The affiliate network is dead: long live performance marketing

The idea
This is the idea that affiliate networks are struggling to justify their margin on each click or referral.

The problem
Theoretically affiliate networks allow advertisers to get to niche consumer needs by leveraging the long-tail of smaller specialist web publishers. In practice this is bunkum.  The 80-20 rule persists and this threatens affiliate network’s market position.

For example.  A large UK retailer uses one of the largest UK networks and is able to “see through” the affiliate network to understand which publishers send it the most traffic.  The results show that 80% of the traffic that this retailer gets is from 20% of the publishers. Consequently there is a big trend in the market for merchants to approach the publishers directly to strike deals, cut out the middle man and split the margin.

This completely flies in the face of the affiliate network model.   Affiliate networks traditionally argue that the value for merchants lies with a large number of smaller traffic referrers: Merchants cannot cost-effectively build links to this vast array of referrers and therefore pay a margin to a network to do this connecting for them.

If merchants can answer yes to the following, the future looks bleak for affiliate networks:
1)    Does most of your traffic come from a small number of high volume referrers?
2)    Can the technology (click monitoring) be created in-house or bought (e.g via direct track) cost effectively?
3)    Is the “missing 20%” low quality traffic.

The solution

Firstly, I have checked this out with a few networks and the message is that it is very unlikely that 80% of their merchants will go direct anytime some.  Nevertheless it is an issue and the networks have a few things up their sleeve:

Networks are offering a wider-array of value-add services & better software to their merchants and affiliates in order to retain them.  This is stuff like stats, bad affiliate alerts, online content tools such as reviews.

Affiliates are evolving to overall “performance marketing” networks.  This will mean they will be offering the whole range of CPA, CPC, CPM, Lead Gen, email marketing, cash-back (like quidco) etc.
We have recently seen a few acquisitions which are not about scale but about breadth (e.g. Buy.at acquisition of xyz).  I also expect to see more acquisitions of analytics and marketing tools.

Opportunities for growth companies.

Affiliates themselves continue to be growing revenues across the board, both organically and by acquisition.  As they evolve into performance marketing networks, I am interested to understand which part of these businesses will end up being most valuable:
•    The databases they own on consumer behavior
•    The margin they take on advertising clicks
•    The optimization and analytical tools they offer to advertisers.

I wonder if any CEOs of affiliate networks or their investors know this?

There are also some interesting lessons for the web-publishers / affiliates.  The message coming from the networks is that the simple “google traffic sites” know for their CPC focus are less and less effective.  I think there will continue to be a flight to quality where traffic from rich, valuing-adding publishes like moveme.com will accrue value.

If your site is proactively sought-out by consumers as a valuable resource to influence their buying patterns, then the quality of your traffic will get top-dollar from the networks (just look at the valuation of MoneySupermarket).  This is the type of affiliate that I’d love to invest in.

Comments

[j.brown]

Interesting but it just seems to describe the evolution of affiliate marketing more than anything else.

[Nic Brisbourne]

Hi Paul - should have read this before really, and apologies for that. Not sure I agree either :).

The affiliate industry needs an aggregator - without it there is a many to many relationship between affiliates and merchants that is prohibitively difficult to manage for most people. There will always be a portion of the market that goes direct and you are also right that affiliates and networks are evolving as the market matures, but like every industry so long as you keep adding value you will be ok.

The other thing to remember is that affiliate remains a high growth category.

[mirror mirror]

I'll have to agree with you. You often have to ask, why even use an affiliate company, when using stats software you can track and pay revenues directly. A lot easier and helps build a rapport with the affiliate.