Issues That Might Lead a Merchant to NOT Offer a Public Affiliate Program (Negatives)

By , November 1, 2007

As a consultant, I earn much of my income by advising merchants who seek to add an “affiliate program” (also called an “associate program,” “referral program,” or “partner program”). However, not all merchants should have affiliate programs, and even those who can benefit from an affiliate program should be aware of certain “drawbacks.”

  1. “Diversion” – Conversion of Free Referrals to Paid: For any established merchant, there is a risk that adding an affiliate program may result in “diversion” of previously unpaid referrals to paid status. Before adding an affiliate program, such merchants must be confident that profits from “new business” will exceed the potential diversion loss.
    • Current referrers sign up for affiliate program: It is possible that some “free traffic source” sites, which are currently referring customers to you without compensation, will join the affiliate program to earn commissions from those referrals. To evaluate this risk, review your site logs and “analytics” reports to determine how many sales result from “unpaid referrals.” (Be sure to evaluate the impact of paid advertising, including CPM or PPC/CPC advertising that may appear on third-party sites through Google AdWords/AdSense. If you’re already paying for traffic, the “diversion risk” is lower.)
    • Prospects may join affiliate program to get a “rebate” on their own purchases: Many webmasters (affiliates) recognize that “affiliate programs” afford an opportunity to earn commissions or rebates on their own purchases; if your customers are relatively sophisticated, they may join the affiliate program only to earn commissions on their own transactions. If potential affiliates perceive that their referrals are likely to use this “rebate” strategy, they will less inclined to participate in the affiliate program.
      • The most common “solution” to this “problem” is to set a minimum-payout threshold larger than the commission on a single sale transaction. This solution doesn’t work with an “affiliate network” that provides consolidated payment.
      • If elected to bar affiliates from earning commissions on their own transactions (as Amazon and some other merchants do), the affiliate manager would face some additional compliance work to detect such transactions and reverse them.
      • Another strategy to combat affiliate worry (about customers using the affiliate program to earn rebates) is a two-tier affiliate program, which provide a share of commissions to affiliates who refer other affiliates who then refer customers.
    • Affiliates divert natural/organic search traffic: Affiliates who are successful with SEO (search engine optimization) strategies are likely to obtain favorable position for key search terms that currently drive substantial traffic to at no direct cost. This may even include searches for “” (Most merchants conclude that over time, this is offset by additional business.) Some affiliates may also find “paid search” (PPC search) opportunities that divert some search traffic from organic to paid-affiliate status.
    • Affiliate divert paid search traffic: To the extent that has been successful in obtaining profitable customers through its PPC (pay-per-click) search campaigns, it may discover that some affiliates are successful at drawing some of this traffic themselves, either running “direct-to-merchant” or “affiliate” search campaigns. If the normal cost of PPC search is lower than the affiliate commission, this could result in a net cost to (Again, most merchants conclude over time that adding “PPC search affiliates” increases overall traffic and sales, and often draws traffic at lower cost than in-house PPC search.)
    • Incentive Sites: A number of internet companies promise consumers either “rebates” or “charitable donations” based on a share of affiliate commissions, if the consumer uses the “right” affiliate link before making a purchase at a merchant site.
      • Such affiliates generally do not bring new customers to a merchant, but instead “poach” a transaction that should properly be attributed to some other source (which increases the merchants’ costs, reduces the accuracy of other reporting methods, and alienates affiliates whose commissions are poached).
      • Some “incentive affiliates” are actually “fronts” for “parasites,” who use the “incentive” business model as a pretext for the lack of referring URLs in most of their affiliate links, and for their unusual (high or low) conversion rates.
      • On some affiliate networks, these sites are flagged or assigned separate categories so that merchants can allow or exclude them; some unethical incentive affiliates actively circumvent such methods.
      • I recommend that merchants exclude “incentive” sites from affiliate programs. Such an exclusion will add compliance costs.
    • Coupon Sites: As you’d expect, many consumers actively search for such codes before completing a purchase. Merchants who display a “coupon” or “promotion code” prompt during the checkout process remind many more consumers to search for a coupon. This can result in affiliates “capturing” transactions which they did not originally refer.
      • When I review merchant site logs, several of the top-100 search phrases are usually variations of “MerchantName coupon” or “MerchantName promotional code.”
      • If affiliates promote such offers or if affiliate sites appear in search results for these terms, they will draw a substantial amount of traffic from these searches, collecting commissions for many customers who were already in the checkout process.
      • Another risk (of a “coupon prompt”) is that some of your competitors or their affiliates may seek high organic or paid placement for “your” promotional search phrases, in order to divert your prospective customers to buy from them instead. (This risk is increased if you prohibit your own affiliates from promoting your coupons.)
      • I always recommend two actions to counteract this risk: “get rid of the prompt” and “create your own coupon page.”
        1. If possible, don’t prompt for a coupon code at all; or move the prompt “below the fold” and below the checkout button; or suppress the prompt if a code has already been applied to the shopper’s cart (so that the application of an affiliate coupon will suppress the prompt that might otherwise divert credit to another “coupon affiliate”). These strategies may require additional (probably complex) programming work by your staff.
        2. Create your own “coupon page” at your own site, so that it will appear first in an organic search for “MerchantName coupon” or “MerchantName promo code.” Note that this is an important strategy even if you offer no coupons (if the page says “there are no currently valid coupon offers” [ideally in the page title], then fewer consumers will click to coupon sites.)
