A critical review of online affiliate models.

Author:Bandyopadhyay, Subir
Position:Report
 
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  1. INTRODUCTION

    An online affiliate is an Internet based company (website) that partners with an online merchant to refer customers to the merchant. The affiliate puts links to the merchant on their website or in their email sent to subscribers. These links can be banner advertisements or plain hypertext markup language (html) text that directs the viewer to the merchant's site. If the viewer visits the website, the affiliate receives money from the merchant based on the type of affiliate model the merchant is utilizing.

    When the Internet first became popular in the 1990s, there were a variety of online affiliate models that aimed at attracting visitors to their website. Many of these models simply paid Internet users to view their ads, many paid the visitor to click on the link and visit the company's website (pay per click), and some paid per purchase made. After the Internet bubble burst, the models were re-evaluated, and only a subset of the original affiliate models survived. Today, the most popular affiliate model is the percentage of the purchase. This is the predominant model in use because it is commission based and does not involve an initial outlay of money; affiliates are paid after the purchase has been consummated.

    Affiliate programs have faced trouble since the bursting of the Internet bubble. According to the Aberdeen Group by 2000, many companies were faced with the grim fact that online sales were not creating the anticipated profits and many companies folded their Internet marketing team back into their traditional marketing and advertising teams. As a result, affiliate managers often encountered more traditional marketing philosophies. This created a problem for the affiliate managers because the more traditional marketers did not want to pay commissions forever. The traditional marketers were used to one-time customer acquisition fees. Hence, affiliate managers needed to create new affiliate models. According to Aberdeen:

    "By 2001, it had become clear that ad banners would not deliver the conversion rates that online marketers required. Pay-for-performance and cost-per-activity rates (CPA) metrics began replacing cost-per-thousand (CPM) models that emphasized the importance of driving eyeballs to a Web site."

    Hence, new affiliate models have been created that relate more directly to the sales revenue that is generated.

    Despite the shake up in the online affiliate business, there is a plethora of new and old affiliate models available to an eBusiness. As a result, an eBusiness often finds it difficult to choose the right affiliate program. What is needed to make the right decision is to (1) identify the suitable affiliate programs available to an eMarketer, and (2) a set of critical success factors for these programs. A thorough review of the articles on affiliate programs did not yield a study that addresses the above issues. Our study is expected to fill this important void in the literature on affiliate programs. Our paper is organized as follows. First, we review all types of affiliate models currently available. We compare and contrast their distinctive characteristics. Next, we develop a set of critical success factors or criteria to evaluate individual affiliate models, and choose the right affiliate. Finally, we suggest how to manage the network of affiliate programs, and to measure the effectiveness of each affiliate.

  2. TYPES OF AFFILIATE MODELS

    In this section, we examine the types of affiliate models and how they work. There are many types of online affiliate models. Table 1 provides a summary of the major affiliate models. The primary models may be broadly grouped into three categorizes: (1) exposure based models, (2) revenue based models, and (3) hybrid models. Among the exposure based models, three most popular models are (a) pay per view (such as CPM), (b) pay per email, and (c) cost per activity (CPA) or cost per click. As for the revenue based models, three noteworthy models are: (1) percentage of revenue, (2) flat referral rate, and (3) pay per lead. In addition, there are a few hybrid models that combine the characteristics of revenue and non-revenue based models. Notable among them are (1) link exchange, and (2) combination models. In the following paragraph, we provide a brief overview of these models.

    2.1 Exposure Based Models

    2.1.1 Pay Per View

    There were a variety of pay per view affiliate models in the 1990's when the Internet first became popular. Pay per view simply means that the website pays an affiliate based on the number of times ads are shown to their customers. This type of model can also be referred to as a CPM (cost per mille or thousand ads shown) model. This type of advertisement has a fixed cost with very little chance of fluctuations. For accounting purposes, it is simple to implement this type of model. In addition, if you are selling a high priced item, it can be costly to provide affiliates with a percentage of the purchase price and hence it may be more cost effective to pay your affiliates based on the number of views your website receives. In addition, advertisers liked this type of model because it was the type of model that had been used in traditional advertising and therefore they were familiar with it.

    However, advertisers began to question this model in the early 2000's when the click through rates began to drop substantially. If the people viewing the advertisement are not purchasing the product, the merchant begins to question the value of the banner advertisements. Hence, advertisers were forced to reevaluate this type of affiliate model and adjust it accordingly.

    One of the most popular pay per view websites was AllAdvantage.com. This company paid its viewers to have an ad banner running on their computer while they were surfing the web. This was a very novel idea at the time, being paid simply to surf the Internet and have an unobtrusive banner ad running on your screen. However, many of their viewers did not even read the ad. Some viewers even found ways to cheat the program by adjusting the screen parameters so that the ad was not even visible, and also, by using software that simulated actual web surfing so that the banner was running when the person was not even online.

    Of course, this company has long since closed its doors and...

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