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CDnow pioneered what is rapidly becoming an important new form of marketing. But it is far from alone in relying on a pay-for-performance program to contribute to its online revenue. Amazon.com's Associates program, launched in 1996, now has some 400,000 affiliates. By one estimate, 16% of online marketers participate in a revenue-sharing affiliate program. And although CDNow and Amazon have amassed the largest number of marketing partners, thousands of other sites, including the successful online marketers REI.com and Dell Computer, have strong affiliate programs as well. Barnesandnoble.com is catching up with its rapidly growing program. Its commissions range from 5% to 7% and, by mid-1999, it had well over 100,000 affiliates.
Indeed, Forrester Research estimates that by 2004 half the projected $33 billion in worldwide online advertising spending will be performance based. Jupiter Communications further estimates that, by 2002, fully 25% of Internet retail sales will be acquired through sites using the affiliate-advertising model.
Affiliate programs are an important profit source for many sites. Payment is either by flat fee or by commission. Most commissions fall in the 8% to 12% range, although some can go as high as 25%. In just the third quarter of 1998, the popular technology site CNET, for example, facilitated over $80 million in sales for dozens of its online advertisers, receiving a flat fee for each and every referral in the process.
What's more, the programs are becoming increasingly sophisticated. Third-party networks like LinkShare and Be Free offer commercial Web sites the management systems, services, and software necessary for navigating the details of an affiliate program. In one of the latest evolutions, companies like Vstore.com provide Web server space and design templates to mom and pop vendors that want to set up shop on the Internet but don't possess the requisite technical know-how and resources to do so independently. Such firms pay their affiliates on each sale of Vstore goods generated through their storefronts.
Critical to the success of revenue-sharing programs is their lack of exclusivity. Most affiliate programs are open to any site that wishes to participate. Details of the program are posted on the Web advertiser's site for anyone to read. The process of becoming an affiliate is straightforward: the prospective affiliate reads the contract, accepts the terms, and fills out a registration form. Typically, the affiliate then controls the content and placement of the ad.
An open program encourages appropriate Web publishers to identify themselves to the relevant Web advertisers. Since the Web publisher now bears the opportunity cost of an advertisement that fails to deliver the desired result, he or she must carefully evaluate potential advertisers to determine which ones offer the best opportunities for generating the desired market response. Therefore, open agreements, ironically, increase Web publishers' opportunities to target their marketing precisely by maximizing the potential number of solely appropriate Web publishersthose that can deliver customers.
There are no theoretical restrictions, economic or otherwise, on the potential number of sites a company can use to distribute its message to consumers. Thus, the revenue-sharing model follows directly from the many-to-many communication model underlying the Web. This contrasts with the one-to-many broadcast model that rewards only those few marketing channels that can attract the largest number of visitors.
What's more, in the revenue-sharing mode, the price of advertising is a function of the desired response by the market. Measurable market responses include key marketing objectives like unit sales, software downloads, qualified leads, product inquiries, and so on. Thus, the results-oriented model is the answer for marketing managers who are being asked to justify the sums earmarked in their budgets for Internet advertising.
Compare this strategy to the perverse situation in the broadcast television medium where, despite declining audiences, advertisers are forced to pay the networks ever-higher rates to reach fewer and fewer mass-market households. This situation persists only because advertisers have no obvious way to demonstrate declining outcomes.
Impression-based advertising in the mass media will likely never completely disappear on the Web. But as the Internet continues to mature, advertisers will continue seek out specific target segments of potential customers and the corresponding Web sites that can deliver those customers. That will contribute to the continued explosion in open revenue-sharing advertising programs. As pay-for-performance programs continue to proliferate, more and more mom and pop Web sites will be able to participate in the profit potential of the Web. That will bring more large commercial entrants, and more customers for those entrants, into the online marketplace.
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