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Affiliate marketing is an ancient phenomenon in the rapidly changing world of e-commerce and e-business. However, there are very few strong established metrics of understanding how this business works and how it can be made sustainable. The most popular story about the origin of affiliate marketing places the invention of this concept in the hands of Jeff Bezos, CEO and founder of Amazon.com. There is a large body of evidence to the contrary though, which suggests that Cybererotica, an adult site, was either the first or among the early innovators in affiliate marketing with a cost-per-click program. (Collins, 2000) Though Amazon.com was not the first merchant to offer an affiliate program, but its program was the first to become widely-known and serve as a model for
subsequent programs. In recent years, Websites and services based on Web 2.0 concepts-blogging and interactive online communities-have greatly impacted the affiliate marketing world. New media has allowed merchants to become closer to their affiliates and improve communication between them. (Hinchcliff, 2006) Online affiliate marketing networks besides directly increasing the visibility of advertisers also have indirect network effects on the ranking of advertiser's web sites in search results. Growth in visitors coming from search engines would be a direct result of this improvement in search engine rankings.
Therefore it is believed that cost-benefit metrics associated with affiliate marketing programs, such as the average marketing cost will decrease when the positive effects of affiliate marketing
on search engine rankings are taken into account. (Janssen & Van heck, 2008)
Abstract
Introduction
Affiliate Marketing is a low cost method of exploiting a large network of web-sites to act as a channel to advertise for a particular product or service. Affiliate marketing is gaining increasing importance as a channel, as the internet reaches more and more people. However, this form of internet marketing faces several issues as it grows in the light of several recent scams. In this paper we follow a modeling approach to determine the most important factors which will help affiliate marketing overcome its pastignominy.
As the internet proliferates to reach more people in the far corners of the earth, the success of a brand, especially an e-brand, stands to be driven to a great extent by online marketing. The Internet has brought many unique benefits to marketing, one of which is lower costs and greater capabilities for the distribution of information and media to a global audience. The interactive nature of Internet marketing, both in terms of providing instant response and eliciting responses, is a unique quality of the medium.
Affiliate marketing, but one of the many ways in which internet marketing can be done, is eliciting
an increasing amount of interest these days among researchers, experts and marketers around the world. In a line, affiliate marketing is using one website to drive traffic to another. It is an Internet-based marketing practice in which a business rewards one or more affiliates for each visitor or customer brought about by the
affiliate's marketing efforts.
Affiliate marketing is also responsible for much of the spam that clogs inboxes, contaminated search results, and the barrage of pings and fake TrackBacks that have driven many bloggers to shut down comments on their sites. The system allows individuals and other businesses to become freelance marketers for a company and generate income from individuals following links on websites or in e-mails sent to them.
(Singel, 2005)This kind of abuse from affiliates has severely affected the usage of affiliate marketing in the past and consumer trust levels have certainly dropped. This has consequently led to a decrease in the effectiveness of affiliates as a legitimate marketing channel. The difficulty in predicting the future of Affiliate marketing, if and how it will rebuild from here on, is that the future of this marketing method need not necessarily be an extrapolation of the past. We do not yet have a theoretical foundation for understanding the existence, creation and destruction of network effects in Affiliate marketing. Neither do we have an existing model to help an observer develop a sense of what the important entities in the industry are nor are the qualities of these entities in the Affiliate marketing universe explained in any way. In this
paper, we develop a causal Model that models the inter-play between the entities involved in the Affiliate Marketing universe. More importantly, the model provides a sound foundation to develop an understanding of how affiliate marketing would perform in the changing dynamics of the future.
To understand the behavior along with the mechanisms by which various entities in our model influence each other, one must first examine the importance and characteristics of these entities. We consider three primary entities in the Affiliate marketing universe namely, the Merchant, Publishers and the Affiliate Marketer.
The overall targeted consumer base for internet marketing is expected to keep growing given the increasing importance of Internet marketing and the growing number of internet users. The Internet is used by 1663 million people all over the world or about 24.5% of the world's population, as of June 2009. (Internet growth statistics, 2009) The only question for affiliate marketing is whether it can successfully leverage this reach the internet as a marketing medium provides them.
The chief attraction of affiliate marketing lies in the sheer number of affiliates, also known as publishers. For example, in a given affiliate network, there would typically be 400,000 affiliates with an incentive to try different approaches and monitor performance rather than just 500 marketers or sales people, as would happen in the non-virtual sibling of this model.
In a sense, affiliates can be visualized as a network, which becomes more dynamic and more intelligent as more 'nodes' are added to it.
(Kelly, 1998) Affiliate marketing allows the merchant to have a larger number of 'sales people' at an effectively lower cost. It also allows him the opportunity to leverage the sheer size of t h i s n e t w o r k t h r o u g h l e a r n i n g b y The Entities In The Affiliate Marketing
Universe
Source http://en.wikipedia.org/wiki/File:
Affiliate_Marketing_Illustration.png
Figure 1. Illustration of the concept of affiliate marketing Step 1
Step 2 Step 3
Customer
Brand/Seller Affiliate
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experimentation at minimal cost. Affiliate marketing has a more elaborate feedback mechanism as well because there is tracking performed and more data is available to participants. This further enables the results of these 'experiments' to percolate down to the merchant quickly so that more effective forms of marketing can be used in future. As we shall further see in this paper, Affiliate marketing needs to be extremely performance-oriented. A totally decentralized system is not efficient; at times it is downright defective because total autonomy can paralyze a system. Hence the importance of performance measurement metrics such as Cost Per Sale (CPS) in establishing guidelines of behavior for affiliates.
