marketing: tricks of the trade
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Mitch Arnowitz: If
everyone is an affiliate of everyone else, how on earth do retailers distinguish
themselves from one another?
Mr. Hecht: This is a problem that's permeating the industry. You have noticed
that Amazon, which began as a book store, is now also a music store and a video store and
who knows what else they are going to be. The majority of retail sales in America,
however, don't occur at department stores. The growth is in specialty store, and there is
still a way to pick affiliate programs that are complementary and contextually relevant to
you. If everybody becomes a department store of everything else, and if there is no
specialization, there is going to be an enormous shakeout and a lot of unemployed
marketing directors. If you are an affiliate who's only joining programs and you don't
have a core product, pick the ones that best fit you and develop a specialty. Wrap content
around it, transactional content that people have a sticky reason to come back for. If you
have a core product, complement it; if you don't, specialize.
Mr. Gerace: I think that's a very good point. If you compare the different link
typesbanners, buttons, search boxes, text links and text links placed in
contentwe have found the highest conversion is actually on the text links which are
embedded into articles or which follow articles. The content wrapped around transactional
links that Brian talks about forms more of an information opportunity.
Q: My name is Raj
Khera. I'm the CEO of GovCon (http://www.govcon.com),
one of the largest communities for government contractors on the Web. How much does it
cost to set up an affiliate program? Also, I read an article in the March 1999 issue of
Red Herring magazine (http://www.redherring.com)
about zero margins. It described how margins are going so low that sometimes they are
below cost. How does that affect an affiliate program?
Mr. Gerace: If your program is performing for you, the bulk of the cost of
setting up an affiliate program will end up being what you pay your partners. To give you
an idea of the scope of these programs, scaled affiliate networks should drive 20-30% of
gross sales. That's true for all of our partners who have a network of more than 5,000
sites20% of gross sales online for a given online merchant. Be Free has a variety of
fees, either a percentage of sale or traffic-based pricing, and it varies, depending on
whether somebody wants exclusivity in a space, etc. We are typically a fraction of what's
paid to the affiliates. So, if you decide to pay your affiliates 10% of gross sales, your
affiliate program's going to cost you roughly 13-18% of gross sales, depending on your
ability to convert and whether or not you picked traffic or percentage.
Mr. Hecht: I don't want you to hike up the price on Electronic Newsstand, Tom,
but this sort of overhead management of running an affiliate network, although not
negligible, certainly pales in comparison with the upside. It's probably one of the best
value propositions. I'd certainly recommend it over paying millions of dollars to one of
the big guys before you have to.
To answer the question about margins, you have probably all seen that buy.com (http://www.buy.com) is selling computers below cost. The
premise is that valuations of Internet companies go off of the top linehow much you
sold rather than how much you lost in order to sell it. Buy.com depresses the price of a
computer, sells it for say a $1000 rather than $1500, and books the $1000 in revenue every
time with nobody caring what happens lower down on the balance sheet.
Just as an aside, I think that's a perfectly fine strategy for capturing market share.
I would prefer that they booked it as a marketing cost rather than as revenue, but, that
aside, the consensus I'm hearing is that, in general, those below margin loss leaders are
unsustainable except in a very limited way. I don't think we are going to have to deal
with them on a long-term basis. It's almost more of a single shot to get someone on the
With respect to affiliate programs, the sky's the limit. If a place is willing to sell
a product below cost, and if you are an affiliate, I would say that's a signal that they
are willing to pay a lot of money or lose a lot of money to generate a sale. Go to the
negotiating table and hike up your affiliate percentage because, if they are taking a loss
on the sale, they are taking a loss on you.
Mr. Gerace: I think there is also a lesson to be learned from traditional
retail. There are a lot of companies today in the traditional space that operate at very
low or almost no margins. Those companies, let's say CompUSA or your local grocery store,
make the vast majority of revenue by charging slotting fees to their suppliers. CompUSA
charges Compaq to appear on the CompUSA shelf. We think there is going to be virtual shelf
space created, both on the retailer sitewho is featured on your home page, for
example, versus one level deep or two levels deepas well as on the affiliate network
where the merchant is going to have increasing control over what links are placed on
affiliate sites. They will be able to sell that space to their suppliers and share that
revenue with their affiliates.
Mr. Hecht: In the longer term, I think you'll see a steady state emerging, such
as what you have in traditional businesses. In real estate, for example, a 6% margin is
somewhat standard. I confess that doesn't bode all that well for the margin pressure on
affiliates, since affiliate margins will have to come out of that, but I couldn't guess
what the average margin will be a year from now.
Q: I'm George Molaski from
Writers Club (http://writersclub.com). What are the
terms and conditions that are most generic or industry standard now? Could you also
address the number of clicks away from the front page that you want to be, as well as
issues of exclusivity?
Mr. Hecht: There are
contractual standards emerging, and there are best practices emerging. Tom's Be Free has
an application form which standardizes a lot of the agreements, although the percentage
commissions vary greatly. Generally, agreements deal with issues of ownershipthe
name is shared somehow and there is some sort of a co-branding element. There usually are
not contractual restrictions about where on your site you put the affiliates, but there
are best practices if you want it to be worth your time. I only know my own business, but
if you put a picture of a magazine cover on your site, you will drive three to four times
as much revenues than if you just name the magazine. If you put it on the home page or the
second page, you will also see a multiple over putting it on the third or fourth page.
You'll have better results if you integrate offers into your content, rather than simply
putting it in a shopping area where you rely on people to go shop for magazines, something
they probably didn't come to your site to do.
Mr. Gerace: We see from the affiliate side that certain things are expected of
affiliates. First, there will be no adult content. Very few online merchants are willing
to risk their brand by having it sit next to adult content. Usually there is no
competitive content since most merchants want to make sure that their brand is protected
as distinct from their competitors online. Those are two big conditions, usually, to
working with a merchant. The only other item is that the click-to location is actually as
important as the click-from location. Affiliate links should get the user as close to the
register as possible. They should be one or two clicks from making a purchase, rather than
having affiliate links that point to, say the Electronic Newsstand's home page, then make
the user drill back down to the products they want.
Q: I'm Howard Friedman with
e-cerv (http://e-cerv.com). We provide managed
applications that are focused on customer relationship management. Most of your focus on
the affiliate programs has been on the consumer side. How would you contrast that for
business-to-business affiliate programs? How would you take a company like ours, one which
has a suite of products targeted at very different company sizes and business segments,
and market them effectively through an affiliate program?
Mr. Hecht: As a provider of
business-to-business products, are you talking about enlisting businesses to sell on your
behalf to other businesses they might work with?
Mr. Friedman: Business associations, etc.
Mr. Gerace: Barnes & Noble launched a business solutions program. They want
to be the online bookseller to Fortune 1000 companies and they are using an affiliate
network infrastructure to place links on the intranets of corporations like Motorola,
Arthur Andersen, Microsoft and others where the company selects what titles appear. They
can recommend titles to their employees or each division or any individual manager can
recommend those titles and then Barnes & Noble uses the affiliate network to take
those corporate purchasers to a secure, discounted location on their site. That's actually
ended up being a great way to capture corporate buying and business-to-business
Mr. Friedman: Isn't that very similar to the consumer version since you are
targeting individual consumers as opposed to the enterprise?
Mr. Gerace: You are also targeting corporate buyers where corporations want to
automate their purchasing process, use corporate credit cards and receive detailed
reporting. They want to know that if they told everybody in a division to buy a given
title, how many actually did. Yes, you are purchasing consumer-related goods that are not
parts or widgets, but what is interesting is that the corporation selects the goods. They
could select discounted insurance policies or widgets. They could have three widget makers
and show the lowest prices or make it easy to click through, but they are placing links on
their intranets and embedding the content and the recommended items.
Mr. Hecht: I'm intrigued by the thought of it. I haven't given a lot of thought
directly to that sort of permutation of situations. We would probably be talking about
something like an office furniture vendor which has its own core suppliers on its Web site
realizing that it has the attention of office managers who are of interest to Office Max
or Staples . . . it should work. I would say, though, that the variations on what I
described are going to be much more akin to a business development kind of relationship.
