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Jeff Molander is the CEO of Molander & Associates, which provides strategic guidance to entrepreneurs, private and institutional investors, agencies, multi-channel retailers and service marketers.

We asked him a few questions about the thorny issue of cannibalisation of sales by affiliate marketing and what retailers can do to solve it.

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More and more retailers are expressing concerns that affiliates are cannibalising other sales channels. But is it actually happening?

First, yes, the 'cannibalisation of sales' is very much a retail-focused concern.  It's happening and we know this because savvy marketers are measuring and actually seeing it in the order-level data. 

Marketers focused on lead generation also use affiliate marketing but the concern isn't as prevalent. Lead gen folks are more concerned with improving quality of leads and many lead aggregators (i.e. Insurance.com) are sophisticated enough to have worked through the issue with their affiliates.

This leads to what 'it' is; the cannibalisation issue itself. Retail marketers find themselves struggling to balance objectives of their search marketing campaigns with those of affiliate programs. Affiliates, they've suddenly discovered, are competing. In fact, they have been for years. Affiliates pioneered paid search while marketers sat on the sidelines, all the while grabbing low-hanging-fruit opportunities like bidding on branded trademarks. 

Many such activities offer tremendous ROI at low cost and, today, marketers want those benefits for themselves. 

Also, marketers are re-thinking the value affiliates contribute in relatively new terms. They're studying simple things like the type of customers referred by various types of affiliates. In other words, marketers see some affiliates contributing valuable customers with higher lifetime values and other affiliates sending less desirable customers. In many cases, affiliates are earning the same fee from advertisers and that, they believe, needs to be corrected. Of course, affiliate networks and affiliates aren't as eager to correct.  

Finally, marketers want more from their affiliates. Many retailers are hyper-focused on getting more incremental sales/leads from affiliates. In simple terms, they want affiliates to send all the customers and potential customers they can but they only want to pay affiliates for customers that buy as a direct result of their efforts. 

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Why does this matter when affiliate marketing is performance based?

That's a common question that needs to be addressed. I like to think of it in these terms: Performance marketing is absolutely effective but is it efficient? We all know that it works but how well? 

We're definitely entering a maturation phase where some marketers are much better at stretching their marketing dollars. During these difficult economic times that will only become more important. CMOs will only come under more pressure not less.

In simple terms, 'performance-based' has become a bit of an industry darling.  In reality, there's much more behind a performance-based marketing strategy than 'I only pay when I receive' the desired action from a customer. 

There are behind-the-scenes, tactical issues that must be managed like fraud, returns and cancelled orders, managing multiple affiliate programs and/or multiple performance-based strategies, such as CPC search and affiliate. 

When multiple performance-based programs are used, the concern for duplication or cannibalisation arises. Specifically, duplicate payments can be made (leading to cost inflation). Duplicate 'scoring' of marketing strategies can occur which cloud true ROI measurement. 

Marketers need to know what's working and what isn't. When orders are credited to multiple performance-based campaigns or channels this prohibits good analysis and stifles optimisation.

In summary, there are serious tactical-driven issues that need to be addressed: Behind-the-scenes economics that can seriously impact efficiency. 

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What approaches should retailers take to the issue?

Marketers need to begin measuring performance marketing's level of efficiency, not just its level of effectiveness. How? By  taking a more holistic approach -- looking at everything from top down. Marketers must be fearless in how they collect the data and analyse it. 

When they see something ugly in one practice area, marketers should not fear saying to themselves "you know, that's just not working as well as this strategy!"  Don't hesitate to pass judgment if the numbers hold true. This requires a team approach where e-commerce managers are not emotionally or financially invested in any given channel to the point that it impairs their ability to say, "hey, this isn't working as well as my colleague's strategy... let's re-think and re-invest".

Most importantly, marketers must be willing to act on their analysis -- test and adapt. When you see something that doesn't work, invest accordingly.

