How the Affiliate Marketing Industry Killed Itself
Published: August 23, 2007
Author: David Rodnitzky
Affiliate marketers – most ecommerce businesses either love ’em or hate ’em. Admirers love the concept of having thousands of outsourced marketers working on your behalf and only get paid when they actually drive business to your company. Haters see affiliates as black-hat leaches who will use any underhanded technique to piggy-back on your good name and get revenue credit for traffic you could have driven without them in the first place.
Regardless of the camp you are currently in, my sense is that affiliate marketing as an industry is in decline. As I see it, there are three main factors that are driving this demise, and each of these factors are directly the result of affiliates being too aggressive, underhanded, or a combination of both. Sadly, the weakest link in the chain brings down everyone else.
1. Marketers Wised Up to Affiliate Tricks. A few years ago, it was relatively easy for an affiliate to game a merchant’s affiliate program with little chance of detection. Here’s three clear examples.
First, affiliates bought the merchant’s trademarked name on search engines. For example, there was a time when affiliates of the University of Phoenix could make a killing buying keywords like “university of phoenix” “u of p” and “phoenix degree.” Obviously, anyone typing in “university of phoenix” is highly inclined to fill out request for information form to learn more about the school (which would result in a payment for the affiliate that presented the form). Merchants soon recognized that the better solution was to ban affiliates from buying their trademarked keywords and to just buy them for themselves, avoiding an unnecessary middle-man fee.
Second, affiliates of ecommerce companies took this concept one step further by either buying paid search or optimizing organic search around “company name + coupons.” Thus, a user would come to a company Web site directly, select a product, and get to the checkout page and see a box that said “enter your coupon code here.”
Savvy consumers would then go back to Google and type in “company name + coupon” and be bombarded by affiliates offering the company’s most recent coupons. As soon as a user clicked on any of these sites, the affiliate would get commission for a purchase that they did nothing to drive. Translation: the merchant would have to pay the affiliate a commission, give the consumer a discount, and lose a lot of margin dollars they otherwise should have retained for themselves.
These days, merchants are catching on to this technique. The solution is either to severely restrict or ban coupons altogether, or to create terms and conditions that prevent affiliates for buying these coupon-related keywords.
Finally, there was a time when unsavory affiliates basically created spyware programs that would intercept a consumer prior to a purchase and insert the affiliate’s tracking code at the last moment. Thus, regardless of whether the consumer went directly to a merchant’s site or not, the affiliate still got a commission. While there are rumors that such link hijacking programs still exist, most major merchants now have systems in place to identify and ban any affiliates engaging in such practices.
In general, online merchants are just a lot more attuned to not just whether affiliates are driving revenue, but whether they are driving incremental and legitimate revenue that the merchant would not otherwise have gotten. Thus, the fact that your affiliate program is driving $300,000 of revenue a month is no longer necessarily a great thing. In fact, if that $300,000 could have been driven straight to your site anyways, and if you are paying a 10% rev share to affiliates, suddenly that $300,000 of revenue is actually a $30,000 profit loss.
Overall, I would say that the general attitude of merchants towards affiliates is one of caution and mistrust. Fewer and fewer merchants are willing to allocate a significant chunk of their marketing budget to affiliate marketing, precisely because the risk of bad players infiltrating your affiliate program is too high.
2. Search Engines Shunned Affiliates. I could make a pretty strong argument that Google AdWords was largely built on affiliate revenue. In the early days of AdWords (let’s say 2002 to 2005), affiliate marketers were a massive driver of AdWords profit. I know from experience that by 2005 there were dozens of affiliates spending close to $1 million a month on AdWords.
In the early days, Google was more than happy to take any money that came through the door. As Google’s business matured, however, Google realized that affiliate money came with a price. For starters, they felt that it decreased user relevancy. For example, if you typed in “University of Phoenix” and you clicked on an ad that took you to a landing page that required you to fill in personal information, and then you just got a “thank you” message afterwards, you might feel that you had a bad experience.
Having one affiliate in the Google search results would probably not be that terrible. But affiliates are aggressive at squeezing out every penny they can, and many affiliates began to create duplicate Web sites to show up multiple times on the same search query. Thus, if you did a search for “university of phoenix”, you were likely to see 9 out of 10 paid ads coming from affiliates, but in reality there were probably only two or three companies actually driving these 9 ads.
So now the user experience wasn’t just bad for one or two paid ads, but it was bad for almost every ad. It made Google a lot of money, but there was internal concern that these ‘scum marketers’ (an actual phrase that I am told was used at high levels inside Google) could jeopardize the Google brand of search relevancy.
By 2005, AdWords had moved beyond fringe arbitrage marketers and was approaching the mainstream. So much so that Google realized that there were plenty of ‘direct’ marketers who were willing to pay for spots held by aggressive affiliates. These direct marketers were no doubt not as savvy as the affiliates (who had been doing this for years, and who were benefiting from Google’s “keyword history boost”). The result was ‘good’ marketers being blocked by ‘bad’ advertisers.
Google’s solution was the infamous “quality score” algorithm, which was basically a way for Google to ban affiliates and “made for adsense” advertisers from the search results. Almost overnight, affiliates with 10 to 15 duplicate sites dominating top keywords were either reduced to one ad or eliminated altogether. Affiliates spending a million a month were reduced to maybe $100,000.
And this was the first of several quality score updates. Over time, affiliates saw their ‘keyword arbitrage‘ opportunities continue to shrink on Google. And, of course, whatever Google does is followed by their competitors. Yahoo and MSN have also introduced quality score factors (though they are still a little more willing to let affiliates in, as they have not hit the critical mass of advertisers that Google has).
Had the affiliate community adopted a self-policing system of ethics (no duplicate ads, no misleading landing pages, protection of consumer information), it’s possible that those inside Google battling on behalf of affiliates might have won out over those who sought to do anything possible – even at the expense of revenue – to distance Google from the affiliates. Again, the weakest link brought everyone else down.
3. Pay-Per-Performance Went Mainstream. I’ll admit that my final argument doesn’t really support the overall theory that affiliate malfeasance was largely the cause of the decline of affiliate marketing. That being said, I do think that the overall success of the affiliate model – pay for performance, not for impressions or clicks – led other distribution channels to conclude that they too should offer such a model.
These days, it is not at all uncommon to get pitched by agencies, display advertisement companies and now even search engines on a pay-per-performance model. And even if you still have to pay by the click or by the impression, the sales people selling you your spot now understand that their ability to get you to re-up for more spend is directly correlated to the ROI you achieve on your ad buy.
As a result, the appeal of having thousands of affiliates working on a pay-per-performance basis for your business is no longer as novel and exciting as it once was. Indeed, busy advertisers would much prefer to do one CPA deal with an Advertising.com than 1000 CPA deals with thousands of unknown affiliates.
As loyal readers of this blog know, I am often prone to hyperbole when making predictions (see my awesome post about the death of search engines from 2006). Before you write me too many angry comments, let me just state for the record that I know that there are plenty of totally legit and valuable affiliates out there. I also know that there are businesses that have combined technology with intensive management of their affiliates to produce a lot of incremental revenue from this channel.
But folks, the wild west days of 2005 are gone. Marketers are smarter, search engines are smarter, arbitrage opportunities are drying up, and pay-per-performance is no longer the sole domain of the affiliate. Affiliates filled several voids in the past, but – like the wild west – the amount of empty space just keeps getting smaller and smaller online.