable to display advertising (0.9%) or social (2.1%).
But affiliate does not perform as well as organic search (21.8%), paid search (19.9%) or email (19.8%).
On the face of it these stats are very impressive. But they come with a caveat. We don’t know what proportion of retailer’s ecommerce sales credited to affiliates would have occurred anyway.
Is click fraud still an issue?
Karl Wood, senior Manager, network development, at affiliate network Rakuten Marketing says “Not Really”. He continues, “That ‘Wild, Wild West’ of affiliate seems to be less of an issue. Our compliance team here at Rakuten Marketing take click fraud, cookie stuffing etc. very seriously.”
Affiliate relationships tend to work on a cost per action / acquisition (CPA) model, so ought to be safer from click fraud than cost per click (CPC) ads, also known as pay per click, which are common in display and search advertising.
CPA means no one gets paid unless the required conversion e.g. sale, sign up, download takes place, and it’s clear that the conversion is attributable to a particular affiliate. This is tracked via a cookie that is placed on the user’s web browser that will last for a limited number of days.
But no model is immune from fraud.
Evan Weber, CEO, Experience Advertising, a Florida-based affiliate agency, explains:
When you run any sizeable affiliate program, there’s always the possibility that some of those affiliates are going to try to create false sales with fake or stolen credit cards, or fraudulent leads by having friends sign up. This is why all of the sales and leads needs to be vetted before the affiliate is paid for those commissions. Where there is doubt I recommend a phone call to the consumer if possible to verify their order.
All major affiliate networks have worked hard to clamp down on such dodgy practices. Publishers ought to be carefully vetted and systems should be in place to catch unusual activity.
Is affiliate business still dominated by coupons and cash-back?
An affiliate could be any sort of website, app or web based tools – and the market has seen a lot of innovation – but the model has favoured incentive-based affiliates, including coupons, loyalty, money-off and money-back companies, and price comparison engines.
Retailers have a love-hate relationship with incentive affiliates.
On the plus side, some of these site are huge, so provide a great opportunity to drive new business, to promote new products, to shift slow-moving stock or pinch business from competitors. Incentive sites can contribute anything between 60%-90% of revenue on some affiliate programmes, according to Aftab Aslam, head of client development (UK&I), Tradedoubler.
On the other-hand incentive sites can erode retailer margins and intensify price competition, while taking a cut of sales – sometimes hijacking sales to customers who would have purchased anyway.
While these incentives and price comparison affiliates still dominate, it appears that other affiliate businesses, perhaps more appealing to retailers, are growing also.
Jules Bazley, CJ Affiliate:
The channel is still weighted towards cashback and coupons, but we’re now seeing the mix become more and more varied, as brand-side understanding of affiliate marketing evolves. The scale of other publisher types has grown and is continuing to grow – content and editorial publishers, for example, and the many upcoming and emerging types of publishers – onsite conversions, tech-driven and even affiliate publishers that are using retargeting in more effective ways.
What’s holding back the growth of alternative affiliate models?
There are two factors that hold back the growth of alternative affiliate models.
1. Last click attribution – traditionally the industry has paid the affiliate that cthe ustomer visited last. This can favour the incentive sites over others e.g. reviews sites that many have had a greater influence over the purchase decision.
2. Retailers imposing flat-rate low commission - with a short cookie period which applies to all affiliates, regardless of their influence over the purchase decision.
Evan Weber, Experience Advertising explains, however, that “Walmart or Amazon don’t have to pay out as much as other retailers. But [low commission] is also because of coupon sites that exist only to serve up coupon codes to people in the purchase process, which affects all the affiliates.”
Weber understands that “Merchants don’t want to pay coupon affiliates much commission,” but argues that “it shouldn’t affect all types of affiliates. [Retailers] are just not prepared to or don’t have the manpower to micromanage it.”
Secrecy and invisibility
The Achilles’ heel of affiliate business is its invisibility to anyone outside the business (including many participating advertisers and publishers). Few people outside the affiliate world realise how big it is, how important it is to participant retailers’ or publishers’ businesses, or understand how it really works.
This is important on several levels. First, if the industry is going to grow, affiliate marketers and affiliates need to see/know who is involved, what they are achieving and any issues companies face. Second, if the business is going to finally leave behind the old “Wild West” image there needs to be much more transparency, retailers need to understand how the business works and what it will deliver for them. Third, if affiliates do not do more to improve transparency, the business risks coming under the same scrutiny as the ad business.
Let’s look at these issues in more detail:
Affiliate marketers & retailers do not like to talk about their affiliate businesses
What is the poster child of the affiliate business? It should be Amazon. Amazon was a pioneer in affiliate marketing, founding Amazon Associates in 1996. So why don’t we know more about the role it played in the ecommerce giant’s growth over the last 20 years?
According to BuiltWith, which tracks the technologies that underpins websites, Amazon Associates is the biggest affiliate network in the world. There are a staggering 145,835 websites around the world are live with Amazon Associates and 435 of the top 10,000 global sites. This is a third larger than CJ Affiliate, the largest of the multivendor affiliate networks.
It would be fascinating to know just how much this vast network contributes to Amazon’s revenues today, or how much it contributes to the company’s revenue growth from $147.8 million in 1997 to $135.9 billion in 2016, but such gems are not generally included in company annual reports.
Amazon’s advertising spend, which includes affiliate commissions, was $5 billion in 2016, which gives an idea of how much ecommerce business affiliates drive to Amazon. N.B. That’s three times the UK’s total affiliate spend.
It is rare to see affiliate links marked as “sponsored” or “ads”
It is uncommon for affiliates to declare to customers that they receive a commission from the retailers or publishers they link to.
There were 124 million transactions in the UK alone via affiliates according to an IAB study reference earlier. How many people who clicked on those links realised they were helping websites get paid?
Arguably there is a transparency issue here, if customers rely on the opinion of the affiliate, such as a reviews site, or are not being given a full range of choices because key providers do not pay an affiliate fee. It is an area which is increasingly coming under scrutiny of authorities on both sides of the Atlantic.
There is a complex web of affiliate networks
For example: a cruise is booked through an affiliate travel agent of an online booking company; which was referred through an affiliate voucher code company; which the customer signed up with after clicking on an affiliate ad.
Then there are a host of intermediaries, including people who cleverly arbitrage the buying and selling of affiliate media. I’m sure I am not the only one who would like to know more about how this fascinating – but still a little murky – business really works.
More on affiliate marketing: