Cheap Affiliate Management Does Not WorkWritten by Robert Glazer
October 4, 2012 # 8:57 pm # Marketing Insights, Specials # 6 Comments
More often than not, companies that are not happy with the state of their affiliate program and/or their manager are struggling for one reason: they’re not devoting enough time and resources to the management of the program. In an effort to keep the total costs of their affiliate program low, many companies nit-pick the dollars spent on a third party agency or Outsourced Program Manager (OPM) rather than evaluating whether the fees for program management are justified through successful program performance.
Typically, marketing managers are far too focused on their OPM costs, which usually run under $3k a month, and are not paying nearly enough attention to the total cost of the program, which can run into millions of dollars. Thinking about the management costs of an affiliate program separately from the total cost of the program can be a costly mistake, as poor management can dramatically drive up the program’s total cost. Conversely, efficient and creative management of resources and talent can significantly impact a program’s performance.
The reality with most affiliate programs is that companies are getting exactly what they pay for with their management choice.
Firms that offer affiliate management services for a few thousand dollars a month usually operate in one of two ways. A smaller OPM often has an overstretched founder along with processes and people that do not scale, resulting in poor performance for non-core programs. Mid-size and larger OPM’s have figured out how to scale, but to do so they usually have to employ low-cost, inexperienced program managers and assign them to 10+ accounts, ensuring that each client program gets little to no quality attention. Incentives at these firms are often tied to the number of programs managed. Careful examination reveals that OPM’s with the highest manager-to-program ratios charge the least.
Another major downside of affiliate “McManagement” is that quantity-focused program managers, looking to make the program look good, go for the easy revenue.
They pay hefty commissions to low-value affiliates which include coupon sites, incentive sites, and loyalty and toolbar sites in order to show the perception of top-line growth. These affiliates often target customers that might have purchased from the brand directly and can potentially damage the effectiveness of other marketing channels. Also, when top-line growth is the focus, there is no incentive to control costs, even though the manager is making decisions virtually at will with their clients’ dollars that are being spent on commission and network fees.
By paying a higher fee to a reputable agency that is more engaged, companies generally get a stronger, more experienced affiliate management team that is focused on fewer programs. These teams are spending time building 1:1 relationships with higher-quality affiliates such as blogs, product feed sites, and content-based daily deal sites. They are also segmenting affiliates so that the highest quality (not highest volume) affiliates are paid more and low quality affiliates (which are often high volume) get lower commission rates.
Additionally, with this more time-consuming approach, companies save money on affiliate network fees, because the network fees are based on commissions paid. (This is also an important reason why every company should think twice before hiring an affiliate network-based manager, as there are inherent conflicts of interest with the network’s economics and management responsibilities).
Here is an example of how this plays out based on an actual “before and after” example related to total program costs for Acme Company.
- Scenario 1. Acme’s affiliate program has been managed by lower-cost OPM 1, as Acme believed that they could get a lot of value for very little cost. OPM 1 charged $3,000 and the account was managed by someone with one to two years of experience who also has nine other accounts to oversee simultaneously.
- Scenario 2. Acme brings in a higher cost and more talented, sophisticated agency/management team, OPM 2. They see it as an investment and want a focus on total program profitability. OPM 2 assigns a senior director with a support team to the account, and the firm focuses on only a handful of programs at a time.
On the flip side, Acme spends more money on experienced, sophisticated OPM 2 who gives their program significantly more time, energy and focus and whose managers’ success and compensation is not tied to the number of programs managed. Although they are now paying three times as much for the management, they ultimately save $265,000 – about 20% – because of the benefits brought by their team’s ability and the mandate to focus on the cost side of the equation. It is also important to note that this example is only focused on cost, and not the difference in quality of the revenue. When revenue quality is considered, the disparities are even more greatly magnified.As you can see, initially Acme is saving $60K annually on management fees, but this savings actually comes at a significant cost in other areas. Even though the company’s affiliate program revenues are identical under both scenarios, there is a big difference in the total money spent ($265,000) because OPM 1’s team lacks the experience necessary to really understand how a high-quality affiliate program should be run. With OPM 1, Acme ends up making substantial commission payouts to low-quality affiliates, and by extension to the network as well. It should also be noted that Acme was essentially entrusting a $9.2 million channel to the equivalent of a $30K year employee. In no other marketing channel would this even be considered—in fact, any other channel of this size would almost certainly have a senior manager and/or a supporting team.
Fundamentally, in the affiliate industry, as in most things, you really do get what you pay for. Make sure to keep the big picture in mind as you decide who will manage you program.