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Do you feel affiliate networks are doing enough to tackle the problem?

Honestly speaking, the entire conversation is not one that affiliate networks are looking to have with clients because it shines a big spotlight on something that's been blindly assumed: efficiency. 

Affiliate marketing itself has clung to effectiveness for too long. There must be a sense of accountability on the efficiency front. Marketers are demanding it.

That stated, networks are addressing the problem behind the scenes and have been for years -- on an individual case basis. With affiliate solution providers aligned closely with analytics solutions, it's becoming increasingly simple to gather data; however, business-minded analysts must be called in to audit it. 

Therein lies the challenge: human resources and, again, the commitment to act on findings in a way that may suggest one channel's 'ROI superiority' over another.

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We think online businesses should be focusing as hard as they can on retention. In the gambling industry, affiliates can earn a fixed percentage of lifetime profits – the more a punter plays, the more the gaming firm pays. Does this ever happen in the retail, travel or finance sectors? Should more merchants be using affiliates to encourage repeat business?

In retail this is becoming increasingly important and they're tracking the type of customers affiliates refer. Although this is the case, we have yet to see retailers move toward innovative affiliate-based models such as those being pioneered by the gaming industry. 

In my estimation it's only a matter of time before retailers adopt this strategy. As I see it, it's one that marketers will adopt with or without the help of networks. 

At some level I believe some networks are standing in the way of progress here.  I see this as a clear opportunity for networks to discourage direct marketer-affiliate relationships -- which are taking place already behind the scenes. 

Companies like DirectTrack and BurstaBit are happy to facilitate 'private' affiliate tracking and reporting solutions. If I were running a network I would be moving in this direction -- facilitating more sensible marketer-affiliate relationships on the financial/cost side.

Again, in retail, most here in the US have reluctantly embraced affiliates sending repeat business. Sharing a customer's loyalty is a sticky subject that they're forced to live with. Affiliates like FatWallet.com and uPromise.com have tremendous loyalty -- more so than marketers that work with them. 

Marketers have balanced this by finding creative ways to compensate such affiliates. 

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How do you feel affiliate marketing budgets might be affected if and when retailers move away from the 'last click wins' model?

What a question! I'm glad you asked. Here's an answer that you may not expect: CPA affiliate may very well prove to be a more valuable asset among all the various advertising cogs in the wheel -- comparison shopping, affiliates, search, banner/display, etc. Budgets may very well see an increase. 

Bottom line: This is where the action is -- and things are just now beginning to heat up. Watch for companies like ValueClick taking all their performance-based media opportunities and roll them together for larger advertisers -- using CPA affiliate networks like Commission Junction as an "indicator of purchase intent" in a more complex, yet highly predictable, shopper behaviour pattern. 

Who wins on the publisher side? Those who provide the most value and the value game always comes down to actions. Influencing purchase intent is great but causing the sale wins every time. That translates to CPA shining brightly and standing to win the lion's share of what is sure to be a more complex payment model. Indeed, 'last click wins' is all but dead as everyone from Microsoft to Valueclick runs toward a more appealing (to marketers and publishers) solution.

Driving all of this is convergence. As affiliate marketing units gets swallowed up by companies offering multiple strategies it opens the door for scale across all of these strategies. 

Another driving factor: Marketers typically aren't spreadsheet whizzes, but today's efficiency-focused environment demands use of basic analysis and what amounts to reconciliation. It isn't sexy or complicated, but it's a lot of bloody work! 

Yes, it's vital to success when developing an efficient approach but it doesn't scale well. There's too much friction and a reliance on business analysts (in short supply). Once each channel's true performance is understood, it is possible to begin making intelligent improvements but there's a lot of manual, heavy lifting involved.

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If and when this happens, do you expect more publishers to get involved in the affiliate space (such as news sites whose audience typically isn't in a buying mindset)? 

Absolutely.  These kinds of sites are already involved behind-the-scenes.  It's just not publicly discussed.

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