Affiliate Model

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AFFILIATE MODEL

The affiliate (or click-through) model is a popular e-commerce relationship in which an online merchant agrees to pay an affiliate in exchange for providing an advertisement and link to the merchant's site. Each sale generated as a result of a customer "clicking through" from an affiliate to the merchant results in a small commission for the affiliate. The deal provides a stream of cash to affiliates and brings the merchant, which owns the affiliate network, a host of new traffic, cutting customer-acquisition costs and allowing it to target its desired audience.

Forbes magazine reported that affiliate deals generated annual retail sales of about $5 billion, or roughly 13 percent of all Web-based retail commerce, in the late 1990s and early 2000s. However, all affiliates were not equal. In 1999, Jupiter Communications reported that only 15 percent of all affiliates accounted for 85 percent of affiliate-generated sales. The retailer with the largest stable of affiliates, at 430,000, was e-commerce giant Amazon.com, whose affiliates generated annual sales of about $200 million.

Retailers may run their affiliate networks in-house or farm them out to third-party services that manage the networks, issue regular checks to affiliates, and address technical problems. The sales commission paid to affiliates generally falls between five and seven percent, according to Forbes. However, depending on the type of arrangement, the size of the firms, and the click-through rates, commissions often reach as high as 15 percent. The most common format for routing visitors to a merchant was the ubiquitous banner advertisement—electronic "billboards" that sprawl across Web pages. These provide merchants with virtual storefronts all over the Web, rather than only on their own sites.

Amazon.com largely pioneered the affiliate model in 1996, when it began recruiting thousands of smaller Web sites to help generate new traffic to its online store. Amazon.com and other companies found willing partners among smaller e-businesses, content-based Web sites, and Web portals. Indeed, for several years banner ads were the lifeblood of most major Web portals, and many content sites depended heavily on click-through banners as well. By offering to route users to a merchant's Web site to spend money, affiliates stand to draw revenue by hopping on the coattails of the retailer's sales. However, a danger lurks in directing visitors away to another site, perhaps never to return. In that case, if the visitor chooses not to purchase anything from the retailer, the affiliate has potentially sent away its visitor, perhaps never to return.

By 2001, the click-through model's future was cloudy at best, amidst a growing consensus that banner ads simply don't work well. Although banner ads constituted about 50 percent of all Web-based advertising revenue, the click-through rate had fallen to a paltry 0.3 percent; direct-mail response rates, never viewed as particularly strong, were nonetheless estimated at up to 1.4 percent by comparison, according to Business Week . While online advertising revenues grew more than 100 percent annually in the late 1990s, Merril Lynch & Co. expected the 2001 growth rate to plummet to just 17 percent, totaling $9.7 billion. The timing couldn't have been worse, as the steep plummeting of click-through rates coincided with a drying e-commerce revenue stream. Sites that depended on affiliate deals were thus increasingly seeking out alternative sources of funding or courting acquisition by leveraged firms.