New research published by E-consultancy today shows a trend towards reduced investment in affiliate marketing over the past 12 months. Why has this digital sector seemingly gone into reverse?

The Affiliate Marketing Survey Report 2008, sponsored by R.O.EYE, shows that, compared to a year ago, merchants – on average – are investing less of their digital budget in affiliate marketing and getting a smaller proportion of their sales through this channel.

Additionally, fewer merchants are reporting that affiliate activity provides them with high volume.

The findings came as a surprise to E-consultancy since we have have got used to writing positive stories about a channel which helped to drive more than £3 billion in UK online sales in 2007.

But the findings, whilst by no means all negative, clearly suggest that the continued growth of the affiliate marketing industry cannot be taken for granted even though I believe that this is a blip rather than the start of a decline.

According to our survey of more than 250 merchants, the average proportion of online marketing budget designated to affiliate marketing has dropped from 18% to 14% since 2007, while the proportion of online sales ascribed to affiliate activity has decreased from 16% to 12% over the same period.

So what has caused this decrease in budget and sales from the affiliate channel? The matter was discussed extensively at R.O.EYE’s launch event for this research, held at the Groucho Club in London on Tuesday night.

While the credit crunch and worsening economic situation may be playing a part, another suggested explanation was that merchants are getting better at attracting and converting their own traffic which reduces both their reliance on affiliates and cost of sales.

Additionally, whilst merchants are still getting healthy incremental sales from this channel, they are scrutinising their investments more closely and getting better at the technicalities of working out who should be correctly attributed with the credit for a sale or sign-up.

Because merchants are also getting better at measuring what they are doing and de-duplicating across digital channels, it may be that they are attributing less credit to this channel even if it is actually delivering to the same extent as before.

It was suggested that these findings might not be a bad thing for the industry if it means that merchants and agencies are refining their approach to affiliate marketing, cutting out the slack, and ensuring that their investment is as effective as possible.

As respected affiliate Keith Budden and others suggested on Tuesday night, this could help to create a more sustainable industry for the long-term.

Without a doubt, merchants will continue to invest in affiliate marketing provided that they are getting incremental sales.

However, the research represents something of a wake-up call for the industry although the more encouraging news is that almost half of merchants still report that the channel is still “very cost-effective”.

If merchants have cut back their budgets because of the economic downturn, then that is surprising news since affiliate marketing is purely based on performance and inherently low-risk. However, the seemingly inexorable slide towards recession means that there will inevitably be more of a focus on retention than on acquisition.

Whatever the reasons for reduced budgets, the findings will hopefully provide plenty of food for thought for the sector and points for discussion at next month’s eagerly awaited a4uexpo and during the build-up.

More details about the E-consultancy / R.O.EYE Affiliate Marketing Survey Report 2008 are available here.