Part of the nuance of running a consumer affiliate marketing network is that you are
dealing with mass numbers of affiliates, and your success or the success of the network
doesn't depend on any one of the affiliates. It seems like that would just be a layer in
the supply chain for business-to-business affiliates. I think you probably enter the
people to run it in the core skill set.
Mr. Arnowitz: Tom, is Barnes & Noble's pay-out to the intranet host
companies the same percentage it pays to other affiliates?
Mr. Gerace: Good question. They actually have two completely separate affiliate
networks. One is a consumer network which is their larger network, then there is this
business solutions program. Instead of giving a commission on sales, they give a discount
that's realized at the point of transaction for those business customers. Anybody coming
through this network goes to a secure environment which is mostly separate from their
consumer side, where they get a transaction that's realized at a lower dollar value. The
corporate purchasing actually results in discounted purchasing.
Q: I'm Ann Shack with
Freetrip.com (http://freetrip.com). I'm from the other
side. I'm the content provider. I have a value-added site that provides driving
directions. Our partners do very well integrating information about things you can see
along your trip. We also want to offer deals to people who are traveling or thinking about
traveling so that they can purchase related items from our site.
However, we can't do what Barnes & Noble has asked us to do, which is to review
books, put up the reviews, add content and create new pages. We have an application. We
are one of those value-added providers that gives away something for nothing and connects
our clients with their customers. That's what we want to leverage and we have a targeted
audience. How do we take advantage of the affiliate program without having to add staff
and create a Web page environment?
Mr. Hecht: I come from a
content background so I grapple with this all of the timehow much content and how do
you create it on a budget when you're not a primary content provider? I would go home
tonight and, since you are probably an expert in what people think about when they are
traveling, write down a list of ten products that you would like to sell. Write one
article, one piece of content that you could author yourself, using all the buzz
words"10 Things You Must Think About On Your Trip." One piece of content.
Give it a prominent link on your site. You don't need an expensive editorial staff to do
transactional content. If you are not a great writer, have someone who is a great writer
edit it and put it up on the site. I'll bet you that if it's marketed in the right way,
that button will get a competitive number of clicks to your core service. Then you will
have a way to test whether that's valuable for marketing.
Mr. Gerace: Another thing to think about is that affiliate links take a lot of
different forms. They can also be links to promotions. If Brian happened to have about 40
travel magazines to sell, you might have a button that says, "Buy discounted travel
magazines, the absolute lowest prices for Freetrip users from the Electronic
Newsstand." You can use even the regular deals that are promoted as featured items on
the site. Additionally, email links are becoming increasingly popular. That's where people
are embedding affiliate linksin their email updates, newsletters or even in their
Mr. Arnowitz: Arik Schenkler, a netpreneur in Israel with the Internet Dollar Center
(http://www.internetdollar.com), sent us a
question by email. What is the average payment for your affiliate sites and what's the
highest amount one of your affiliates has been paid? By the way, James Marciano from
Refer-it (http://www.referit.com) has said that about
$50 a year is the typical payout to an affiliate.
Mr. Hecht: I would say that is the wrong metric. The average is going to be
depressed by the 80/20 rule20% of our affiliates produce 80% of our revenue. We have
traditionally done "good" rather than "plenty" with about 5,000
affiliates. That pales in comparison to the 50,000 or 100,000 we're beginning to think
about. If you have a "plenty" situation, it's probably a 98/2 rule where 2% of
your affiliates produce 98% of your revenue. It's unfair to ask about the average per
affiliate because, of the 20% that actually do sell, some of them sell one, two or three
magazines a month and they get a check for $10 or $20. We also routinely send out checks
for hundreds or thousands of dollars a month.
Mr. Gerace: I believe that the standard deviation is as telling as either the
average or the mean. The average and the mean are going to be very different numbers. The
fluctuation in the standard deviation is actually far more interesting. We have run this
number for each of our networks individually and for our networks in aggregate. In
aggregate, the standard deviation in average payment is $32,000 a month, so no matter what
average I made, there are sites making a ton of money out there and there are sites making
nothing. The sites that are making a ton of money are those that have content which very
closely matches their audience interests and that merchandise that content effectively.
