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+++ S P E C I A L R E P O R T +++
"Creating and Managing Affiliate Programs"
Brad Waller
Vice President, EPage <http://ep.com/>
December 1, 1999

Moderator's Comments

Hi All:

As promised, today we have another excellent special report entitled "Creating and Managing Affiliate Programs" from Brad Waller. Affiliates are a hot item and a way to generate a lot of business if done right. Brad is an expert in this arena. And, he has provided us with some excellent resources.

George Matyjewicz, C.M.O.
Moderator, E-Tailer's Digest



"Creating and Managing Affiliate Programs"
Brad Waller
Vice President, EPage <http://ep.com/>

Affiliate programs are the fastest way to build an online sales force. The leaders in this field are CDNow (perhaps the first with a program that predated their web server), LinkExchange, Amazon, and Art.com. Each has done something different in this area.

CDNow was the first that I know of to realize that they could use independent users as an extended sales force.

LinkExchange may not be an affiliate model that you think of because there is no revenue generated for affiliates, but the idea is similar. They got millions of sites to show banners, and in return they got a 50% return with their banners shown across the network. LinkExchangešs model could have just as easily been one to share revenue based on page views, but that would be more complex, and was not needed, as the market did not demand this.

Art.com was founded on the principal of the affiliate model. It is possible that this has changed, but when they started, they said that they would never pay for a banner impression. To do this and still become successful, they needed a large network of active affiliates. They did this through generous revenue share and a full commitment to the program from the top down.

Before the Coding Starts. 
All the details must be nailed down. You will have to decide on every facet of the program early so you do not go down the wrong path. Every site is different, and the exact solution for each program will be different. Margins, sales prices, expected business volume, network size, payout amounts, your own infrastructure, accounting methods, and personnel will all affect the way your program should be set up. There may even be some businesses that cannot benefit from an affiliate program, but not many. Is your CFO ready to "give away" profits?

What is your Unique Selling Position? Ask the question: "Why should anyone choose your program?" Your program has to be different or better than what else is out there. If you are going into the online book market, you better have something special (like a really high payout and great service) to compete with the many established companies already there. If you are creating a new market, then you can be more stingy. The best thing to do is to find a niche and fill it, or make potential affiliates a better deal than they get elsewhere. The bottom line: Make them more money or provide a unique service.

Co-branding or Content provider? Are you trying to further your brand? Some sites such as EPage are not as concerned with brand recognition through the program. We created this program to become our own competition by allowing anyone to have a classifieds section on their website. Amazon and others are concerned with branding as well as sales, and require affiliates to promote their brand. This is something only you can determine. Look at your business plan (you do have one?) and see if there is some inspiration there. You want to figure out how your affiliates will utilize this relationship. How excited will they be to build your brand? Many affiliates want to just throw up a few banners to fill unsold inventory, and let the money roll on in. The better ones look at the relationship as a partnership where they are working to build both businesses.

How much to Give Away?
How much can you afford to give? I like to start with 50% of the net profit per sale and work from there. If you have salespeople now, look at what you are paying them. These affiliates are very much like commissioned salespeople, but you donšt have to pay them a minimum wage to stand around waiting for a customer. There are many ways to pay out. You can pay per sale, per click, per lead generated, or some other imaginative payout. Think of every sale as one you would not have made without your affiliate. After all, these customers are like bonus traffic to your site, so these sales are gravy. Also, plan on your affiliates using the relationship to buy at a discount. Some programs prohibit this, but any imaginative affiliate can get around this by signing up and then having a friend or relative do the buying. Again, this is a sale, and more sales is a good thing!

Questions to Help Determine Affiliate Value:
What does it cost you now to generate a lead? a sale? What is the lifetime value of a new client? How much of that are you willing to give to your affiliates? How much, if any, of the backend are you willing to give to your affiliates? If you expect that most longtime customers will come in through the affiliate and then use you exclusively, you might want to reward the affiliates a percentage of the lifetime (or one year) value of a customer.

Peapod, an online grocer, pays out more than the average net profit for one order to an affiliate. They found that a customer that orders three times is very likely to become a loyal customer, so they pay $15 for the first order by a customer referred by an affiliate, and another $15 when they place their third order. Affiliates get a reasonable high payout amount, they get paid for orders made at a later date, and Peapod pays to obtain loyal customers. I do not know the lifetime value of a Peapod customer, but my guess is that they pay out close to half the yearly net profit they make from a referred customer.

