For Chadwick’s, Pay-for-Performance Pays Off

Like the customers he markets to, Neal Patrick, assistant vice president of marketing at Chadwick’s of Boston, understands value. When determining where to spend his marketing dollars to promote the off-price women’s apparel cataloger’s Website, he tends to lean toward the sure thing: the pay-for-performance concept.

Using a pay-for-performance model for online advertising, Chadwick’s pays a commission only when a prospect buys merchandise or requests a catalog. The cataloger pays a 5% commission on sales and 10 cents per catalog request. The beauty of this type of arrangement, Patrick says, is that “you end up not having to worry about the best placement of your marketing dollars. It’s self-selecting.” As an added bonus, Chadwick’s has been able to outsource the program, so Patrick is spending just a few hours a week on it himself.

Since the West Bridgewater, MA-based company shifted its online advertising program to Chicago-based Performics a year ago, Chadwick’s has attracted thousands of customers who were unfamiliar with the site. In fact, as many as one in 10 new customers discovered the cataloger’s site through an ad on another Website. “It’s been fantastic,” Patrick says. “We’re into the low double-digits as a percent of online sales that are coming from this program.”

Performics keeps a percentage every time a customer buys something or requests a catalog, though the company would not reveal the exact amount. But for example, if a cataloger pays a 10% commission to a site that generated a sale, Performics would get 2.5%-3%, with the balance paid to the partner, says Performics vice president Kate Bergin.

With Chadwick’s online sales now accounting for 15%-20% of the cataloger’s estimated $600 million in annual revenue, the growth potential is significant. During the first 11 months, revenue from the Performics program rose 30% a month on average, while the number of overall online transactions climbed 700%. And the average amount per order increased 9%, so that it’s now comparable to the $85 average order size that the Chadwick’s print catalog brings in, Patrick says.

Much of this growth came as Chadwick’s added partners to the program during the year, ending up with six times as many partners as when it started, though the cataloger declines to specify the exact number. You can find Chadwick’s spots on Ebates.com, Greatergood.com, Igive.com, and other merchant sites, plus on numerous search engine sites. Performics handles all the deals with partner companies.

A unit of $1.3 billion apparel and home goods marketer Brylane (owned by French catalog/retail giant Pinault-Printemps-Redoute), Chadwick’s had its first foray with pay-for-performance online advertising two years ago. The cataloger in 2000 forged a deal with Commission Junction to pay for online ads on a cost-per-click basis. Chadwick’s quickly generated more traffic to its Website, but the conversion rate in the “low single digits” was lower than expected, Patrick says. Chadwick’s subsequently arranged to pay only when a prospect requested a catalog or made a purchase.

A growing trend

Chadwick’s is part of a growing trend toward pay-for-performance online marketing. According to the Interactive Advertising Bureau (IAB), pay-for-performance deals represented 13% of a total $1.8 billion in Internet ad revenue during the third quarter of 2001, up from 11% during the third quarter of 2000. For full-year 2000, IAB suggests performance deals represented 10% of all Internet ad revenue, up from 7% for 1999.

Experts attribute the growth in pay-for-performance deals partly to the sluggish economy, which has made advertising a buyer’s market. “When the economy gets tougher and resources are more finite, more merchants are interested in performance-based advertising,” says Lauren Freedman, president of Chicago-based Web marketing firm The E-tailing Group.

“Online marketing is so soft now that publishers will acquiesce to advertisers’ terms even though they don’t like them. They just have to suck up and do it,” says Jim Nail, senior analyst at Internet marketing research firm Forrester Research in Cambridge, MA. But Nail also acknowledges that pay-for-performance is attractive to marketers who just aren’t sure that impression-based cost-per-thousand online marketing (paying a flat fee per each 1,000 visits to the page featuring the ad) works. “Pay-for-performance is a way of lowering their risk,” Nail says.

Will pay-for-performance lose appeal when the economy picks up? Chadwick’s of Boston’s Patrick doesn’t think so. “There’s always going to be a strong market for a pay-for-performance model,” he says. “You can’t just think it will go away.”

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