      • Some merchants (including actually offer lower commission rates to “coupon sites.” This policy creates additional “compliance costs” for the affiliate manager.
      • Some merchants prohibit affiliates from promoting coupons or promotion codes. This policy creates additional “compliance costs” for the affiliate manager.
    • Parasites intercept customers: Hundreds of unethical companies use a variety of illegal strategies to accrue affiliate commissions on transactions for which they have made no contribution whatsoever. This can include “toolbars,” Trojan-horse and virus programs, and other strategies which monitor a consumer’s internet activity, replacing URLs with affiliate links whenever possible or “stuffing” cookies so that the affiliate is credited for transactions that actually came from some other source. (Merchants can reduce the impact of “parasites” by avoiding networks like CJ which allow their participation, by actively monitoring and auditing affiliates whose activity appears unusual, and/or by subscribing to, which monitors and reports parasitic activity.)
    • Employees May Divert Sales: It is also possible that your own sales agents and other employees might use affiliate links to generate affiliate commissions on transactions which otherwise would not be commissionable. They might divert affiliate commissions to themselves, to family members or friends, or to “fake identities” created for this purpose. This may require changes to your employment policies and your independent contractor agreement(s).
  2. Costs of running program It’s extremely important to recognize that there are substantial costs to create and operate an affiliate program. These include:
    1. Setup fees (and other implementation fees) charged by an affiliate solution provider;
    2. Staff or contractor costs for technical implementation of the affiliate technology on the merchant’s site (the same technology can be used to track “non-affiliate” referrers also);
    3. Staff or contractor costs to create the “affiliate content” on your web site (recruitment page, affiliate agreement, terms & conditions, policies, FAQs);
    4. Staff or contractor costs to adapt and create “banners and buttons” and text ads for use by affiliates, and to create and post category and text links for affiliate use;
    5. Staff or contractor costs to manually “hold” or “extend” transactions, to monitor transactions, and to manually modify or “reverse” transactions that do not meet required contingencies;
    6. Monthly minimum fees charged by the affiliate solution provider;
    7. Commissions paid to affiliates;
    8. Fees paid to the affiliate solution provider (typically a percentage of affiliate commissions); and
    9. Perhaps most significant, staff or contractor “affiliate management” costs to recruit and manage affiliates (including “compliance”). Many merchants spend an additional 20% to 50% of the affiliate commission amount on “affiliate management” and other overhead for the affiliate program.
  3. During the first few months of an affiliate program, costs will far exceed gross revenue, and even over the first year, costs are likely to exceed profits from affiliate-driven transactions. It is likely that the affiliate program may generate zero new sales in the first 60 days.
  4. Limits on Future Changes
    • Once an affiliate program is launched, the merchant faces new limitations on future business changes. Most important, if a merchant offers a large commission, then it may become harder to engage in price competition with other merchants who have no such cost.
    • In addition, affiliates tend to be more vocal than other consumers, so any action that makes them unhappy is more likely to generate negative publicity. This creates some “positive pressure” on a merchant to deliver “best-of-breed” customer service and reliability. If a merchant later seeks to “reduce expenses” in ways that impact customer service or reliability, affiliates’ negative reaction may be “louder and wider” than if no affiliate program were offered. (Affiliates can also represent the “canaries in the coal mine,” whose complaints may be earlier and more vocal, which could benefit a merchant.) However, since already has a customer base made up of “webmasters,” I’m not sure this “amplification” will be as significant as it is for other online merchants.
    • If a merchant offers an affiliate program and then later makes the business decision to reduce commission rates or to end the program, then there is a huge risk that some of the affiliates will be bitterly (and vocally) upset.
  5. No Boost in “Link Popularity”: Some merchants mistakenly believe that an affiliate program will increase the company’s “link popularity” as measured by Google’s PageRank or other measures. This is untrue for affiliate programs where links pass through an intermediary (nearly all “affiliate networks”), and it is increasingly untrue even for merchants with “direct affiliate links” such as Amazon (whose affiliates have historically boosted its PageRank). However, the presence of affiliate links on “web-marketing or webmaster-themed” forums, how-to sites, and directory sites may result in discovery of your company by others who are creating directories, and thus may result in additional unpaid links, over time, which might eventually increase PageRank. It is possible to design an affiliate program which incorporates “direct linking,” but most SEO strategists don’t believe that even a direct-link affiliate program will have a significant impact on PageRank or other “optimization” measures. Probably the single most significant “SEO benefit” from an affiliate program is simply the increased traffic generated by the program, as Google’s toolbar and other tools are used increasingly to measure actual page visits by consumers.

  1. Issues That Might Lead a Merchant to NOT Offer a Public Affiliate Program (Negatives)
  2. Public vs. Private Affiliate Programs
  3. What Factors Do Publishers (Affiliates) Consider When Selecting Advertisers (Merchants)?
  4. Affiliate Technology & Network Choice
  5. My Usual Recommendations (for Merchants planning an affiliate program)
  6. Affiliate Recruitment Strategies and Practices
  7. Captive and Stealth Affiliates
  8. Affiliate Program Policies
  9. Outsourced Program Management (OPM) for Affiliate Programs
  10. Selling the Affiliate Program
  11. Types of Affiliates (Web Publishers)

One Response to “Issues That Might Lead a Merchant to NOT Offer a Public Affiliate Program (Negatives)”

  1. Milan Jara says:

    Hi Mark,

    Thanks for writing this. As a merchant this is very important set of information.

    Me myself am wondering if most of my sales were really from prospects that found my website and were ready to buy.

    I like the idea of creating the coupon page on my site which should cut some of that cost down.

    Just recently I had two sales, both over 1500 that I know of that went to search for a coupon and a lost 10%.

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