How Will They Link?
There are many different ways that affiliates can link into your program. It is undisputed that simple testimonials with a text link works best. Users are at an affiliatešs website for a reason. They are there to find information or get help, or buy something. If the site recommends a product or service, it will outsell a banner at the top of a few pages. When a trusted source writes: "MYSS! Is generally accepted as the best book about how to sell on Web at any price... and it's an amazingly low US$17. And their site proves that they know what they're doing ­ it's the most persuasive selling site I've ever seen on the Web!" you will take notice and go check out this opportunity. This canšt sell 10,000 products, but it will sell a select few very well. It can also add credibility to a shopping site if it instead talks about the wonderful customer service and that the merchandise showed up on time and in great condition.

Email can be great direct marketing opportunity, but there is the grave danger of affiliate spamming. It really does work when done well, but be very careful if you allow it. I recommend that you do not give instructions helping anyone email, and consider email promotions on a case by case basis, to be approved by the program manger. Any violation not only gets you kicked out, but forfeits all unpaid earnings as well. No second chances here, because it is your reputation on the line, not the spammer.

Custom content making the program part of their site works very well. Art.com has many effective affiliates who integrate individual pieces of artwork into various areas of their site. Think about the possibilities: Corvette posters on the Corvette site, kid posters on a toy site, Michael Jordan posters on a Chicago Bulls fan site. These links which fit perfectly into the content of the site will drive buyers to the merchant.

Images work OK. You can give the affiliates images to use to link into your site. Amazon has a few hundred graphics in various form factors to link to books, movies, toys, etc. These will get people to click, but not nearly as well as any of the above. There is no "call to action" to get buyers to do anything.

Finally, banners can be used. Expect worse than average clickthrough rates and disappointed affiliates. Industry average is about 0.5% clickthrough rate, although some banners are as high as 10%, and many are 0.1%-0.3%. Generally, the higher clickthrough banners are not going to have great conversion rates because they drew the users in with a misleading or general statement ("Win Cash", "Best Free Sites", etc.). Yes, you can generate a few banners for the lazy affiliate, of for them to use as filler for otherwise unsold banner inventory. You do not really want to have them use your program as banner filler, because this is the poorest performing method for programs. Neither party will be happy with the results.

Two-Tier or One?
Definition: Affiliates can recruit more affiliates and earn a percentage of their commissions as well as make sales themselves (similar to MLM). Minuses: More accounting, Dividing the pie into smaller pieces, the danger of affiliates doing nothing but recruiting more affiliates, not selling product. Pluses: Potential for explosive growth, "Manager" affiliates want to help their "subs". The cheapest and fastest way to build a large affiliate base.

Writing Checks - How Much and When?
Would you want to write 1,000 checks every month? I would. Donšt look at having to write a lot of checks as a negative. This is a great problem to have, because it means your program is successful. You will have to check with your bank to see if you can use a scanned signature or stamp for the checks. If the volume is high enough, you can use check printing services.

Minimum payouts are a must. If you are running a business, you should know the true costs of each check. Labor, materials, stamps all add up. Last I checked, it costs us between $1 and $2 to write an affiliate check, including my labor. I used to work for a major aerospace firm where the figure was a factor of 100 higher if it was done through a purchase order. Obviously, it would not be worthwhile to send affiliate checks through that process. Some programs pay no matter what. I think $20 is a good compromise. Large enough to be meaningful to the affiliate and not cost you too much to write, and small enough to get checks out to them more often.

I like paying affiliates monthly, but some program do it quarterly to save money. Affiliates are generally in it for the money, and the more often you give them that positive reinforcement, the more likely they will keep your links up to date and push your program over the 2,000 others they can choose from.

You might want to pay after the first period no matter what they have earned to keep the interest of the affiliates. The first month or two is vital. You want to make sure that they keep you around long enough to figure out what it takes to get your program to work. If they get discouraged it is very easy for them to delete the links. Even a $2 check will get them excited and let them know you are serious. If you can, write a message like "great start", or "I hope to see your name from now on", or whatever on their first check, and "congratulations" or "good job" on regular performers. The human touch really does wonders.

Should You Do It Yourself?
Resources: What can you afford to spend more of? Time or money? Can you afford to run your program in-house? Staff priorities, database management, and other infrastructure is needed to keep the program running. Do you have the qualified technical staff AND do they have the time to develop, test, and implement a program?

