Background of Performance or Affiliate Marketing – 1

These articles describe the growth of the performance model for advertising based on a talk I gave in 2012 – and that is already history.

The internet has provided the advertising industry with an extra place to try to reach their markets. Indeed, advertising has become the default method to fund websites as the “information was meant to be free” dogma has been almost impossible to shift.

That said, the internet is not just another channel for advertising. Skills and practices from other forms of advertising will not always transfer or be sufficient to participate online. Online marketing really is different.

Reminder: The internet is disruptive technology – it has already disrupted the business models, methods, relationships and hierarchies of the travel industry, media, retail and advertising.

Forces that have changed the advertising industry include…

  1. Low barriers to entry – low cost, few geographic boundaries, few gatekeepers mean there are many more places to advertise.
  2. Distributed rather than mass audiences – fragmentation of advertising over many sites which also means fragmentation of advertising budgets
  3. Lack of control of the online medium – different browsers, ad blockers, distributed ads to third parties etc
  4. Different relationship between the advertiser and advertisee – more complex than one-way versus interactive and often many steps between them
  5. Globalisation of industry participants and audience/customers
  6. Loss of control by the state (regulation and tax)

1: Low barriers to entry means unlimited advertising space and opportunities

Traditional methods of charging for advertising assumed a scarcity value – there are only so many television channels and timeslots, only so many editions of newspapers and magazines with a standard size of page and only slightly varying number of pages. A number of professionals were employed to create and manage this advertising.

There is no scarcity of advertising space on the internet – anyone, anywhere, can put a site online and generate thousands of pages very quickly. One page per article increases the advertising space – and splitting an article over several pages multiplies the advertising space accordingly.

Also as niche sites build up low-volume but very targeted audiences, the problem of multiple pages to advertise on compounds with an escalating workload to decide which sites to advertise on, and how to manage the oversight and payments to an ever-increasing number of website owners.

Another rising problem was the setting of fees. Traditional media had distribution or audience measurements and rate cards, the audience of websites for run-of-site advertising or individual pages within a site is more difficult to judge and define. Wild claims of website “hits” were common… and still are.

2. Distributed rather than mass audiences

The nature of the internet with infinite niche websites rather than a traditional small number of stable television channels, newspapers and magazines means that rather than mass advertising to large audiences, advertisers needed to distribute their advertising through many channels to reach many smaller audiences.

This fragmentation of advertising over many sites, with existing websites changing and new websites coming online adds enormous costs in booking, management, monitoring and payment models. It also meant that the advertising dollars had to be spread thinner.

Clearly, new payment methods were needed and performance marketing stepped into the gap even though it often clashes with old-style business models. Advertising could now be paid for based on results, measured by views, clicks, leads or sales.

This, of course, leads to another problem. If you have moved from a small number of accounts to manage to a large number, you have created management and administrative problems.

Into this opportunity stepped affiliate and advertising networks who provide the marketplace, technology and accounting functions for large numbers of advertisers (merchants) and large numbers publishers (affiliates) to work together. Only larger, online-only advertisers tend to run successful in-house affiliate programs.

3. Lack of control of the online medium for Advertisers

Through these changes, advertisers were losing control over their advertising.

Technical issues. Web pages and their ads will appear different on different screen resolutions, different screen sizes and different browsers. An increasing number of users use ad blockers which stop advertisements displaying… although it is possible that the ads are downloaded and paid for despite not being shown.

Distribution issues. The network distribution brought a lack of control as the ads went on third parties, fourth parties, fifth…  Often advertisers have no way of knowing where their ads appeared, let alone deciding where they wanted them to go.

Placement issues. The performance model means that the publisher decides where the advertisements go, and will choose the advertising style and place most likely to perform (ie convert to a click, lead or sale).

As an example of placement issues, I have had advertisers request banner ads in places where I doubt their ads will produce the desired action to produce revenue.  I refuse because it would effectively mean giving them free branding.

Performance goes both ways – the ads have to perform to bring advertisers sales or other KPI, but they also have to perform for publishers to produce sufficient revenue. If I allowed advertisers to choose where and how their ads appeared on my sites, I’d make very little money. Having said that, I always give advertisers the right of veto.

4. Different relationship between the advertiser and advertisee – more complex than one-way versus interactive and often many steps between them

Relationships between advertisers and those who display their advertisements are loose at best.  While performance marketing is often portrayed as a win/win solution for advertisers and publishers, these were not traditional business relationships. They have aspects of the commission-based sales team, but few of the safeguards. Affiliates were often anonymous and untraceable.

5. Globalisation of industry participants and audience/customers

The technology of the internet means that businesses can deal with, and sell to, anyone, anywhere – particularly for services or electronic goods – which shakes up concepts such as distribution areas.

6. Loss of control by the state (regulation and tax)

Transactions that cross international boundaries create legal questions. Even more so, is the ability for global countries to operate out of the country with the most attractive legal and taxation frameworks, and cheapest or most most able workforces.

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