The sites making nothing are typically those that list a bunch of different products on a
page or a bunch of different vendors on a page and link to their home pages.
Q: I'm Arnold Kling with
homefair.com (http://www.homefair.com) which
provides relocation information to consumers. We give the information away for free and
we'd like our affiliates to help us give it away for free. We once received a check for
$1.59 from Electronic Newsstand. Thinking about the cost of writing that check, putting it
in an envelope and adding the stamp, I wonder whether people are trying to come up with
more creative ways of paying, perhaps things that can be transferred electronically to
make that process less expensive?
Mr. Hecht: Yes, but you are
going to have an adoption problem. I'm not in the electronic banking business so I'm not
going to wire you $1.59. The fact that you got a check for $1.59 is a testament to the
courtesy we try to show our affiliates. A lot of affiliate programs won't send you a check
for less than $50 or $100. They save it up, which is really their way of rounding down. If
you have enough people who earned $1.59 and you don't pay them, you start making money off
of them. I'm sure that I lost money sending you that check for $1.59, but I hope that you
appreciated our effort and that you are going to work with us to sell more magazines.
Mr. Kling: Is anybody looking at quasi-currencies such as frequent flier miles
or other things that can be transferred?
Mr. Gerace: At Be Free, one of the things we do is the payment infrastructure
for most of the networks we enable. Many times when you get a branded check, we wrote that
check for the merchant. We have begun exploring electronic funds transfer (EFT) in
earnest. The one big barrier is that the costs of insuring against EFT are higher than
check writing, particularly when you are sending out thousands of different wires to
locations where you haven't confirmed the identity of the person on the other end.
Insurance companies are funny that way. As far as points programs, we expect to roll out
the opportunity to pay in miles or points and people are using consumer bucks.
Mr. Hecht: CD Now (http://www.cdnow.com)
gives out CDs. We prefer the cash option, but I think that the up and coming model will be
that for any value up to $100 or $200 you can accept that in cash, sky miles or something
like it. In a way it becomes almost more fun, a carnival-like environment where you get to
pick your prize. That might be a better option with smaller affiliates for whom the dollar
check is never going to be meaningful, but they would get a kick out of 500 frequent flyer
Mr. Arnowitz: There are also payment consolidators such as Commission Junction (http://www.commission-junction.com) that
will aggregate or pool together a bunch of little amounts and send you one check at the
end of the month. They are getting pretty popular.
Mr. Hecht: You can get an $8 check instead of a $1.59 check.
Q: I'm Bob de Lorenzi with
PatriotNet (http://www.patriotnet.com), a local
Internet service provider. We don't have much of a sales force. Actually, you are pretty
much looking at our sales force. We are focusing specifically on DSL, a very complex
product to sell, and we are trying to come up with methods and compensation structures to
support some sort of affiliate program or channel resellersome way in which we can
have people out there making the transaction for us. We are asking customers to spend
hundreds of dollars a month and we have come up with the ability to pay good revenues, a
residual income for three years on people who sell these circuits for us. How do we apply
this with the affiliate perspective you are talking about?
Mr. Hecht: I think you probably
need to do a hybrid affiliate/sales representative model. If it's a complicated product,
you are not going to simply tell somebody about it online and have them tell their
neighbors. College-represented programs have their affiliates come in for a one-night
training session. They brief them on the product, give them a stack of blank contracts and
explain the payment system. There is some training there, but in the end it's up to them
how much they make of it. You can use the Internet as a connection and as their sales
resource center where they get updates on how to sell and so forth. It's a virtual sales
force, but I think there has to be an initial human contact since it's so complex.
Mr. Gerace: If one of the challenges is that a lot of people don't know what DSL
is, and if you are doing an up-sell from lower bandwidth connectivity, one option may be
to have a pay-per-lead system where you pay a low dollar amount for all of the leads you
get inbound, then you can hand them off to vendors who are positioned to complete the sale
Mr. Hecht: The market, now, is $1-$2 per lead.
