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What about affiliate networks: are they in the same situation as ad networks who are starting to lay off people?

October 21st, 2008 · 1 Comment

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. 🙂

Tags: Beat Recession

1 response so far ↓

  • 1 Gates VP // Nov 15, 2008 at 7:37 pm

    Seems to me that the affiliate-style marketplace is an ideal place to put dollars in a down-turn. I would expect affiliate to thrive and grow in this market.

    Yes on the one hand, hesitant companies will be tempted to simply allow for traffic from “natural” channels. But that’s a very defensive stance and horrible place to be. In a lagging economy failure to be aggressive is akin to waiting to die.

    If everyone is waiting for pocket pairs, it’s time to start betting your suited connectors.

    From a fundamentals standpoint, I think this might actually be a mistake:
    As a result, retailers will pay less to affiliates.
    What other advertising channel actually guarantees sales? From a friend in the business: “CPA isn’t going anywhere. If I can spend $5 to generate $10 in profits, why would I stop?”

    And flip it around, imagine that you have $1M to spend on generating sales. You know that the economy isn’t great, and you’re seeing lots of misers everywhere. You can either pay some agency a bunch of money for some form of “display” campaign, with no guaranteed return or you can pay for conversions.

    Don’t get me wrong, I believe the some form of display is still essential to long-term business success. But really, this sounds like a market where you want to raise the value of conversions, not drop them. Sure it eats up some GP, but it also steals from dwindling market share. Heck, steal the money from less performance-driven parts of the sales budget. I mean, why not spend money where you know you’re making money?

    If you’re expecting less conversions and you drop the value of those conversions, you’re simply going to aggravate your situation. Less money = less interest = less affiliates = less conversions.

    Maybe my math is wonky here, but if you figure that your market has just shrunk by 20%, shouldn’t you be upping your conversions by 25% to compensate? Heck doesn’t it make sense to be the first to push rates? (especially with a crappy Holiday season looming?)

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