Are you curious about these small performance advertising networks featuring sports car give-aways and huge cash prizes?  Today I aim to take the lid off of affiliate marketing’s secret underworld of “affiliates that are affiliates of affiliates” (read: layers of middle-men).  I’ll give you the real story behind so-called CPA (pay-for-performance Cost Per Acquisition) networks—what they are, how they operate and why advertisers lose when working with them. 

I’ll also explain why every marketer with an affiliate program can learn a lesson from an affiliate-focused brawl between two affiliate solution vendors, aZoogleads and Valueclick’s Commission Junction, as it relates to eBay’s affiliate program (one of the largest).

Behind the scenes traditional affiliate networks are duking it out with their own affiliates who look to compete.  What does this translate to for marketers?  Whether you’re looking for sales or leads affiliate networks have become, in varying degrees, inefficient.  I endeavor to explain how:  Adware has played a role as has affiliate marketing’s intersection with search and, finally, CPA networks—miniature affiliate networks. 

CPA Networks Defined
In order to understand what a CPA network is one must understand, first, where they came from.  While this month’s Revenue Magazine discusses Cost Per Action networks and attempts to contrast them against “traditional” affiliate networks like Commission Junction and Linkshare, it fails to present the most interesting, useful perspectives that speak to why CPA networks are the work of the devil and what, exactly, they are. 

In order to understand what a CPA network is one needs to understand a few facts:

1) Affiliates have grown up to become affiliate networks
2) Many of your biggest affiliates aren’t affiliates; rather, they’re affiliates who have transformed into affiliate ("CPA") networks
3) These affiliates-now-networks are better at motivating affiliates than traditional affiliate networks

Confused?  Here’s an example.

An advertiser pays 10% to any affiliate (or “publisher") off the street through their CJ program.  It pays 15% to its very best or “super affiliates.” One day, a super affiliate realizes that it could use it’s privileged position and eliminate all the business risk associated with being an affiliate (buying advertising, conducting search optimization, managing product data feeds, testing creatives).  The affiliate simply approaches and motivates other affiliates to generate orders and/or leads for the advertiser… offering them 12%.  Hey, that’s better than the 10% “street” commission over at CJ.  The other 3%?  That’s profit for the super affiliate.  Indeed, it comes at the rate of 80-90% margin to the “super affiliate now turned network”—even after it has purchased 2 Porsche Boxters as contest prizes to their highest grossing affiliates.  Sure beats the little tchotckies advertisers themselves use as contest bait (you can keep your plane tickets Orbitz!). 

Dangers for Advertisers, Profits for CPA Networks
The result?  From the advertiser’s perspective, transparency is further clouded and affiliate accountability is diminished if not eliminated.  At this point advertisers are multiple arms length from the affiliates who present their brand—without access to their names, addresses basic company information, etc.  They literally have no idea who is presenting their brand, how or where.  Who does?  Their affiliate who has “gone network” on them.

Then again many big brands out there don’t care… “it’s a volume game”—the budget waste and lack of control (risk) is accepted as a cost of doing business.

Again, the “super affiliate turned network” takes its 15% and breaks it up.  It’s operational costs amount to an ISP / hosting bill as most of these cats are programmers and can easily create a tracking solution - or lease it from Digital River (who recently acquired DirecTrack’s tech solutions division).  In short, anyone can be an affiliate network today… so long as there are advertisers willing to pay the various layers.

Advertisers Waking Up
Increasingly, advertisers are being invited to understand the details of this rather scandalous shell game that translates to “serious financial waste” within their affiliate programs.  Of course, some marketers are more vulnerable than others based entirely on how much they choose to understand regarding how affiliates send visitors and rack up commissions.  Some are happy to not know the details, over-paying affiliates on occasion, while others are more frugal.

Increasingly, larger numbers of advertisers are troubled by this phenomenon and are making change by auditing affiliate programs.  As a result, affiliate rules, terms & conditions are being modified to reflect a more balanced financial arrangement. 

eBay Offering Retailers A Lesson
eBay knows how to run an affiliate program—paying affiliates based on customers acquired and percentage of actual profit (unlike retailers).  Also unlike retailers eBay has announced that it will not participate in Commission Junction’s (CJ) Link Management Initiative.  What’s good for the rest of Valueclick’s CJ unit isn’t good enough for eBay, a company that recently found itself in the middle of a spat between CJ and rival Azoogleads—an affiliate turned competitor; indeed, a CPA network that wanted to remain a CJ affiliate and have some direct relationships with advertisers. 

In summary, Azoogleads built its business on CJ’s back (as a super affiliate), got funded and then sat up and proclaimed itself a competitor (a CPA network). 

If I were eBay I’d be mid-stream on a seven year itch considering the circumstances.  Could the AzoogleAds - Commission Junction spat signal eBay’s love affair with Valueclick’s Commission Junction is waning?  Might eBay tell them both to kiss off?  While some might label this wild speculation I believe that eBay’s technical prowess is significant (read: they could easily build and implement their own tracking and reporting) and affiliate loyalty strong (affiliates are more likely to do what eBay suggests than take orders from a network).  Does the third party (network) really play a valued role?

How Super Affiliates Beat Networks
Indeed, the battle is over and in some ways affiliates that are now CPA networks have beaten the networks that helped create them.  They maintain much higher profit margins and are flush with cash to the point where they pay their affiliates in advance.

AzoogleAds’ funding, I thought, was remarkable.  I suggested in a blog at Revenews that VCLK had better pay it some attention.  To summarize, a few years ago large affiliates figured out that they could create a business much more lucrative than being an advertisers’ affiliate… even if they were receiving an elevated commission/bounty from you (the advertiser).  In fact, this “super affiliate” level commission would allow them to beat the affiliate network at their own game. 

Could Affiliate Networks Implode?
Almost like a cherry on top of a poison-laced sundae, the realization of this shell game might just send retail-based advertisers over the top.  Realization of the above described economics could be the straw that breaks their back and forces large, multi-channel advertisers - and even some smaller brands - to bring affiliate marketing in house—out of the hands of affiliate networks that have, in many ways, failed them.  Retailers have already realized:

- Affiliate marketing doesn’t scale well
- The promise of a “virtual sales force of teeming thousands” offers little value and increased risks
- As their own search efforts increase, affiliates offer decreased value (as affiliate search marketing tactics clash with the advertisers’ tactics)

When you realize how simple affiliate marketing tracking and reporting technology really is you start to see how a techno-Goliath like eBay (who should already formed tight bonds with its affiliates) might just take a pass on not only the shell game but the inflated costs that come with it.  I’m left wondering if the entire affiliate services industry loses here. 

As a side note, in September 2002 “auctions” made up 15% of CJ’s business according to publicly circulated documents defining “Vertical Market Strength.”