Remember not too long ago I blogged about affiliate marketing’s place in the overall digital marketing?

Back then I stated that affiliates participate effectively not only on the acquire stage, but “also help in the branding (let’s not forget those link impressions that aren’t being paid for), retaining and growing the current customer base, as well as converting.”

Today I was happy to find a chart which outlines the stages of online customer engagement lifecycle, listing also the marketing drivers that facilitate conversion on each stage (click the below image to enlarge):

The above chart provides an excellent visualization of the roles that various types digital marketing play in driving conversions. Of course, one may argue that some of the above-mentioned “key actors” (e.g.: AdWords, Social, SEO, etc) work well on all stages (and I would agree). Also, when I look at the above figure, I see affiliate marketers working well on all 5 stages: (i) lead generation (all possible types of affiliates), (ii) facilitated buying (topical microsites, and social media affiliates), (iii) retention (various content affiliates, and personalized shopping websites), (iv) loyalty (loyalty and rebates affiliates), and even (v) WOM agents. The reason is the same as I have mentioned elsewhere: Affiliate marketing is not a type of marketing (like social media marketing, PPC, content, display, SEO, email marketing, etc) but rather a name for the type of business relationship/partnership between a marketer and an online (or now even offline) business being marketed — one where the former is being paid by the latter based on the performance / conversions driven in.

A good question came to me in the email yesterday:

Is there a certain metric you use to predict revenue potential for a site?

I have a potential client with a blog that gets as many as 75k uniques and close to 200k pageviews per month… He can’t understand that he has tons of great content that people like reading and that it could be monetized.

There are indeed ways to put together a tentative projection of your future affiliate earnings. While the accuracy of these projections will always be highly contingent on a number of program-specific metrics (2 through 5 below), as well as on how exactly you are going to market merchants on your website, there is a number of variables to consider prior to starting out as an affiliate — metrics that will tell you how well your website may do with affiliate marketing. Consider the following five:

1. Clickthrough Rate (CTR) — It will be dependent on (a) the targetedness of your traffic, and on (b) the type of linking you’ll be using (banners, text links, product links, etc). Read more about it here.
2. EPC, or Earnings per 100 Clicks — This metric tells you what other affiliates are already making on this program, and while it should by no means be your single criteria (because it’s an average calculated across all affiliate activity within the program), it is a good one to analyze. More in my article here.
3. Average Order Value (AOV) — Average ticket which is calculated as a sum total of all affiliate-generated orders referred over a given period of time, and then divided by the number of orders.
4. Conversion Rate (CR) — The click-to-sale or click-to-lead conversion rate. Analyzing a program-specific CR is easier, especially when it is publicly available to affiliates prior to joining an affiliate program (as is the case with AvantLink-based programs, for example). Analysis of vertical-specific CR is also an option, but won’t be as precise. More on onversion rates here.
5. Reversal Rate (RR) — This is  the percentage of affiliate-referred transactions that get reversed by the merchant. Unfortunately, in many cases you won’t be able to analyze reversal rates prior to actually joining and experimenting with an affiliate program. Some networks, however (like AvantLink or ShareASale) do provide data on this vital metric even before you sign up with an affiliate program.

Plugging all of the above into the originally described scenario (publisher with some 200,000 pageviews a month), picking a merchant who pays 12% commission (comm) on all sales, presupposing a very close niche match between the affiliate and the merchant, and assuming the following:

• CTR = 1%
• EPC = $60
• AOV = $125
• CR = 5%
• RR = 10%

We arrive at the following calculation:

• Traffic: 200,000 * 1% (CTR) = 2,000
• Sales: 2,000 * 5% (CR) = 100
• Earnings: 100 * $125 (AOV) * 12% (comm) – 10% (RR) = $1,350

To arrive at your personal projected EPC you will want to divide Earnings by Traffic and multiply the result by 100. So:

• $1,350 / 2,000 * 100 = $67.50

Comparing our projected EPC figure to the program’s actual EPC ($60), we see that we are not that far off, and our overall projection must be sufficiently plausible.

Finally, a word of warning: remember that things will differ drastically from merchant to merchant. So, take things easy (especially when there are investments involved) not to fall victim to your own incorrect projections.

Today I am starting a series of posts (I am not planning to publish them in a consecutive manner, but new ones will be added as I come across the issues to address), and a whole new category – Affiliate Marketing Fallacies. In this rubric I will be covering the popular fallacies and misconceptions about affiliate marketing. About a year ago I recorded this video (my most popular YouTube video to date) where I addressed the misrepresentation of affiliate marketing as “possibly the absolute laziest way to make money.” I will certainly include it in the corresponding post in this new category as well.

Today we are going to look into yet another misconception about affiliate marketing.

