Affiliate Marketing Gets a $3.3 Billion Wake-Up Call

Founder and Managing Director

A host of transactions in recent months are complicating the affiliate marketing space, making it abundantly clear that companies with affiliate programs need to take a close look at their network privacy policies and make sure that they have independent representation for their programs.

In particular I’m referring to the acquisitions of Ebates and Conversant by Rakuten and Alliance Data, respectively. Rakuten acquired Ebates for $1 billion and Alliance Data bought Conversant for almost $2.3 billion. That’s more than $3 billion worth of transactions in the affiliate space in the last few months alone.

The most interesting details of these transactions aren’t that they’re eight digits, but rather the complicated dynamics of all these different relationships and the conflicts that they may present. By their nature, networks represent both affiliates and merchants in the same transaction, just like a real estate agent who represents both the buyer and the seller. When the parent company of an affiliate network also buys one of the largest affiliates in the space, it raises a lot of red flags and also leads to an important question: Is an affiliate program and its data the property of the retailer, the affiliate and/or the network, and who can it be shared with?

Answering that question requires creating more transparency in the affiliate industry. For many retailers that means transitioning from Generation 1 to Generation 2 affiliate programs and ensuring that, first and foremost, their best interests are being represented.

You can thank Generation 1 programs for the affiliate marketing industry’s lingering poor reputation. There are a few striking differences between Gen 1 and Gen 2 programs, most notably the inexperience of their program managers, misleading success metrics and misattributed affiliate payout schemes.

Generation 1 programs typically:

  • Manage the affiliate program in house, using someone either without prior experience in the channel or who spends less than 25% of his time on the channel. Or the channel is managed entirely by the affiliate network, which creates that conflict of interest.
  • Judge program success by the number of affiliates and the overall affiliate revenue without consideration of attribution.
  • Place higher value on last-in attribution. As a result, the affiliate immediately before the point of sale receives the commission.
  • Include over 80% of affiliates from toolbar-based loyalty sites or low-value coupon sites, which are violating program and network rules.
  • Use multiple, competing affiliate networks. This falsely assumes that more networks results in larger reach.
  • Offer little to no transparency when it comes to affiliate activity. It’s not uncommon for Gen 1 programs to lack a referring URL that shows where affiliate traffic originates.

These recent industry acquisitions should signal that it’s time for companies with affiliate programs to understand exactly who runs their programs and how their incentives align. That’s where the transition to Gen 2 programs becomes important.

Gen 2 programs, often managed by an independent agency, have the ability to generate the highest ROI of any online marketing channel – all while assuring retailers that their data is in the hands of people who have their best interests in mind. These programs aren’t as large as Gen 1 programs based solely on the false notion of “affiliate revenue,” but their focus is on incrementality.

Gen 2 programs typically:

  • Manage programs with an experienced group of in-house managers or specialized third- party firms that partner with the in-house teams.
  • Judge program success by the number of new customers acquired and the amount of incremental revenue generated, using multichannel attribution models.
  • Compensate affiliates based on quality, looking closely at what type of promotion they do and their relevance to the brand.
  • Focus on high-quality, brand-aligned partners, with the goal of having top-twenty affiliates comprising less than 50% of the program.
  • Use fewer large-scale networks and often use SaaS programs to manage large partners directly.

The above differences in Gen 1 and Gen 2 programs are just a few of the reasons why larger merchants are seeking best-in-class independent networks or SaaS platform and independent affiliate management agencies that give them more direct control of their brand and their relationships.

For example, Target has partnered with Impact Radius to license technology for the Target Affiliate Network. With this type of affiliate program, Target has a first-party cookie relationship with its customers, owns its data and has direct relationships with its partners and affiliates that don’t require third-party approval. In short, the company is in control of its brand, as it should be, and the management agency only has one master: Target.

The large amount of financial activity that has taken place in the affiliate space recently is yet another reminder for companies to revisit their network privacy policies and contracts. Transitioning affiliate programs from Gen 1 to Gen 2 is the only way to ensure that affiliate programs are generating the most ROI possible, and that retailers can rest assured that their data and interests are in the most capable hands.

Robert Glazer is founder and managing director of Acceleration Partners

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