Mr. de Lorenzi: I've seen our competitors pay as much as $300 for somebody who
brings them a circuit. What we think is really going to attract people is paying 15% per
month for the first year, 10% per month for the second year and 5% per month for the third
year. You make a sale one time and you have this generation of revenue over the course of
Mr. Gerace: That definitely incentives the person who closes the sale, but I
think you could pay to get a list of names of potential buyers online through an affiliate
network by saying we'll give you a $1 or $2 a name. Then you hand those names off to a
partner who can close for you. They're going to have to do the educational sell. Paying a
buck or two per name is not going to close sales, but it will let you know what your
market looks like and it's going to bring the market to you.
Mr. Hecht: It's probably more like a car sale where there's a complicated
purchase. People aren't buying a lot of cars online. They are researching the cars on the
Net, then going out and closing the sale with a human being.
Mr. Gerace: We do that with the Lending Tree (http://lendingtree.com),
for example, where they pay for a mortgage application. Obviously, no one is going to
actually close their mortgage today through an online application, but they pay for the
name and address of the person who is looking to buy or refinance.
Mr. Arnowitz: How do people
know what kind of deal to strike? We have heard pay-per-lead, pay-per-click, percentage of
the sale, flat fee, store credit, tiered programs. How do they know?
Mr. Gerace: If you're first in
the space, you get to decide. If not, you will see a number of different models. One of
the things you can do is come up with a model that your partners like better as a way to
compete and capture affiliates from a competitive network.
Mr. Hecht: It's ruthlessly Darwinian right now. There are no rules and there are
no rate cards. Every person who goes out and raises venture capital or who has a business
idea, also has a business plan that says they have to sell banner advertising or
placements or slotting for a fixed fee. Right now, there is just no demand in the market.
If every impression on the Internet was sold at a supply and demand equilibrium, there
would be a 20¢ CPM instead of the $60 or $80 CPM on Yahoo's rate card. You have to figure
out how to worm your way into those crevices. If you are joining affiliate programs, go
ahead and ask for an up-front payment, but you are not going to get it unless you are
really big and important. Get the best commission you can. Work your way downgo for
a quick deal, go for a per lead deal, then join an affiliate program. If you are on the
sell side and you are trying to get your distribution built, offer your affiliates the
lowest reasonable thing you can, which is a percentage. Many will take it. If there is
someone who is in a better position, they're bigger in the jungle and can demand a higher
percentage, let them ask.
Mr. Gerace: The way to think about it is, first, consider what your customer
acquisition is through other programs, then consider what each repeat transaction is worth
to you. Acquire customers for the repeat transaction number if you can, otherwise consider
a hybrid that rewards first-time buyers more handsomely.
Q: Good morning. I'm Joe Zuccaro with
Covad Communications (http://www.covad.com), a DSL
services provider . Have you ever had to decide whether or not to give an affiliate the
boot? Have you found some that just drop off on their own accord?
Mr. Gerace: We know of
circumstances where affiliates have been shut down. Typically those affiliates begin to
violate some of the core principles I mentioned earlier. They start having content that is
either considered adult or offensive in other ways, or they begin working with a
competitor. The cost of having an affiliate in your program is relatively low, if you have
technology that automates your work flow and if you have processes inhouse that make
supporting those affiliates efficient. Typically, even if somebody is driving only one
sale or zero sales for you in a year, it's not worth booting them out because you're still
getting reach and branding that even the smallest partners bring. Booting them also
creates a negative impression in their mind and they tell three friends and so on and so
forth. But for people who violate your agreements, it's absolutely important to enforce
those agreements and we have seen that happen.
Mr. Hecht: We don't boot affiliates for low activity or inactivity. If there is
a chance that they even have a button of ours somewhere on their site, someone might see
that and make a sale and there is no incremental cost to us maintaining them. We have
booted folks for violating "community standards" and we have affiliates on our
radar screen which we check back with from time to time to make sure they haven't crossed
Q: I'm Ira Kaufman from
E-teen (http://e-teen.net). We're building a portal for
young people from around the world. Have there been any examples of sites aggregating
noncompetitive vendors as an affiliate program for a special target market, like a mall?
