I am going on record and declaring that the traditional 20-30% affiliate network performance fee model is headed for extinction.
Currently, there are significant pricing and structural changes taking place in the US performance marketing industry that are signaling what may be coming for the rest of the global performance industry.
For networks to remain relevant and competitive as the market evolves, they will need to embrace changes to a model that has not evolved with the times and is hindering the industry’s greatest opportunities for future growth.
What is the performance fee model?
At its core, a full service affiliate network has historically offered three main components:
- Technology (programme hosting, tracking, payments & reporting)
- Publisher development services
- Account management services
These services are in addition to ancillary functions, such as fraud monitoring, compliance, etc.
Rather than charge for each of these services separately, full-service affiliate networks usually charge a single “performance fee,” or “override” as it is referred to in Europe. This fee is typically a percentage of program revenue (e.g. 1-2%) or commissions paid to affiliates (e.g. 30%). The idea is that it covers those three main service components.
This model came of age in the early 2000s when affiliate marketing was a new industry and the networks provided the majority of new publisher relationships for retailers. Networks also tended to have publisher exclusivity in the early days of the industry, which helped make this fee model so popular.
At the time, the performance fee model made sense because:
- Retailers only had to pay the network when a sale was made.
- They had little knowledge of the publisher landscape.
- They were attracted to the wide base of exclusive relationships forged by the networks.
As a result, the performance fee model became the standard for the industry over the next decade.
Ongoing challenges with the performance fee model
There are two long-standing challenges with the performance fee model.
1. Conflicts of interest
In the performance fee model, networks represent both affiliates and merchants in a single transaction. This is comparable to financial advisors who get paid a commission based on their investment recommendations. Studies have shown that commission-based advisors dramatically under-perform those who are paid a fixed fee and are unbiased in their recommendations.
In online marketing, this is why no one hires Google to be their paid search agency. They understand Google’s goal is to sell more clicks.
2. A lack of transparency & accountability
The typical service agreements in the performance fee model lack both transparency and accountability. Retailers receive a single bill from the network that does not include specifics on the actual costs, time and resources that went into each part of their programme. These broad-templated agreements often don’t include service level agreements (SLAs) or contractual consequences if services go undelivered or standards/metrics aren’t met.
What happens if you need more account services? Or if your account team does not deliver or turns over? Or if the network missed fraudulent activity? In a performance fee model, these questions often go unanswered.
An example of a network that has done a good job with breaking these out is Affiliate Window. Their contract and SLA’s offer clear details about what their clients can expect of them for each component, as well as what the client’s responsibilities are.
This lack of price transparency has also resulted in many companies paying vastly different prices for the exact same service. It’s not uncommon for one company to pay a performance fee that’s 50-100% higher than another company - even when there’s no difference in the two agreements otherwise. Often the company paying the higher rate has an older agreement that auto-renewed or had not put the programme out to bid recently.
Here are five trends that threaten to bring an end to the current version of the performance fee model.
1. The dominance of mega affiliates
As the affiliate industry progressed in the 1990s and early 2000s, “mega affiliates” emerged. Mega affiliates are usually large coupon and loyalty affiliates often representing about 80% or more of the revenue for the largest affiliate programs. Consequently, they also drive about 80% of the performance fees. Mega affiliates are not proprietary to any one network and, in many cases, work directly with retailers on a day-to-day basis.
Although mega affiliates represent a large volume of programme sales, retailers are struggling to understand why these large relationships should demand a premium performance paid in perpetuity. This was one of the driving reasons eBay and Groupon decided to build their own in-house networks when their programs grew big enough. It’s also why Software as a Service (SaaS) affiliate technology platforms have grown dramatically in popularity.
2. The conscious uncoupling of technology & services
SaaS affiliate platforms came onto the scene about three years ago and have had a larger presence in the US market which has had a high degree of complacency and declining competition due to M&A. They immediately targeted programmes that were paying outsized fees to networks for a few high volume non-proprietary publisher relationships. Instead of charging traditional performance fees, SaaS platforms charge a fixed fee or a volume/transaction-based fee that is tied to product innovation. In turn, these platforms offer quality, white-labeled affiliate network technology to manage “direct” affiliate relationships for retailers.
By default, SaaS platforms provide price transparency to merchants for the technology aspects of their programme. Subsequently, this then puts a de-facto price on the other services (publisher development and account management).
For example, consider a large retailer who currently pays $1 million in performance fees to a network with 90% of that $1 million coming from fees to access the 10 largest mega affiliates. If that retailer compared that fee with what a SaaS affiliate platform offers, they’d likely find that it would only cost them about $250,000 a year to access their own private network. They’d also see that the network is essentially charging them about $750,000 for “publisher relationships” and “account management,” or approximately $62,000 a month.
The question is, how many retailers would pay a bill presented to them for $62,000 a month for “publisher relationships” and “account management?” Many might, if the value is there. However, for most, upon closer inspection, what the network is charging them for these individual services doesn’t add up when looking at each component. This is particularly true when the account team is made up of junior managers juggling 10-20 accounts at a time and the vast majority of revenue comes from just a few relationships that are non-proprietary.
3. The rise of attribution
The current performance fee model is also colliding with cross-channel and multi-touch attribution. Merchants have taken a hard look at last-click attribution and have discerned that not every sale is a “good sale.” They’re also seeing that affiliates are bumping into other forms of paid marketing, resulting in the retailer paying out multiple channels for the same sale.
