When the FBI charged Shawn Hogan and two others with defrauding eBay of about $21 million in affiliate marketing sales, Benjamin G. Edelman was watching closely behind the scenes.
Edelman's name rarely came up at the time of the 2010 arrests, but the Harvard Business School associate professor had been helping eBay gather evidence for months.
"eBay asked me to catch anyone I could," Edelman says. "From litigation documents, it's now known that I caught them."
“I looked at the diversity of views and wondered, who has it right?”
Edelman's experience makes him an appropriate expert to provide advice to businesses using affiliate marketing programs. His new working paper, written with Wesley Brandi, is titled Information and Incentives in Online Affiliate Marketing.
The paper offers ways to help companies make better choices and avoid being defrauded—specifically by asking whether it's better to manage these programs in-house or to use outside experts..
Power Of The Network
Affiliate networks slash the cost of buying ads for sellers through the use of advertising marketplaces. In essence, sellers are able to place hundreds or thousands of ads on a wide variety of websites in a network, but pay only for those ads that entice a consumer to make a purchase. (This setup is different from other online advertising such as banner ads, where the seller pays for the placement when the consumer sees the ad, regardless if they click through or make a purchase.) Standardized contracts allow advertisers to accept a proposed placement with a single click.
"If you look at affiliate marketing programs they are all very different," Edelman says. "Some are tightly run and picky about who they let in. Others let anyone in. Some have rules about what affiliates can do, while others are the Wild West. I looked at the diversity of views and wondered, who has it right?"
One problem with affiliate marketing, however, is that some websites participating in networks are prone to "misbehavior," as the researchers term it, behavior that is largely unseen by the advertisers or even the affiliate networks themselves.
Since they are only paid if a purchase is made, these websites use technology to convince—some critics might argue that "trick" is a better word—buyers into filling their virtual shopping carts. Another fake: claim credit (and commissions) where none is due. Hogan was charged by eBay of collecting millions of dollars in commissions on purchases he did not generate.
How can marketers protect themselves from these shady practices when using affiliate advertising programs? What management practices work best?
Catching Affiliate Fraud
Edelman and Brandi, admitted computer geeks, developed software that allowed them to observe management structures within companies using affiliate branding. Edelman, who earned his way through college writing software and working on client computer projects, and Brandi, a software engineer turned online fraud fighter, set up web crawlers that ran more than 2 million page-loads on a variety of computers and virtual computers.
In 2012, they tested the vulnerability of three of the largest affiliate networks—Commission Junction (CJ), LinkShare, and Google Affiliate Network (GAN), which shut down in April 2013—to schemes used by some sites to entice consumers to click: cookie-stuffing, adware, typosquatting, and loyalty apps.
Cookie-stuffing: A user visiting a merchant's website receives a third-party cookie from a different website and is unaware of the act. When a purchase is made on the merchant's website, the cookie-stuffer is credited. (Hogan allegedly used this method with eBay.)
Adware: A program tracks a user's activity on a merchant's website and redirects the potential buyer through an affiliate link. If the user makes a purchase, the affiliate is credited.
Typosquatting: A web surfer misspells a merchant's domain name and is sent to the affiliate's website. (In advance, the affiliate registers domain names using anticipated misspellings.) The affiliate website then redirects the user to the merchant. If the user makes a purchase, the affiliate is credited.
Loyalty programs: Code inserted surreptitiously on a computer sends the user through an affiliate link when the user attempts to visit a merchant directly. Best case, the user receives some points or rebates but often is unaware of the earnings, especially if they never requested the program in the first place.
Adware and cookie-stuffing are widely viewed as wrong and are banned by affiliate marketers. But opinions are mixed on loyalty software, with some arguing that these applications exist to help consumers, while critics note that they are slipped into computers without the owners' consent. Opponents of typosquatting argue that the practice violates the federal Anticybersquatting Consumer Protection Act and forces clicks that are contrary to affiliate network rules.
Who Manages Online Affiliates?
Edelman and Brandi wanted to know how companies that use affiliate marketing should set the policies that govern the gray areas where bad practices flourish.
They studied three popular models for managing affiliate networks: doing it in-house; outsourcing to a vendor that specializes in affiliate marketing management; or using management services provided by an affiliate network. (Most merchants use affiliate networks to manage the technical infrastructure of the program, but not necessarily the administrative duties.)
There are pros and cons to both internal and outsourced approaches, they say. In general, the in-house approach is more effective at keeping rogue affiliates out of a program. That's because the internal employee who selects and manages affiliates, and is paid a base salary, has different motivations than an outside company, whose managers may be overseeing 100 affiliate programs at a time and are paid on contract or by percentage spent as a result of the ads.
In nearly half of all the programs Edelman and Brandi tracked, they found no affiliate fraud at all. But for the most-targeted merchants—typically the largest ones—the pair found dozens of instances of malfeasance. And the networks suffered more fraud than programs handled by in-house managers.
Some big affiliates were better than others at controlling fraud. The now-defunct GAN merchants suffered, on average, less than half as much adware and cookie-stuffing as the LinkShare merchants, according to Edelman and Brandi. "When it comes to affiliate quality, GAN was impressive, and GAN's high standards show clearly in our large-sample data."
Setting The Rules
Given the potential problems with affiliate marketing, would firms be better advised to ignore them all together? Edelman and Brandi agree in the paper that in the end the programs are worth it: "We are convinced that affiliate marketing fills a genuine need."
But it pays to take steps to closely manage these efforts. If in-house staff is being used to manage the affiliate program, they write, "the merchant may want to encourage its affiliate program manager to take special steps to learn affiliates' practices—perhaps through more detailed inquiries on affiliate intake questionnaires, online discussion forums to share information with counterparts, or extra effort to attend conferences with other affiliate program managers."
If the merchant chooses to partner with an outside manager, the merchant should be clear on what practices the program will permit and to not assume outsourced managers will always act in the merchant's best interest. ("Quite the contrary, our data suggests that they often will not," according to the paper.)
Affiliate networks offer many benefits, but any incentive system can be gamed.
"Merchants that think they've found the secret to zero-risk marketing have not," Edelman says.
It doesn't exist.