How does that work and what are the dynamics around it in terms of sharing commissions and
Mr. Hecht: Tom and I are both
in discussions with a major mall site now. I think the mall concept is coming back again,
even though it was shed a few years ago when the specialty product retailers like Amazon
came along. You are seeing folks like Value America (http://www.valueamerica.com)
that are becoming more like malls, and I think there is going to be a second wave. Amazon
has become like a mall, but it's best when you do it for a target audience. There is a
viable mall concept for special interests and I would say that demographic niches, whether
it's iVillage or Bolt or Tripod, are extremely hot right now. If you can capitalize on
that, by all means do so. If you are going to be a portal, however, transactive content
and stickiness are going to be more important to you than merchants. You have to put the
horse before the cart.
Mr. Gerace: We just announced a relationship with GeoCities (http://www.geocities.com) where they are going to
create an aggregated network for multiple merchants to plug into the 3.4 million GeoCities
homesteaders. We are going to do exactly what you suggestedhave a number of
different merchants that can place buttons or banners or links on these homesteader pages.
GeoCities will write one check from their program. That is a model we see emerging. We
also see what I keep calling "virtual distributed portals." That's where a group
of content sites which have a niche focuswomen's sites or dog lovers or
whateverform a content network that can be pointed to a variety of different
merchants. They actually increase their value by aggregating the content and then pointing
the network to a merchant or set of merchants.
Q: I'm Jim Jacobson
with Wave Communications. After about 12 months we finally launched our E-commerce site
called ConsciousMedia (http://consciousmedia.com).
It's like an Amazon that sells books, music and video for body, mind and spirit. We're
looking to form affiliations with traditional retailers of the products in that
areabookstores, etc. Do you have any thoughts on how to solicit them? We are
competitive with them, but also can bring them advantages.
Mr. Gerace: Think not only about the people in the real world who might have
appropriate content, but also go to the search engines and search on the key words that
are related to your space. The second thing to do is to narrow the search by looking for
those pages you found which link to one affiliate program or another. If you've got that
subset of sites that have appropriate content and which already get the affiliate model,
there's a good group of low-hanging fruit to start off your network. We don't typically
recommend that people go off to find the tougher affiliates right off the batthe
ones who might consider you to be in conflict with their traditional channels. Prove the
model with somebody easier, then go back to the people who aren't selling online.
Mr. Jacobson: We have our own inventory of 40,000 products. We need their
customers. They have a certain rapport and it's the rapport and the relationship that has
built up in the retail arena that we want to leverage.
Mr. Hecht: I might try something like a content sponsorship where you make a
deal with someone like Deepak Chopra to create some sort of a guide and the tradeoff is
that you carry those products so it's really advertising for him. Most sectors have come
around to some sort of co-operitition model. I work with magazines that are also selling
magazines on their own sites. They authorize me because they want more business. If your
sector is more mature, try to take baby steps with them and try to do a content deal. Say,
"Look, I want to start off with good faith sale. I want to give you banners
throughout my book area in addition to the products we sell." That's my best guess.
Mr. Gerace: You've got a tough sell trying to get other merchants to hand off
customers to you. Right now, people consider this to be a land grab for customer
attention. Somebody who is actually transacting business online wouldn't do it. Somebody
who is transacting in the real world considers online to be a horrible threat. You're
going to have a tough time saying, "I'd really like to be the group to cannibalize
your existing sales." There are a lot of affiliates that have content and don't sell
at all online. You would be a perfect place for them to earn extra revenue by sending
their audience through.
Mr. Jacobson: We are finding people who are Amazon affiliates actually moving to
us, which is great.
Mr. Arnowitz: Thank you all very much. This has been most interesting. Marketing
is critical to any business, so I hope that you have picked up a few tips this morning
that will help you promote your business on the Net just a little bit better. Personally,
I was particularly taken with what Brian had to say about "contextual selling,"
a concept that's also getting quite a bit of buzz on the Net these days. Please join us in
the Netpreneur Program Ad-Marketing list (http://netpreneur.org/connect/am)
to continue this conversation or to start a related one.
Once again, thanks to everyone, particularly Tom and Brian, and have a good morning.
End, page two of two
1999, Morino Institute. All