Customers are reaching into their wallets to spend their money online, and companies are matching them. One estimate is that over #2bn in online sales last year will have been driven by affiliate marketing. Increasingly it's finance directors who are the driving force behind this momentum. The logic of the cost-per-acquisition (CPA) model has such an appeal to them that the question now for marketers is not whether to invest in affiliate marketing but how much? You can get it hete
In essence, affiliate marketing is the most transparent channel possible for driving sales. Based on the CPA model, it allows the finance director to make a direct link between money spent on commissions and sales generated from leads. This means that affiliate marketing often makes more sense to the finance director than it does to the marketing director, who also has to concern himself with intangibles such as branding.
Getting the finance director on board
Duncan Cumming, marketing and sales manager at British Gas, believes that the buy-in from finance directors across the UK is due to the CPA model. "They're led by numbers while being risk averse, which sits nicely with the affiliate business model of pay-per-sale performance," he says. "This gives affiliate marketing a clear advantage over other media activities."
The affiliate marketing job is made much easier if the finance director is on board. As the advertising costs sit with the affiliate, the advertiser can decide how much it's willing to pay for the sale of its products. "This approach to market allows channel owners to build business plans knowing that financial approval will be easily sought," says Cumming. "In turn, the British Gas affiliate programme can continue to evolve and increase its contribution to the business."
The buy-in required to launch affiliate schemes for big companies like British Gas is just as important lower down the food chain, and with smaller companies the understanding of affiliate marketing is even more widespread.
Craig Curtis, web marketing manager at gadget etailer Gizoo, believes that a deep understanding of the channel from more than just the finance director means that the retailer can take full advantage of affiliate marketing opportunities. "The whole company buys into affiliates and we're looking to plough more money into it in the coming year," he says. "We'll put as much money into it as we see coming out. The sky is the limit as we have buy-in throughout the company."
Once a company has realised the value of affiliate marketing and tracked the return on investment, the marketing team has a compelling case to go cap in hand to the finance director for more cash for the channel. As the understanding of the medium has developed, this flow of cash has also increased, but there's still a schism over whether affiliate marketing budgets should be capped or not.
Deciding how much to spend
Affiliate marketing treads a fine line between being a marketing or a sales operation. In the marketing world, agencies are used to dealing with set budgets to produce a campaign and achieve certain results. However, affiliate marketing can make more sense when viewed from a sales perspective and the commission paid to affiliates is seen as a sales cost. This has led to a split between those companies that cap their budgets on affiliate programmes and those that offer unlimited budgets.
One of the largest affiliate users in the UK is BT, which used the channel to achieve 40% online growth last year, a figure that it's hoping to surpass this year. Despite the company's deep pockets, it advocates a capped budget. Mike Glegg, head of consumer indirect channels at BT, says that while he recognises that the affiliate channel is an ever-changing landscape, the company will continue to set annual and quarterly budgets. "Delivering the right balance between managing our costs and ensuring that our affiliates and affiliate networks are rewarded in a beneficial way can be challenging," he says.
Other companies, such as bike retailer Evans Cycles, have a more flexible approach to the channel. It has only been using affiliates for around six months but has already decided that the channel is so cost- effective that a fixed budget doesn't make sense. Marketing manager Ben Evans says that as long as he can prove the ROI to his finance director, more cash can always be released. "Affiliate marketing tends to snowball, but our FD has a flexible approach to it as it's so accountable," he says. "If I can prove that we're making money, then he's more than happy to open the throttle on the budget."
This view is shared by affiliate networks which believe that the perfect accountability of the medium plays to the strengths of sales- led organisations that won't refrain from pouring money into the channel if it pays dividends for them.
Adrian Moss, group CEO at affiliate marketing company DGM, says that its client list is beginning to migrate towards the non-capped approach. "This is an uncapped budget environment. If we deliver customers whose value is attractive to the advertiser, then the budget will be uncapped. Budgets do exist, but they're very much in the minority."
Moss argues that the split over the origin of the budget has more to do with marketing directors' traditional fear of accountable channels and political infighting over control than anything else. "It's scary for marketing directors to have a large amount of budget go into such an accountable channel," he says. "It depends on how large a company is and whether it has separate sales and marketing departments, but we generally work with the sales department."
Who pays for affiliate marketing?
