AFFILIATE MARKETING - SECTOR DEVELOPMENTS: Gaining respect

Once they had a slightly grubby reputation, but affiliate networks are now firmly in the mainstream, and finding that the rest of the industry wants a piece of their success. UK sales generated by affiliate networks are estimated by E-consultancy at #2.16bn for 2006, a 60% annual growth, while online revenue from affiliate marketing averages 25% to 30% of an advertiser's total online advertising budget. You can read more here

The UK's top brands have caught on to the importance of affiliate networks to their businesses, and the calibre of both advertisers and publishers involved in the market has changed beyond recognition. "A few years ago we were seen as a dirty word in marketing," says Paul Coggins, executive sales director at affiliate network Zanox. "Now we're a must-have in online marketing budgets."

To Andreas Bernstrom, MD of TradeDoubler in the UK and Ireland, the stigma attached to the affiliate industry is a hangover from the days when there was a lack of understanding as to what exactly affiliates do. "It was seen as an area of shady dealing, in part because it's difficult to understand the intricacies of the business," he says.

Indeed, affiliates were - and to some degree still are - seen as a mysterious market to those brought up in the traditional marketing sphere. For those who think of online marketing as spending money on a banner on MSN, the idea of working with thousands of different publishers, in an environment that's often difficult to control, is alien.

An improving reputation

David Hall, client services manager at Digital Window, formerly known as Affiliate Window, believes that the cost-per-acquisition (CPA) model on which affiliate networks rely is still misunderstood. Paying upfront for online display is perceived as a more successful route than signing up with an affiliate network, in which advertisers pay only for the business that's generated as a result. "The more expensive something is, the more successful it's perceived to be," says Hall.

But the marketing world has had many of its presumptions overturned since the rise of digital channels, and affiliates have shifted out of the shadows to claim a place at the heart of online advertising. The industry has also witnessed a cleaning up of its image, which was tainted to some degree by publishers conducting arbitrage - directing traffic from one site to another and bidding on their own brands to generate cash for themselves through irrelevant search results.

Last year Google changed its search technology to force improved quality of landing pages, sending some of the less transparent affiliate operators packing. The emphasis was on weeding out irrelevant search results in favour of content-rich sites, and the affiliate industry has risen to the challenge. For the key players, the change was a long-needed one that cut out the smaller publishers working from their bedrooms and sustaining the murky reputation of the affiliates industry.

Affiliate networks have been keen to help publishers understand what Google's changes mean for them and to develop tools to help. TradeDoubler has launched a series of content units of pre-created templates relevant to particular market segments, around which a publisher can write content. Thus there are content units particular to the January sales or for insurance providers. "We believe content will win out," says Coggins, "and the shift has weeded out underhand practices." But he says the industry still needs policing. Hall agrees, having witnessed many underhand practices still taking place, such as the use of spyware and adware. "Every network says they don't use spyware but I find it all the time," he says.

Cleaning up the industry for good and setting best-practice guidelines is the next step in the evolution of affiliate networks, and the Internet Advertising Bureau is in the process of doing just that. An IAB Affiliates Forum has been in place since last March, bringing together players in the field to help develop standard guidelines and discuss industry issues. "We need more standardisation of rules and mechanisms," says Coggins.

Many affiliate networks are taking matters into their own hands, developing tools to police brands, for example, and ensuring that client servicing is top of their agenda. Higher professionalism has entered the industry as it moves into its next growth phase and finally gets the recognition it deserves.

Ad agencies were initially slow to pick up on affiliates, but there's now a recruitment drive to ensure they're staffed up with expertise in the area. "Agencies are now taking affiliates seriously," says Coggins. "We're a mature market that's grabbing large areas of budget."

With maturity comes consolidation and, with 20 affiliate networks in the UK, most are expecting a spate of mergers and acquisitions to whittle down the number of players in the market. The performance marketing model is top of mind within advertising companies and agencies, meaning that the affiliate space is becoming hot property.

Ad networks are showing signs of interest in adding affiliates to their portfolio, but most in the industry believe it's too late for new entrants to join. "If an ad serving network wants to break into affiliates, it'll need to buy an established player," says Digital Windows' Hall.

AdLink snapped up Affilinet in 2005 while AOL has offered #460m to buy TradeDoubler (see nma.co.uk 15.01.07). As the CPA model on which affiliates are based becomes increasingly attractive, affiliate networks can expect a lot of interest in their businesses and expertise. Google has mooted the launch of its own CPA product, and some search marketing companies are interested in developing CPA models for their clients.

Bernstrom says that the movement towards CPA adds extra endorsement to the affiliate model. "It allows advertisers to have a return-on- investment tool," he says. "There'll always be a place for CPM [cost per thousand] and branding, but the market is moving towards CPA. Our ad channel is so measurable and clients want to see what they're getting for their money."