Should You Let Someone Else Take Over?
There are advantages to using a third party provider. Minimal time and labor to set up and access to lots of affiliates are the top reasons, even if you do have the technical staff to create the program. Set-up and maintenance costs / monthly fees can be an issue. Commission Junction charges $795 set-up plus 20% of commissions paid to affiliates (15% prime / 5% 2nd tier). Be Free charges a (negotiable) $5,000 set-up plus 2% (varies) of gross, and has a monthly minimum. LinkShare charges a (negotiable) $5,000 set-up plus 2% (varies) of gross. Nexchange and Affinia have no setup fee with varying fees that depend on the program. All this is PLUS your technical integration costs which will vary with the programs, so get lots of details when you talk to the providers.

3rd Party Questions and Issues
Every solution provider has a different philosophy and method. You wan to find the one who best fits your needs and wants. Ask them about your concerns. Are the affiliate programs made into just another form of banner advertising? i.e. do they just give affiliates banners, or do they give them a full range of linking options. URLs used can be cumbersome and confusing. Can they give examples of the link code and how the affiliates will edit their pages? How complex is the process? Who "owns" the affiliates you sign up, and what if you part ways with the provider after the contract is up? How would you take your affiliates with you? How much control are you willing to give up to the "trusted third party"? They track your sales, some pay your affiliates. Are you a control freak that must watch over everything? What happens if they don't stay in business? Do they concentrate on Affiliates or Merchants?

The third party aggregators have access to many potential affiliates. Be Free claims over 1.9 Million affiliates; Linkshare, 200,000+ affiliates; and Commission Junction, 55,000 affiliates. But you need to know how many of these are active affiliates, what percentage get checks regularly, etc. Just because be Free is associated with GeoCities (now Yahoo!) and has access to their millions, does not mean that their affiliates perform better than another provider with fewer affiliates.

If a solution provider is not what you are into, and you donšt have the staff to create your own program, there are a few programs you can buy. Below is a table with some of the programs. If there is a range of prices, that is because they offer extras such as installation, and recurring charges are generally for them hosting the interface.

Program Set-Up Recurring? Host/Requirement
------------------- ---------- --------- -----------------
AffiliateLink $350-$600 $0-10/mo UNIX, cgi

Affiliate Program $499-$999 None UNIX/NT, Perl/cgi

Affiliate Shop $0-$29 $20/mo They host

Affliilate Store $65+ $35/mo ???

Replicator 2000 $395 $0-$16/mo UNIX, Perl/cgi

"Your Own Program" $199-$549 UNIX, Perl/cgi

Other Resources to Investigate
Commission Cart is a shopping cart designed to allow others to earn commissions for promoting your products and services. It costs $249 and you can find it at <http://www.cgiscriptcenter.com/comcart/index2.html>. A Tour OF HTML Forms And CGI Scripts is at <http://www.halcyon.com/sanford/cgi/cgi-tour.html>, and CGI Resources has a section called "10 choices for affiliate software" at <http://www.cgi-resources.com/Programs_and_Scripts/Perl/Multi_Level_Marketing>

The 80/20 "Rule"
The old rule from retail was that 80% of your sales will come from 20% of the force. If you allow anyone to join your program, this will be even more skewed. It can be as extreme as 98/2! The average seems to be closer to 5%-10% of your affiliates will produce the bulk of your results. Active management will produce higher sales ratios, as will selectivity in what sites you allow to join. You may find that it takes more resources to verify and select sites than you lose in allowing anyone to join. Some programs choose to be very selective, some disallow "inappropriate" sites, and others are completely open. What you choose it up to you, but what is the chance that a porn site will link to Toys-R-Us anyhow?

Evaluating the Program
You need to set goals and track results from the program. What is it that you set out to do in the first place? Make money, build traffic, or brand awareness. Whatever metrics you choose, be it dollars, percentages, or impressions, you need to record them and trend them over time. You can also combine statistics to get some interesting ways to compare performance of affiliates to your base site. For example, you can track the dollars per page view, or per user session. You will want to look at the sales per affiliate, affiliate membership growth rate, affiliate activity, and possibly other metrics that you are already tracking. I like to look at the rate of change (positive or negative) for these to see if there is a trend I need to worry about.