A book by Patrick Tan entitled Success with Online Retailing: For Small Businesses, and published in 2003, has a chapter devoted to affiliate marketing (pp. 160-184). Among other things in this chapter, the author gives a definition to a super affiliate [see mine here], and speaks to the question of attracting such affiliates. Tan writes:

A super-affiliate is an Internet marketer who has made a successful living online. He is busy making money online and would not be interested in a program that pays mediocre commissions. You must offer exceptionally high commissions to attract the super-affiliates. (p. 166)

I have actually seen merchants who — being driven by (or talked into) the same thinking — were creating separate storefronts, with higher prices, to be able to afford higher than the vertical’s average commission rates. By so doing they’ve been making their offer uncompetitive, which reflected negatively both on the conversion their overall website, and on their affiliate traffic conversions in particular.

Recalling the topic I’ve discussed yesterday (but in no way supporting Amazon, as I believe they have a lot to improve in their affiliate program), the affiliate has partnered with a merchant that converted at 22%. While 20% is about an average conversion ratio (CR) for the top online retailers (see these charts), most e-tailers out there enjoy a considerably more modest CR. My personal experience with affiliate programs shows that while much depends on the vertical, solid CR generally ranges from 2% to 5%. So, speaking simplistically, if to raise your commission to the “exceptionally high” level you must raise your prices, making your conversion rate drop to 0.5% or less, you’d have to be paying your affiliates 44x times more to compete with them in the eyes of the affiliate.

It is never just about the “commissions”, but always about the payout; and payout is always contingent on the (i) commission rate, (ii) conversion ratio, and (iii) reversal rate — the three variables that should always be looked at in a bouquet, and never separately. Often, higher conversion ratio coupled with a low reversal rate make moderate commission rates more attractive than “exceptionally high” rates.

Reference: Tan, P. 2003. Success with Online Retailing: For Small Businesses. Bloomington, IN: iUniverse.

You’ve made a decision to start an affiliate program, decided on the tracking platform to use, and now you’re facing multiple questions, one of which may be worded this way: How do I put together best possible banners for affiliates to use for my program?

To a great extent, this question has already been answered in the following articles of mine:

• What Size Banners Should an Affiliate Program Have?
• 10 Mistakes to Avoid While Creating Affiliate Banners
• What Size Should Affiliate Banner Files Be?
• Examples of Affiliate Banners

However, there is one thing that I haven’t yet talked about. It’s a secret that affiliate program managers do not tend to share. I will, but let’s begin with a definition:

…competitive intelligence involves monitoring the company’s competitive environment, including customers, competitors, political and legal developments (regulations and laws), and social forces… The two main tasks are the collection and the analysis of intelligence. (Coombs, 2008, PSI Handbook of Business Security, pp. 217-218 / bold font and italics mine).

Employing the competitive intelligence approach is extremely helpful throughout the whole process of affiliate program management, and the affiliate program setup stage is a perfect time to start. It will help you build a competitive affiliate program, and one of the fronts on which you want to stay competitive is the creative front.

Open an affiliate account with the affiliate networks on which your competitors run their affiliate programs. Many affiliate networks allow affiliates to sort affiliate programs’ links by EPC (which normally stands for average affiliate earnings on 100 clicks on a link). Analyze the wording, and the design of your competitors’ best performing links, and when once you’ve gotten a clear idea of what works well for them, write down the text and design ideas you want to experiment with. This should give you good information to start with, but never stop experimenting (read: split-testing) and improving the quality of your affiliate creatives. This will be of benefit both to you as an advertiser, and to your affiliates.

Someone has asked me to address this question in my blog. So here is my answer:

The conversion rate of your affiliate program will always be highly dependent on (i) how established your brand is, and (ii) what industry you work in. It will also roughly correspond to the overall conversion rate that you, as an online merchant, register.

To illustrate how a strong brand contributes to the conversion of an affiliate program, let’s look at the overall conversion data for the following brands:

• ProFlowers – 28%
• OfficeDepot.com – 23.65%
• Blair.com – 20.15%
• 1800Flowers.com – 19.22%
• L.L. Bean – 18.67%
• QVC – 18.32%
• Amazon and eBay.com ~ 15-17%

I have arrived at the above figures upon an analysis of data presented by  Nielsen Online / Marketing Charts for the past 6 months (Aug. 2008 – Feb. 2009). A conversion range from 15% to 25% is not unusual for established online merchants.

As to the differences in conversion ratios depending on the industry, it is helpful to turn to the data that Fireclick Index provides. Here’s the data that they are currently showing:

• Software ~ 4%
• Catalog ~ 3%
• Specialty ~ 1.4%
• Outdoor & Sports ~ 1.3%
• Fashion & Apparel ~ 1%

Analyzing conversion rates over “a number of different segements” of the online market, Foreclick Index arrives at an overall conversion range of 2.4%-3.3%, which corresponds to the conversions I have been noticing with affiliate programs across different verticals over the past 5 years. A good overall conversion rate for affiliate programs ranges from 2.5% to 3.5%. If you’re registering something significantly lower, I would highly encourage you to study the conversion rates in your particular vertical (some verticals — for example, high end jewelry, furniture and electronics — do generally convert at lower rates) to see how you compare to your peers, and if your conversion is significantly lower than your vertical’s average, it’s time for you to vigorously look for the reasons behind it (they may range from uncompetitive pricing to poorly designed webpages, shopping cart, etc).