According to results from many MarketingSherpa Case Studies, online retailers are generating between 10-20% of their total gross sales through affiliates and commission-based partnerships.

While it may only be a smallish slice of the pie, it is a very sweet slice because when handled correctly these sales are pretty much guaranteed to result in net profits.

Which means that most Internet retailers are focusing heavily this year on improving their affiliate program results.

Wayne Porter, VP Product Development AffTrack, divides his time between running metrics reports for clients (who include some of the biggest B2C affiliate marketers out there) and advising them on everything from tactics to hiring.

This week we spent more than two hours prying his brain open to get lots of useful details on how to do better affiliate marketing. Here are our notes:


-> Quick backgrounder - Affiliates, Associates & Partners

Affiliate marketing first hit the Net mainstream in 1995 when Amazon launched its "Amazon Associates" program. At first it was limited to dot-coms, who raced to get thousands and thousands of affiliates signed up as a metric to impress VCs with. Indedependent online entrepreneurs, such as Ken Evoy of MakeYourSiteSell, who made piles of cash using affiliate marketing as their guerrilla tactic of choice.

Mainstream marketers; such as the fledgling Net divisions of traditional cataloguers and retailers pretty much ignored it. It was not, to their minds, exciting or proven. The ones who launched programs, generally stepped back and let them run on autopilot.

The dot-com bust caused three critical trends to emerge:

#1. Failing dot-coms left thousands of hard-working affiliates holding the bag. These affiliates had made millions in sales for the dot-coms, but no one was left to pay their commissions. Much bitterness ensued. Classic affiliates would never trust any merchant the same way again.

Now you have to woo them. Now you have to work with them. Never ever use the "a" word. They prefer to be called "marketing partners", a term which shows more respect for the relationship they have with you.

#2. Failing dot-coms dashed the ad revenue expectations of thousands of content Web sites, portals and email list owners. In 1997, portals could get $35 CPM for banners. Nowadays they're happy to get a lot less.

Two new classes of affiliates were born: Smaller content sites became "CPA affiliates" by agreeing to run ads for which they would only be paid a commission on sales.

Larger content sites and portals became known as "Super Affiliates" (although they vastly prefer to be called "Marketing Partner", "Publisher" or "Strategic Partner") by agreeing to run ads for which they would receive a commission on sales including a guaranteed minimum and/or a "slotting fee," or a hybrid deal structure that combines various components like pay-per-click, per action and or per sale.

#3. The economic downturn caused many marketers to refocus their strategy from general branding and experimentation, to direct response marketing that was as guaranteed-to-work as soon as possible. Marketing was accountable for the bottom line. Affiliate deals were suddenly very attractive.

Terminology has changed for marketers as well. If you are savvy you will use the term "performance marketing" instead of that old "a" word, to indicate you are paying based on performance.


Quick acronym guide:

CPC - cost per click
CPA - cost per action (note: the "a" sometimes stands for "acquisition" so be sure to ask which "a" people are referring to.)
CPS - cost per sale
EPC - earnings per click (note: confusingly some people say EPC to indicate per hundred clicks, others to indicate per single click. Never assume without asking.)


-> Working with Partners (aka Affiliates)

"The days when your success was marked by the number of properties you signed up for your affiliate program are over," says Porter. "There's a very distinct bell curve. Some people say 90% of your sales are driven by 10% of your affiliates. It's actually more like 98% and 2%."

Instead of promoting your affiliate program like crazy and accepting all and sundry who apply for it, Porter says you should focus your efforts on the most likely money-makers. These come in two categories:

#1 "Mid-Tier" Marketing Partners:

These include discount shopping portals, themed shopping portals targeting a particular niche vertical subject, outstanding independent search engine marketers ("guys who are exceptional at matching the algorithms and building funnel pages and funnel sites"), and niche content publishers.

If handled right these partners can make you from "onesy-twosy sales per month" to tens of thousands per month.

If handled badly, well, it is a close-knit community so the word that you are a lousy merchant (either because your site is not highly effective at converting clicks to sales, or because you treat partners disdainfully) will get around quickly.

Porter describes these partners' mindset, "They want to see that you respect them. 'I'm not your subordinate, I'm an independent contractor.'"

While cash bonuses are welcomed, offering non-cash incentives such as a sweepstakes or merchandise prizes is just about the worst thing you can do. "They say, 'I'm a professional. I don't want a chance to win a Palm Pilot. I want money. Don't send me your old office stuff.'"

Another mistake may be sending out an affiliate newsletter. While it can seem like a good idea, it can appear as though you do not take each partner's individual efforts seriously. You are sending a message that they are one of the masses, and not a uniquely valuable partner for you.

If you have so many affiliates that you can not communicate with them on a one-to-one basis, Porter recommends you (politely) drop the ones that are not making you any sales and start getting personal with the remainder.

#2: "Super-Affiliates"

As for the so-called super-affiliates, do not assume your work is done after you sign a deal contract and cut that initial slotting check. Your investment is near worthless if you do not handhold that relationship day-by-day to find ways to get the most qualified clicks from their site.

In both cases, you need to provide partners with as many tools as possible to help them help you. The old days of just posting a page of 468x60 banners for affiliates to choose from are over.

Best four tactics:

1. Bigger banners: Skyscrapers and 720x400 banners do exceptionally well on many sites. Also, offer a wide range of buttons with graphics and copy that you've already tested and optimized.