There is no one way to build a program. The solution for one company may not work for another. This is why there is a selection of third party provider, all who have different technologies and philosophies on how it should be done. Lots of this is basic marketing and common sense, and you will have the ability to do some trial and error as well if you do not lock yourself into any long term deals with affiliates. Read, learn, and look at what works. Use others successes and mistakes as stepping stones. The biggest mistake you can make is waiting six months.


Affiliate listing sites (the top group)

Third Party Providers:

3rd Party Software Solutions
Up-to-date information can be found at these sites:

More Listing/Info Sites:

E-zine database sites:

Brad Waller <mailto:waller(at)ep.com>
VP, EPage Free Auctions & Classifieds <http://ep.com/>
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+ E-Tailer Resources

Subject: An Interview With...
Brad Waller <mailto:waller(at)ep.com>
VP, EPage Free Auctions & Classifieds <http://ep.com/>

With a great special report like this, we asked Brad to tell us a little more about his company and it's services.

1. What is your organizations name?


2. What is the name of this service?

We call it the CSP program. Back in 1996 when I came up with the idea, we thought about what the service would be doing. I created a new acronym taking inspiration from ISP (Internet Service Provider), and the expanded name is Classifieds Service Provider.

In today's terms, we have become an Application Service Provider (ASP), but I still like the CSP name. We are starting to branch out into a more typical ASP relationship with some larger portals (Vertical Portals), where we will do a bit more customization for them. As opposed to the free program that any one can sign up for, we will do a bit extra to integrate two or more sites, and even take offline content and add it into the online content. These deals vary from revenue share to fixed fees for service.

3. What does it do?

It allows any webmaster to create a fully customized auction and/or classifieds site that can be co-branded to their website. See <http://bumpstop.com/bikes/> for one example of a site that one member has created. We have just added features that allow the site owner to specify not only the categories for their site, but also background image, text colors, font choices, table cell colors, etc.

4. What is the benefit of using your products or service?, i.e., what can I hope to accomplish if I use it?

Two benefits. One: there will be an incremental increase to your bottom line; and two: you will have a service that will bring Internet users back to your site more often.

We work on a revenue share basis, so you will share in the money your users bring to our site. Unless you have a "Business Opportunity" related site, chances are that you will not make enough money to quit your job, but many sites make from $20 to $100 a month off their traffic.

The largest benefit is that auctions and classifieds can create a "community" of users who will return to your site (we do not push our "brand") more often to look for new content or post more ads.

5. Why are you better than the competition?

We know the market. We are the oldest web classifieds, and have one of the first affiliate programs. Our program is the most flexible, allowing webmasters to fully customize and co-brand the content of the page presented. The interface is simple for the users, who are always 2-3 clicks from content. Page layouts are simple and intuitive, so my father can understand what to do and he does not get bored waiting for the page to load with his 33.6 modem.

6. Why did you start this business or service?

The main classifieds service was started to make money on the Web. Yes, we saw the Internet as a great way to build a business way back then. The business model changed a few times, but we saw the power of the Web and kept at it until we found something that worked with our target market.

7. How long has the service been in existence?

The main site went live in October 1994 (on of the first 10,000 websites, and one of the first 1500 ".com" addresses), and has been serving classified ads to the Internet audience since. We went live with our first member in April 1996, three months before Amazon launched their Associates Program.

9. How do you market the service? Word of mouth? Newsletter (subscribers)? Affiliates? Ads?

The largest source is users to our main (ep.com) and affiliated sites. Most members come from a link on our home page as well as on many of the co-branded pages we host. Word of mouth works great, but being listed in all the major affiliate directories makes the biggest difference. These listings are free, and work better than a Yahoo! type link since these are for our exact target market. Yahoo! does work great for bringing in general Internet users.

We tried a few banner ads, and spent thousands of dollars a month, but poor results after a while. Initially, we saw about a 10% conversion rate, which worked out to $1.20 per signup. Over time, the conversion rate dropped to the point where we were paying from $10-$20 per signup, and the quality of these new members was not great. The law of averages helps out, but dedicated personal solicitations by me to specific websites has brought in more high quality members than any other method. Since the other methods are free, cost per new member is great!

10. What does it cost?

Zero. In fact, we share back 20% of all ad revenue that comes from ads and display extras posted through your links.

11. How do I sign up?

Just go to <http://ep.com/b/csp.html> to read the simple terms (no legalese, yet), then go to <http://ep.com/ep/cspmgr.html> to start the sign in process.


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