Affiliate Pricing: Designed to Fail?

Inplace #2

DM CONFIDENTIAL – The mass of people descending upon San Francisco’s Moscone Center can mean many things, one of them being ad:tech. It too can mean many things — parties, meetings, meetings, parties and more parties. Somewhere in between and during the mayhem comes the meat of the meaning — the deal-making. While it is always fun to see who is spending and what they are promoting, why ad:tech succeeds is not because of its content but because of the enormous number of people who use it as a way to squeeze in an enormous number of face-to-face meetings. And, no shortage of the face-to-face meetings are buyers meeting sellers –publishers meeting networks and networks meeting advertisers.

Were we to judge the state of performance-based advertising, we’d probably say “confusing.” Infrastructure plays like HasOffers and Cake Marketing are doing amazingly well. In demand as well are those who can help new customer acquisition companies scale. A wave of new ecommerce companies has meant a wave of those who have a model but need scale. It helps explain why companies who help them track and manage are needed, and it explains why those who can help them build and manage relationships while navigating the multitude of channels have lots of work.

Where it gets confusing is the more traditional CPA network. They were the cool kids — a mix of fast growth, fun and profits. They made money when times were good, and they made money when times were tough. They weathered the housing crisis and the credit crisis, but many of the most established and most successful are having a credit crisis of their own. The most recent red flag was that the parent company of Neverblue, Velo, was filing for bankruptcy. Velo’s core business is a microcosm of that impacting the performance industry — subscription billing practices. Is it subscription billing or something else?

Subscription billing worked so well because it enabled payouts that enabled media buying, and it is that focus on media buying which is arguably the biggest shift to have taken place within the CPA network space over the past five years. Owned inventory like email lists has not driven the massive growth — risk-taking on media and merging innovative business models that enables profitable spending has. Until now, how affiliates made that happen wasn’t called into question. It wasn’t until the advertisers couldn’t pay that both they and the affiliates started wondering what was up. A recent nugget of information may help explain things.

At a recent ad:tech, a top manager from an advertiser was leaving his job. A publisher through one of his networks came up and said something to the effect of, How about letting me know where you did your direct buying. I receive a super-high payout. I’d love to know where to spend. The answer was not unexpected — Can’t tell you — but for a different reason. It was not because even knowing where you (the publisher) wouldn’t make it work. The company overspent on direct buying and used the affiliate channel as a way to lower its overall acquisition cost. Did they overspend on direct efforts because they didn’t know how to do it? Or did they overspend because that was the true cost to acquire the traffic they wanted? The truth was closer to the latter. Certain partners were definitely better at buying but given the data advantage the company held and the improvement in third-party tools, the gap was not that great. Getting what they wanted simply would cost a lot of money, certainly more than they would like to spend.

This is one of the lesser explored issues in the performance marketing channel. So often the affiliates get blamed for bad traffic and bad behavior. Sometimes they do engage in bad behavior, but perhaps they do so out of necessity. If a company with perfect information can’t afford to buy media for anywhere close to what they want to pay, how can they expect a third party to be able to do so? And when that third party comes back with not exactly the traffic they want, is it really the third party’s fault? They brought back what they could, given what they had to work with. It truly is a funny thing that the lowest-risk options for advertisers, e.g., rev share, often receive a low percentage payout to affiliates, whereas they might want to pay more for less certain results. A good argument could be made that the affiliate model is not broken — the alignment of incentives is. If there were greater transparency and payments being made for the actual quality of the traffic, those with the ability to perform in quality not volume would receive the highest bounties. The quality over quantity debate is not new, but once advertisers see that trying to do anything but that is unsustainable, perhaps things will start to change.