To Alison Guise, UK country manager of Commission Junction, CPA is at the very heart of marketing. "Advertisers always calculate CPA regardless of what they do," she says.

But while the likes of Google are declaring their interest in CPA (see NMA 11.01.07), few believe that it will become a major part of the search engine's business and aren't feeling threatened by the increased encroachment on and interest in their business model. The affiliate networks themselves are expanding their remit, increasingly using other tools beyond pay-per-click (PPC) to generate traffic and extending their reach into other areas of the online marketing industry. The return-on-investment model they have perfected is now in such high demand across the broader online marketing industry that many networks which began as affiliates are developing a suite of products around their core business.

TradeDoubler has built up a portfolio of products, including an ad network and tracking solution, to complement its affiliate programme. It claims that its Swedish network would be the biggest ad network in the UK (see NMA 07.09.06). "Our experience has been in converting traffic into sales," Bernstrom says. "Whether its CPM or CPC, we're very good at converting."

Going forward, TradeDoubler is looking to cross-sell its products, bringing clients into its model from a variety of marketing solutions. Increasingly advertisers are looking for one-stop shops to produce their digital marketing solutions, and having a suite of products or expertise is the likely model for both agencies and networks.

Affiliate Window recently changed its name to Digital Window following a broadening of its portfolio. "We no longer just offer affiliates," says Hall. "It's about understanding businesses, using data-mining and offering more trackable solutions." But far from Digital Windows distancing itself from the affiliates model, Hall says that everything springs from the back of affiliates' marketing expertise.

Reshaping networks

As affiliate networks increasingly find themselves moving towards the centre of online marketing, many are evolving their proposition for both advertisers and publishers. Commission Junction conducted a research project in 2006 in which it sought answers to where the affiliate industry is heading and what needs to be done to assist its further growth and evolution. Guise says the feedback from the research was clear: "Advertisers and publishers need life to be simple. They want to partner with credible companies, and their needs from their network partners are increasing."

In the light of these findings, the network has invested in a radical change in the structure. Clients will now have a team dedicated to their particular sector and serviced according to their particular niche. Thus finance clients will have a specific team, travel clients likewise. The company is also planning to launch a website that includes microsites targeted at each of its key sectors, containing relevant research and white papers. "This is a dramatic change in the way we service clients. It's about getting the functionality relevant to each specific sector," says Guise.

At Digital Window, a similar shift has been taking place in a bid to both simplify and expand affiliate marketing for clients. The network found that some larger clients in particular were finding it difficult to set up and run an affiliate programme quickly. "We found there was a need for us to understand internally how to make affiliates as good as the rest of a client's business," says Hall.

New avenues for advertising

As online becomes more complex for marketers, particularly since the rise of social networking channels, affiliate marketers are needed to find new ways to engage with such new traffic. The number of publishing models is growing rapidly and affiliate networks need to watch and understand what the changes mean. The range of affiliate models is expanding to include publishing like blogs and social networking sites, and most players are broadening the range of players that can contribute to the affiliate industry. "It's about finding better ways to produce traffic without the negative impact," says Coggins.

Digital Windows is keen to make its workings more transparent and show the impact that affiliates have on a brand or business. "We need to be able to demonstrate true incremental growth," says Hall.

TradeDoubler launched a cost-per-call product last year and is increasingly introducing products that move users between online and offline. It will unveil a contextual product later this year, further broadening the remit of the network. Others are looking for new ways to link publishers to advertisers and of tracking results.

So as they increase in importance, affiliate networks are expanding their portfolios and broadening their reach. Some are seeking new territories to conquer in order to spread their model. Zanox, for example, is expanding into overseas territories as advertisers increasingly look for a global approach to their affiliates business. The network currently runs an affiliate programme for Dell in Singapore and Malaysia, and is looking to expand into China and Australia. "Advertisers want a one-stop global solution," says Coggins.

As the affiliate model is increasingly sought out by brands, affiliate networks are ready to take on the world.-Clare Goff

Summary

Affiliate marketing now outperforms growth in the online industry overall. Bad practices are being weeded out and the stigma attached to the industry is disappearing.

With the CPA model on which affiliates rely now being mooted by the likes of Google, and ad networks encroaching on their territory, affiliates are finding the market moving in their direction.

The return-on-investment model perfected by the affiliate industry is shifting to the centre of online marketing. This means extra competition for affiliate networks and, with too many players in the UK, the likelihood of consolidation in the industry.

Affiliates themselves are well-placed to expand their offering into new areas of marketing. Many are launching new products and offerings, broadening their reach and conquering new territories.

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