The four ways in which the compensation system in affiliate marketing works is through Cost per click, cost per mille (together <1%), CPS (usage 80%) and Cost Per Action (CPA) (usage 19%). In performance based pricing/compensation models, like CPS and CPA, advertisers and publishers share the risk of a visitor that does not convert. Performance-oriented compensation measures help align the objectives of the merchant and the affiliate and thus address the agency problem that would otherwise crop up, as has been seen in the past with issues such as click-fraud and other affiliate
scams.
Typically, the complexity of the market now warrants another tier of players apart from the
merchant and the affiliate. They can be called Affiliate Managers and for the purpose of this
paper include Affiliate Management Agencies, Super-Affiliates and Specialized Third Parties vendors. The affiliate marketers are brokers. For the merchant who wants to market his product, the path to Affiliate marketing these days starts with finding the best Affiliate marketer or
Network. An affiliate network allows website publishers to more easily find and participate in affiliate programs which are suitable for their website and thus generate income from those
programs. It allows websites offering affiliate
programs (typically online merchants) to reach a larger audience by promoting their affiliate programs to all of the publishers participating in the affiliate network. They are the middle men who provide access to networks and often act as neutral monitors to ensure the effectiveness of ads placed. The key value for the broker, merchants and affiliates lies in the economies of scale, which means additional affiliates can be added to the network at very little additional cost. Practically, once a merchant pays the affiliate network his initial set-up fee, he can add new affiliates almost for free and conversely, new affiliates need not pay anything to join an affiliate program. For the same reason, the traffic generated by an affiliate marketing network is likely to be unfocussed and ineffective as there are no costs, no qualifications and hence no entry barriers for an affiliate to enter the network.
The issue of trust in the affiliate marketing universe has been an important one, more so given recent events and the consequent need for all parties on the chain to put in place measures to elicit trust. Brokers often serve as a neutral party that measures performance and monitors the network. They act as a third party who verifies results between merchant and affiliates and serve as a boundary spanner between to create a closer community between the two.
Brokers also ease the process of billing and payment and work as Aggregators who provide a single point of contact for both merchants and affiliates. As such there are very few checks for any entity to start off as an Affiliate Marketer and make improper use of gullible affiliates.
Commonsensically, we can arrive at the relationship between the number of merchants using an affiliate marketing campaign and the number of users or leads obtained from the affiliate marketing campaign. As the base of leads (modeled here as user base) goes up it A MODELING APPROACH TO
AFFILIATE MARKETING
Publisher Merchant User base + +
Performance
-Figure 2: Relationship between Merchant, publisher and user base
would incite more merchants to sign up and of course more merchant signing up would keep increasing the user base, albeit at a decreasing rate as competition heats up. To model the necessity for ads to be contextual we introduce a variable called Performance, which is essentially
an index conveying the relevance and contexuality of the affiliate marketing network.
The more ads are placed in context, the better the quality of the ads, the higher this index. Now in the causal loop below, we assume that as the number of merchants in the affiliate marketing universe increase, The number of publishers would also consequently be driven up.
Correspondingly, with an increase in reach more merchant would come into the universe.
However, as the number of publishers exceeds the affiliate marketer's capacity for monitoring, the performance index is likely to go down. This would trigger the causality of the relationship
between increasing publisher numbers and merchants to turn negative. Now because of the decreasing quality of ads and their lower effectiveness and of course the consequent word of mouth, merchants would flee the
universe.
As discussed before we expect the over targeted number of consumers or internet users to keep increasing given the increasing importance of Internet marketing and the growing number of internet users. An increasing Consumer base of
course drives more affiliates to tie in with an Affiliate Marketer Performance Publisher +
Consumer trust
+ +
-+
Figure 3: Relationship between affiliate marketer performance, consumer trust and publishers
affiliate network. We model the brokers or Affiliate marketers as the efficiency index of the set of affiliate marketers. Stronger the network, better the performance monitoring, the higher would be the efficiency index and consequently
higher the monetary value of this business for affiliate marketers. Now as this index increases, we would believe that the performance index referred to previously would also consequently increase. More contextual advertisements and searches would mean more useful results for the consumer. Consequently we would expect consumer trust in the affiliate marketing channel to increase as the usefulness of these advertisements increase. However, as the number of publishers increases so would experimentation be likely to increase in the channel. As we have previously mentioned, control on the network in essential to the relevance and success of affiliate marketing. As the number of publishers burgeons beyond the capabilities of Affiliate marketers, performance in terms of contextuality of ads is likely to suffer and misuse of the channel might become more probable. Hence we theorize than this would bring down the performance index and consequently consumer trust as well.
An important player in this whole model is the way performance based payment systems for
affiliates are designed. If the objectives of the publishers and merchants can be aligned to a high extent with the help of these performance