Affiliates and crowd marketing

Mar 22, 2008

In this post I hope to explore an idea which has formed a major part of the sales strategy for some of the internet’s most successful retailers: affiliate marketing.

Affiliate marketing is the practice of allowing and encouraging third parties to participate in marketing a retailer’s products in return for a share of the profit generated by the sale. A frequently-seen example of this would be Amazon’s system, which allows third parties – often bloggers – to embed a specially-crafted link to a book on amazon.com. If someone follows the link and buys the book, the third party receives a small commission.

For bloggers, this often dovetails well with the blogger’s own desire to promote or recommend a book that they have personally enjoyed, and the recommendation carries more weight because of this. Obviously, the precise rate of commission offered will be an important calculation for the retailer, since they will not want to erode their profit margins. But the commission need not be extravagant; to some extent, it is simply the principle of a reward that matters.

Such incentives can, however, motivate more than individual bloggers. Often, charities, voluntary organisations and even political parties can make use of these affiliate deals, promoting products to their members or customers on the basis that a purchase made through such a deal will benefit the organisation. That it benefits the retailer too is not considered, but it most certainly is to the retailer’s benefit! The retailer gains substantially from these sales, made without any costs other than the commission paid to the affiliate.

These days, such affiliate programmes are used extensively by websites that exist to promote or recommend products based on reviews, feedback or some other mechanism. Sites such as BargainSpy recommend products which have been reduced in price or are otherwise available on special offer, taking a commission from those retailers that make affiliate schemes available. There is now a whole infrastructure of product recommendation and marketing, driving sales in large numbers, none of which is operated by the retailers themselves.

This can be seen as the beginning of a new model of doing business, in which the marketplace is mediated by the ‘crowd’, an amorphous collection of bloggers, recommendation site operators and other as-yet-unimagined affiliates. Retailers can gain substantial marketing clout from the crowd if they can create the right economic incentives. Typically, this means paying a commission. The question for retailers is whether the percentage cut in their profit margin on a given product is a more cost-effective use of their money than more traditional advertising. Amazon provides a compelling example of where that undoubtedly is the case, and countless other major internet retailers have followed their example.

Smaller retailers may have found it difficult to pursue this avenue. There is undoubtedly some administrative overhead in managing an affiliate system, and the software must be robust enough to ensure that the system operates reliably, only rewarding those who genuine drive business to the site and, equally, ensuring that all purchases which are made at the instigation of an affiliate are rewarded promptly. But these are largely questions of software and infrastructure. As time progresses, e-commerce software must incorporate the management of affiliate schemes as a standard feature. The economic imperatives are clear – a properly-structured affiliate system can grow a business and improve profits. And in a time of economic uncertainty, businesses will need to rely on such innovations to maintain growth.