Today, brands want to be able to better measure performance across all channels, gain a holistic view of their data and costs, and earn incremental revenue. This requires:
- De-duplicating multi-channel payouts
- Controlling fraud and off-brand promotion
- Preventing the use of in-cart and invalid coupons
- Blocking toolbars
- Preventing cookie stuffing, etc
Unfortunately, many networks have been resistant to giving their clients access to technology that offers these insights as it would significantly reduce commission payouts. This means a significant hit to performance fee revenue without an alternative means to charge for these technologies.
Rather than addressing clients’ underlying concerns about revenue quality, some US networks simply changed their fee structure to be based on total sales rather than a percent of commission. This ensured their revenue stream was unaffected by clients lowering commission rates for large partners and was done under the vein of “aligning interests”, which could not be further from the truth.
Take for example a retailer that pays coupon partners 1-2% commission and then pays the network 1-2% of sales. This structure pays the network 50-100% of commission value or “spend” which is unheard of in other online channels.
This behaviour demonstrates how the networks’ definition of “performance” is not always aligned with their client’s best interests and why brands are demanding new and different pricing models.
4. Growth of non-traditional partners
Changing the performance fee model is not only in the best interest of the networks and their clients, it also has the potential to unlock the industry’s biggest opportunity for growth.
As advertisers move away from relying on mega affiliates for the majority of their programme revenue, they are partnering with non-traditional affiliates. Non-traditional affiliates can include content sites, digital partnerships, referral programs and even business development relationships managed via a single performance tracking platform.
While brands are very excited about adding these new types of partnerships to their affiliate programme (relationships that they often forged and developed), they are not enthusiastic about bringing them to a network and then paying a 20-30% performance fee on them.
Advertisers want to pay a commensurate price for the value they are getting. These non-traditional partnerships need tracking, payment, reporting, account management and many other elements in order to be successful and effective. While networks are in a great position to meet this demand, their current performance fee model will keep this new revenue outside of the channel or drive retailers to a SaaS solution.
5. More programmes are moving than starting
In today’s mature affiliate marketing landscape, there are far more large brands switching networks than starting new programs. When moving a programme intact, the performance fee has interesting implications as programme revenue is not at all indicative of effort or costs. While networks provide valuable services, there needs to be a commensurate price for the value being provided.
For example, a few years back, a large US affiliate program with hundreds of millions of dollars in revenue was looking for a new home and were wined and dined by all the networks However, when this company was presented with the performance fee model, they asked two important questions:
- Why should the network make so much in performance fees for these existing relationships?
- Why would the performance fee not start at the baseline level of the existing programme, with a fixed fee to cover all the current business that was in place?
The company asked for fixed fee proposals in its RFP, which most of the networks and participants balked at. Ultimately, they chose a SaaS provider and were able to build-up their in-house and agency teams with more dedicated and strategic resources with the money they saved.
This situation was a watershed moment for the US affiliate industry. It not only propelled the SaaS movement, it also became an example for other large programmes to follow suit.
The networks’ counterpoint
Many networks contend the outsized fees generated from mega affiliates allow them to offer important services in other areas, such as long tail recruitment, R&D and compliance – services that would otherwise be unprofitable.
I’m strongly of the opinion that this logic is flawed and that price and value should be correlated. If someone doesn’t value something because it’s not clear what it actually costs, then they either need to do it themselves or change their perspective.
As an example, US FTC and State tax nexus compliance eats up a lot of our account teams’ time and does not grow a programme in any way. If a client does not value this service, we’ll happily exclude it from our agreement, give them a credit and turn that responsibility over to them. We don’t over-charge them for something else in order to cover that service. Doing so would skew the relative value in multiple areas and create expectation and pricing issues down the line.
Disintermediation and price transparency are coming to almost every industry in the world, something that does not bode well for the current performance fee model. Industries that haven’t adjusted to similar changes are suffering at the hands of players such as Zillow, Airbnb, Uber and Craigslist.
Looking towards the future
Here’s what I see when I look at the future of performance marketing fee-structures:
- Continued decoupling of pricing for technology, publisher development and client services. More fee-for-service relationships will involve itemisation of costs and resources so brands can make informed choices.
- Tracking and payment services for large partners will continue to become commoditised and will be based on a fixed fee or a dramatically reduced performance fee.
- Networks and platforms will need to differentiate on innovation, technology and client service. R&D will be driven by client demand.
- Transaction fees or usage fees will be based on programme revenue, volume, platform capabilities, etc. rather than a one-size-fits-all “performance fee”. I see them also being re-labeled as “platform fees”.
- True “performance fees” will be aligned to the sourcing of unique relationships and programme management that drives quality growth. For example, partners recruited directly by the retailer are subject to one fee structure. Partners recruited from or by the network or technology provider may be subject to an additional or premium performance fee. This is similar to the Impact Radius marketplace model.
- Performance fees for individual partners will not be paid in perpetuity. There will a cap or a time period at which point the fee structure will switch to a fixed or usage based model, more in line with traditional sales.
There is massive opportunity for a whole new group of partners to redefine and drive the performance marketing industry into the future. However, realizing this potential will require the existing players to embrace change and accommodate what the market is asking for. It also calls for more client-focused innovations and for companies to have the right team and resources in place to manage these next generation programmes.
This all goes beyond technology, publisher development and account management and extends out to creative, business development, outreach, and client services – and each of these segments will need to demonstrate tangible, attributable results.
Read more from our PI Columnists.