The fine line between sales function and marketing activity not only affects whether the budget is capped or uncapped, but also where that money comes from in the first place. If the affiliate channel is being used primarily to drive sales, then it makes sense for it to come from the sales budget; if it's more closely linked to other marketing activities it should come from the marketing budget. Where the cash comes from will determine how the channel is used, as ownership will belong to a different department depending on the budget's origin.
Paul Lewis, international marketing manager at genealogy web business Ancestry.co.uk, believes that it's a marketing operation and therefore the company uses the budget to achieve more than just sales. "It's about discovering new niche channels and branding, as well as sales," he says. "Our affiliate commissions all come out of our marketing budget, but obviously it has sales marked against it as well."
Despite capping its budget in the way that a marketing department would operate, BT's affiliate scheme sits squarely under its sales division. But Glegg explains that although it's primarily a sales-driving operation, BT's affiliate programme is also used to perform some important online marketing functions. "Affiliates programmes are a sales unit," he explains. "Ours is performance driven and aligned to our overall sales area, and the primary focus is on generating sales. But we also recognise that we need to protect our brand and perform more traditional marketing objectives."
Alison Guise, UK country manager for Commission Junction, says that the difference is particularly marked when comparing the UK and the US markets. "We've seen a definite shift in the US as it becomes a cost of sale, whereas in the UK it's still a marketing expenditure," she says. "However, we still have a significant number of clients that have a fixed marketing budget and still have the mentality that it's a cost of sales. So if they're doing well and the marketing budget is coming to the end, the plug won't be pulled on the programme."
Other affiliate network operators find that there's more of a swing towards the US model in their client list. Andreas Bernstrom, MD of TradeDoubler, says that the majority of clients now operate from their sales budgets. "When we work directly with a client, we're forthright and say that it's hard to work with a capped budget. 95% of the time we can work with a client on a sales budget rather than a marketing one."
Coping with greater competition
With finance directors buying into it, and affiliate networks and publishers themselves becoming more sophisticated, 2007 is shaping up to be another bumper year for the medium in the UK. Yet the coming year will be a tough one for advertisers, not because affiliate marketing will become less popular, but because its success will lead to prices being squeezed and commissions becoming more competitive.
As the value of affiliate marketing becomes apparent, the battle for the best affiliates will heat up, so hanging onto your valuable sales generators will become harder and harder. For this reason many companies' plans for 2007 include working even more closely with their affiliates and offering them better commissions in order to retain them.
Mark Grant, online marketing manager at health insurance provider PruHealth, says that the company's priority for the coming year will be to drive more value from its affiliate activity, while maintaining the same volume of sales it achieved in 2006. "The key challenge for us will be to offer attractive commissions and end-user offers while still achieving ROI and sales targets," he says. "Our approach will be to develop closer relationships with targeted affiliate partners and develop tailored propositions for their audiences."
This is a similar approach to that being taken by BT, which will be looking to refine its affiliate programme rather than change it en masse, but will also be looking for new ways to get the best value for its spend in the channel.
"The online spend is managed out of one area, so where we see growth in 2007 will determine where we allocate those funds," says Glegg. "From the affiliates programme perspective, it's key to recognise new affiliates that appear in the marketplace and also to understand how the end customer wants to interact online. Affiliates are the experts in this field, so on the whole they're ahead of the game. They understand what customers are looking for, and the value they add to their websites will in turn help us to achieve our sales goals."
Affiliate networks are also expecting to see advertisers develop closer relationships with affiliates. David Hall, client services manager at Digital Window, says that now advertisers can partner with one or two big affiliates which can burn through their budget very quickly, it will begin a trend for deeper long-term relationships between advertisers and affiliates. "The trend will be to say, 'Find me a partner and I'll have no problem paying for it.' Advertisers will want to work closely with affiliates to refine the offering in this case," he says.
Evans Cycles will similarly be adopting an approach that mixes working harder with its affiliates with increased spending in the channel. It's not simply about pouring more cash into affiliate marketing, but making existing spend work harder and refining how it uses the channel.
"We're relaunching our site in early summer and will be building in lots of APIs for affiliates to use, such as bestseller lists, as well as doing specific affiliate offers," says Evans. "Affiliate marketing spend is now more than pay-per-click spend for us, which we certainly didn't expect at the start."
With budgets seemingly increasing across the board and advertisers fostering ever-closer relationships with their affiliate partners and networks, the flow of money into affiliate marketing in the UK shows no sign of abating. Greg Brooks
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