MarketingSherpa's December affiliate marketing survey results are in -- and the results are stunningly different from our expectations.

2004 has been a particularly tough year with merchants' fears of cookie stuffing and dishonest adware/spyware, CAN-SPAM legalities, and paid search arbitrage.

Many experts, including us, worried these factors would drive the estimated $1.5 billion affiliate marketing industry into a decline.

Guess what? According to our survey results, affiliate marketing is alive and well. Overall 91% of surveyed merchants and 82% of affiliates expect revenue growth in 2005.

(Yes, we sliced the data several ways to see if these rosy projections were just from newbies and hopeful small-fry. They generally weren't. Both typical super-affiliates and merchants with established programs forecast a good 2005 along with everyone else.)

What's up? Here's more data on our findings along with expert commentary...

Key worrisome tactics: Search, email, pops, and desktop apps

Why are MarketingSherpa editors and outside experts alike worried about the future of affiliate marketing? Four key worrisome tactics will directly affect revenues:

Tactic #1. Search marketing

According to stats we've seen from affiliate management systems, somewhere between 30-40% of affiliates depend almost entirely on search engine marketing to drive traffic.

Of our affiliate survey respondents:

- 49% of all affiliate respondents said they would *not* be willing to work with a merchant that banned all paid search ads

- 27% said they wouldn't work with a merchant that banned trademark search ads

On the other side, 51.1% of surveyed merchants had restrictions on search marketing. 8% said no affiliate could use any search; 7.4% allowed organic search campaigns only; 21.3% outlawed paid ads against trademarks and top terms; and, 13.4% restricted trademarks and top terms to super-affiliates only.

We suspect affiliate revenues driven by search will decline in 2005 because:

o The Google "death dance": Rumors abound that Google's about to crack down even harder on affiliate marketers in early 2005. The engine's continual algorithm changes have made it difficult for affiliates relying on SEO to maintain decent rankings this year. Plus, soon affiliates' paid AdWords may be rejected entirely for many terms if not all.

Short-term this would hurt Google revenues, but we suspect they think the reduction in potential trademark lawsuits, plus increasing merchant AdWords accounts, will make up for it.

o Trademark protections: Merchants are beginning to clue in that trademarked terms (especially their name and variations on their URL) are seriously easy and profitable to run both paid search and SEO campaigns for. Let's face it, your intern can run a trademark search paid ad program. So why let affiliates in on the easiest search pickings?

Many marketers debate that affiliate ads protect you somewhat against competitors' ads sucking up clicks that should rightfully be yours. Yes, affiliate marketing consultant Jeff Molander told us, but so can lawyers' letters. Which would you rather do, pay a lawyer or give out affiliate commissions plus pay more for your own PPC campaigns on the same terms?

o Optimized ranking protection: Some search engines will hurt or ban your listings if they think you are creating a series of mirror sites copying the content on your main site in order to fool them. Some affiliates' pages can look an awful lot like mirrors...

o Search marketing accountability: The days when many merchants relied on affiliates to handle search may be soon over because it's just too risky to put a primary traffic driving tactic in the hands of a third party who is neither directly employed by nor accountable to you.

If search traffic is critical to you, you should maintain as much control as possible.

Tactic #2. Email marketing and CAN-SPAM

Only 10.8% of surveyed affiliates described themselves as primarily an email marketer. David Lewis, President 77Blue, which builds private-label shopping sites for organizations seeking to profit from affiliate commissions, told us the CAN-SPAM act definitely caused merchants to elminate spammers from their affiliate ranks.

Previously many merchants barely (if at all) policed affiliate email. Now according to our survey, only 13.4% merchants allow affiliates to email without restrictions.

We were dismayed, however, to learn how few merchants pro-actively police email. 44.8% rely on passive policing, saying "affiliates must promise not to spam and if we hear a complaint from a spam recipient, we'll cut that affiliate." Only 12.7% pro-actively track affiliates' email campaigns to make sure no spam occurs.

Just 11% require affiliates to run their email lists against the merchant's DNE (Do Not Email) suppression list prior to mailing. According to our reading of it, this actually *is* required by the CAN-SPAM Act.

18.1% of merchants are avoiding the email legal mess altogether. 13.1% simply allow no affiliate email at all, and 5% only allow emailed promos in editorial newsletters (which are not covered by CAN-SPAM).

On the affiliate end, 72% said they might continue to work with a merchant who required using suppression files prior to mailing. 49% said they would bail on a merchant relationship if email were banned entirely.

So, our question is, why aren't more merchants offering secure suppression files to affiliates so everyone can keep mailing legally? (See link below to a system that works.)

Tactic #3. Pop-ups

Although consumers say they hate pops, the darn things still work well enough that 24% of surveyed affiliates told us they would cease working with a merchant who banned pops.

Our take on the matter -- be careful because pops can damage your brand. We strongly urge merchants to put pop rules and regs into place especially regarding frequency caps. It's one thing to allow affiliates to use a tactic that works, it's another thing to allow pop proliferation to annoy your marketplace so much they begin to hate you.

Tactic #4. Dishonest desktop applications (adware/spyware)

65.1% surveyed merchants say they worry about cookie stuffing and adware/spyware (practices whereby affiliates can gain commissions from traffic they weren't directly responsible for driving to your site).

34% said they only allow "pre-approved" desktop apps to be used for affiliate marketing, and 31.1% said they never ever allow desktop apps.