2. Text links and text-based email newsletter ads do well. Again test variations on the copy and offer partners the most powerful wording possible.

3. Photos and blurbs for all your SKUs make shopping sites' jobs easier.

4. Content rules. "The more content you can give - articles, product reviews - if you can actually make your content extend the value of their site, you'll do well," says Porter. "For example, a video retailer could give thousands of movie reviews to a site in a searchable format, that click out to you to complete the sale."


-> Hiring the Right Partner Manager

All of this relationship management is a full-time job. Which is why many sites we have spoken to in the past six months tell us their one new marketing hire for 2002 will be an affiliate manager.

Unfortunately, despite the fact that there are a lot of marketers out of work right now, that does not hold true for experienced affiliate managers. Porter says, "There are big shortages of qualified managers."

This does not mean you should go the lazy route and let your program languish without management, or hire someone unqualified and hope they will somehow handle it. "I've seen people hire former interns, assistants, even janitors", says Porter.

Here is his list of what you should look for in a potential hire:

- A good understanding of the Internet media
- Customer relations skills: Partners are your most important customers after all.
- Very good analytic and reporting skills
- Excellent written communications for relationship-building
- Unafraid to pick up the phone to schmooze verbally (note: many people who are fabulous in writing shy away from phones.)
- Obviously apparent integrity. This must be someone who has to convince, often wary, partners that they can be trusted.
- Charisma, charisma, charisma

Why is charisma so important? Because your brand as a merchant is based to a large degree on the personality of the manager who partners interact with. Your manager has to be someone who partners really want to work with, and be loyal to even when the competition comes calling with sweetheart deals.


-> Should You Use the Networks or Go In-House?

There are several types of affiliate networks (for example CPA ad placement services which are basically media brokers).

The networks we are referring to are the full-service networks that handle your program for you in terms of back end technology, promoting your offering to their pool of affiliates, policing against fraud (which is apparently rampant), cutting affiliate checks on your behalf, and providing sophisticated tracking services.

Four of the top full-service networks are:

Commission Junction http://www.cj.com
LinkShare http://www.linkshare.com
Performics http://www.performics.com
Be Free http://www.befree.com

Just because you invest in a network to handle your affiliate program does not mean you do not still have to hire an in-house manager for it as well. Your program requires one-to-one relationship building to be successful.

A plethora of affiliate management programs are available for merchants who prefer to pull the program entirely in-house. You can also hire consultants to help you.

Smaller merchants prefer to pull things in-house for economic reasons (for example, Commission Junction customers are required to pay a full-year's estimated affiliate commissions into an escrow account).

Very large merchants may also prefer to go in-house because you pay the networks a percent of every affiliate sale made through their system on top of the regular affiliate commission. For example, CarFax pays its top affiliates 30% commissions plus 10% on top of that to Be Free.

Porter says, "The biggest threat to the networks is you developing trust with large affiliates and taking the relationships off-network."

-> Competition and Commissions

How do you figure out how much to offer in terms of commissions? Porter says merchants tend to make a few basic mistakes:

Mistake #1: Basing your commission on what your competitors are offering.

Affiliates will choose you over your competition because they hope to make more money with you. This does not mean, though, it is just because you have got the same or a higher commission. If you have a higher sales conversion rate, a better reputation for honesty, and a charismatic manager, your commission could be smaller than your competitions' and still work, as long as it is not so small that you look like a cheapskate.

Mistake #2: Offering a chintzy commission.

Sales commissions are not the place to start acting like a tightwad. Closely examine your net numbers to see how much you can really honest-to-god afford. Then be open about it. Affiliates would rather work with an honest, smart company that's going to be in business over the long haul.

Mistake #3: Offering your best rate to everybody right away.

Top affiliates expect to get better rates than the masses. If you publicize your best rate to everybody, you have not given yourself any room to dicker or encourage.

Porter says, "They expect it. There's what you'll pay, and what you'll really pay."

Mistake #4: Offering a commission at all.

Some entertainment industry sites may not need to offer cash at all because most potential partners are involved because they're fans, not businesspeople. "You want to give them loyalty points. For example, we track your traffic and if you do well you get a free mug or some other type of merchandise." In this case affiliates are frequently referred to as "ambassadors."


Can you figure out who your competition's affiliates are in order to lure them away? Sure. Porter says, "I use Alexa and Google's Googlebar as I surf to locate good affiliates."

Should you worry about your partners competing with your own marketing? Paid search engine marketing is the place where this happens the most. Porter notes that Overture has begun actively discriminating against affiliates in order to keep more merchants buying paid listings.

"They actually headhunt paid affiliate links and throw them out, or make them tag their description as an affiliate link. Tons of affiliates have complained about this. It comes down to margins - merchants have more money to keep bidding against each other so Overture makes more money in the long run."

Even if you have some heavy search engine marketers as marketing partners, you'll probably have to invest in Overture marketing yourself.


-> Resources

Porter recommends merchants have their managers join the Internet Marketing Affiliate Association's online discussion forum. It is free, but you must be either a manager or directly involved in the industry.
http://www.usamc.org

The best managers can see the world through a partner's point of view. Porter's three favorite news and community sites for partners are:

http://www.associateprograms.com
http://www.revenews.com
http://www.abestweb.com

Porter recommends consultant Jeff Molander for merchants seeking strategic or tactical advice:
http://www.molanderassoc.com

To learn more about Porter, go to http://www.afftrack.com