GeekMBA360

A reader just asked me this question in response to my "Adbrite Layoff — is this the beginning of more ad network layoffs"? post.

Affiliate Marketing is a topic dear to my heart. I worked for one of the largest affiliate programs in the world for a couple of years. I’ve always been amazed and impressed by the creativity, entrepreneurial drive, independence, and persistence of successful affiliates. Therefore, I decide to devote an entire post to this question.

Affiliate networks will be affected by the current economic crisis. It’s likely that most of them will have some layoffs. But, I think they’ll do much better than the CPM/CPC based display ad networks during this economic crisis.

The affiliate model is performance based. Merchants only pay affiliates when they make a sale. During hard times, companies will watch their top line and bottom line closely, and want to make sure they get positive returns on their marketing dollars. So, I expect most online merchants to continue to use affiliate as an important channel to drive traffic and sales.

On the other hand, consumers are spending less. And consumer spending drives retail. As we’ve already seen, Q3, 08 retail sales was the weakest in nearly three decades. I think we should expect to see more drops in retail. Consumer are spending less. Retailers will make less money. As a result, retailers will pay less to affiliates. 

One might argue that online channels have the price advantage — they tend to sell products at a cheaper price point than offline channels, and therefore should fare better in a depressed economy. I think there is certain truth to it. But, online sales won’t be immune to recession. It’ll still be impacted, but to a lesser degree.

I’m also wondering what merchants with large affiliate programs will do. There are a number of potential issues:

• should they reduce the size of their affiliate program in order to reduce cost? — I know that there are large online retails out there who are really concerned about paying 6-10% to their affiliates when their margin is already pretty low. They’d very much prefer to have tons of natural traffic to their sites, which will result in much higher margin. I wouldn’t be surprised if some merchants take a hard look at their affiliate channel economics, and decide that their affiliate programs should be shifted to focus on fewer categories that need affiliates’ help to promote and sell.
• merchant might adjust affiliate commission rates as they want to reduce cost.
• instead of working with a third party affiliate network, merchant might decide to move affiliate management in-house to run it more efficiently.

Considering aforementioned factors, I think affiliate network will be pressured to run more efficiently. I wouldn’t be surprised that we’ll see some layoffs by affiliate network companies. However, I think fundamentally affiliate networks is performance based, and it’ll weather the economic storm much better than its ad display network cousins.