The problem is, many merchants don't have any sort of tracking in place to catch rule breakers. (See measurement section below.)

In fact, Harvard grad student Benjamin Edelman is currently the lone giant in this field. His blog (link below) serves as the best resource for fretting merchants.

Are branded destination sites the best affiliates of all?

Merchants have long admitted that only 2% of their total affiliates really perform worth a dang. In general, these consistent performers tend to be known name brands and niche content sites that get traffic of their own accord.

These include loyalty sites (cash and point rewards systems), couponing sites, charitable organizations, and beloved vertical content sites. They build a brand name that's searched for, they build their own permission list, and they build a relationship with consumers which they then use to pass on buyers to you.

Merchants' concerns about search, spam, annoying pops, and unethical adware tactics are all solved.

However, we don't expect significant affiliate revenue gains to come from these affiliates. And, neither do they. As a group, they were the least likely to predict their revenues would "rise a lot." 53% predicted revenues would stay the same or "rise a little."

Why? Well, most are well established and fighting for market share in a stably-sized pie, rather than entrepreneurial launches.

This very stability points to a major problem for merchants who rely on affiliates to drive new customers. Consumers who like these sites are likely to click loyally using the affiliate link even though they've bought from you many times in the past.

You're paying for returning traffic -- not newbies. Which is fine, if that's what you budgeted for.

However, only 41% of surveyed merchants currently track new versus returning customers from affiliates. An additional 22% said they'd add that capability in 2005. We hope they are not in for a nasty shock when they do so.

The days of blithely assuming affiliate marketing is de facto acquisition marketing are likely to be over.

And, when affiliate marketing gets moved from the acquisition silo to mingle with the rest of your retention campaigns, we suspect merchants may find the price is unexpectedly high.

Requesting that we keep their names off the record, several very large merchants have told us they plan to change affiliate commissions in 2005 to reflect this fact. A few will lower commissions across the board; some will only commission on new customers; and others plan to maintain commissions but add a bounty payment for newbies.

The latter is probably the safest course to steer short-term.

Worth noting: 23% of all surveyed affiliates (including 27% of branded destination affiliates) told us they would *not* work with merchants who only commissioned new names even if the commission were much higher.

Improving results measurements

Ugh! 37% of surveyed merchants have no plans to track new versus returning customers from affiliates in 2005 and 35% have no plans to track affiliates' campaigns by lifetime value.

In fact, the only measurements most merchants currently apply to their affiliate campaigns are:

o 91% by total sales per month o 84% by total clicks received o 78% by click to conversion rate o 71% by commission level

Just 58% tracked by type of marketing tactic used (which makes us wonder how they hope to police bad-egg affiliates, or to learn valuable lessons from affiliate tactics that could be applied profitably in-house).

The first rule of successful direct response marketing is measure, measure, measure. (The second is test, test, test, which you can't do without measuring.) Yet, most merchants' measurements are sadly lacking.

This fact makes us wonder about their optimism for 2005. Are they basing high hopes on gut alone and a revived economy? Many may be.

So, what can you do to increase affiliate revenues? Five tactics:

We asked consultant Shawn Collins, who has worked both sides of the affiliate/merchant fence extensively, what steps merchants can take to overcome the odds and grow affiliate revenues.

His five recommended tactics:

1. Try offline marketing: To sign up new affiliates for one merchant, Collins recently tested a snail mail postcard campaign (link top sample below). He got a 10% response rate!

2. Gift your affiliates: Collins estimates only 2% of affiliate program managers send affiliates anything for the holidays beyond perhaps an ecard. While affiliates are in this game for the cash, a gift such as a flat screen TV or iPod can go a long way to maintaining happy relations.

3. Give super affiliates more cash: We thought everyone used this proven tactic to get more performance from your most profitable relationships, but according to Collins, it surprises many marketers. Consider your best affiliates value-added resellers. Treat them as well as you can.

4. Allow affiliates to do search PR: Running optimized press releases on wire services that feed Yahoo, MSN and Google News is the last bastion of easy search engine optimization. If you're not geared up to handle it yourself in-house, consider allowing a few super affiliates to handle this for you.

The good news is press releases have a limited lifetime on the search news engines, usually about a month. So you can turn off that switch whenever you are ready to take over the tactic in-house.

5. Consider a blog and an XML-newsfeed: Due to the nature of your promotional materials, content filters may be stopping the update emails you send affiliates. Collins now supplements email with a regular Blog and XML-feeds with news and promo links for affiliates.

Useful links related to this story:

Charts from our top-line survey results, plus creative samples from InstrumentPro.com's affiliate outreach campaigns: http://www.marketingsherpa.com/affmarket/study.html

Benjamin Edelman's great blog on adware and spyware http://www.benedelman.org/

Our favorite group weblog (blog) on affiliate marketing, with more than a dozen of the top affiliate marketing experts sharing and analyzing news: http://www.revenews.com

Typical XML feeds from merchants for affiliates who may not get email: http://feeds.feedburner.com/AMWSO

Kowabunga - the affiliate management system that helped spread the word about our survey to affiliates and merchants. http://www.kowabunga.com

UnSubCentral.com - the secure DNE (Do Not Email) list suppression service some merchants require affiliate emailers to use. (Disclaimer - MarketingSherpa Inc is also an UnSubCentral client.): http://www.unsubcentral.com

Molander & Associates - Consulting for Merchants http://www.molanderassoc.com/

Shawn Collins Consulting http://www.shawncollinsconsulting.com