Affiliate Marketing Programs for SaaS: Defined, Explained, and Compared
Like many of you, we are actively looking at different ways to market and sell our Software-as-a-Service (SaaS) products. One of the more intriguing options is the use of Affiliate Marketing approaches that help to simultaneously broaden our customer reach and generate revenue. Affiliate Marketing has proven to have a low Customer Acquisition Cost (CAC), so that makes it particularly attractive. However, like many of you, I had a lot of holes in my knowledge and understanding of what Affiliate Marketing is all about and the potential benefits and CAC. This blog post is meant to help us as we consider Affiliate Marketing, so we hope it helps you too!
What is Affiliate Marketing?
According to Wikipedia:
“Affiliate Marketing is an Internet-based marketing practice in which a business rewards one or more affiliates for each visitor or customer brought about by the affiliate’s marketing efforts.”
The above definition implies a few important points:
- Affiliates are third-party individuals and/or firms with no direct relationship to the company whose products they promote except for a compensated reward for a particular action
- This means that affiliates are necessarily paid on a commission or Cost Per Sale (CPS) basis or Cost Per Action (CPA) mode. If their marketing results in a sale or other positive benefit for a merchant, then they are paid. If not, no money changes hands for the affiliate’s marketing efforts. In essence, affiliates are paid a commission on sales, a sort of revenue sharing.
- Affiliates are a form of marketing. Specifically, affiliates generate traffic for their websites and other content in order to drive traffic and hopefully sales to another one. This is a form of marketing in that it increases the visibility and customer reach of brands who would otherwise make their presence online known through search engine marketing (SEM), search engine optimization (SEO), advertising, e-mail, website syndication, or other methods..
In the affiliate marketing world, there are four primary players: The Merchant (Brand or Advertiser), The Affiliate (Publisher), The Network, and The Customer
- Merchant (Brand or Advertiser) — This is a company with something to sell or promote that is looking for others to magnify their online marketing efforts and increase overall sales and/or visibility.
- Affiliate (Publisher) — This is the third-party that will promote a Brand’s products or offerings in exchange for compensation based on performance
- Customer — This is the end-user who is introduced to the Merchant or Brand by the Affiliate’s marketing efforts, or is already interested in the Merchant’s products or Brand’s offerings but comes across Affiliate’s marketing efforts in the scope of their online activities.
- Network — As discussed in greater detail below, this is an infrastructure for connecting Brands with one or more Affiliates and facilitating the business relationship between them.
Benefits of Affiliate Marketing
Affiliate Marketing can be one of the most effective and lowest cost ways to increase traffic and sales. Marketing without affiliates requires distributing limited marketing budgets across a range of marketing activities whose end goal is to drive sales and profit. Affiliates achieve the same end goals, but without requiring the Brand to spend its limited marketing budget to achieve those end goals. This is because affiliates are paid based on their performance rather than their efforts. The below diagram illustrates how affiliates’ marketing efforts boost overall profits even when some of that profit is distributed to the affiliates.
In order for affiliates to make money, they need to be responsible for driving sales and traffic to the Brand site. If they don’t drive sales, they don’t get any compensation. As a result, in addition to the end benefit of more sales, Brands derive even more value from the unpaid marketing efforts of affiliates. When your affiliates promote a Brand, traffic to the Brand’s site will increase. Even more so, links created by affiliates will give your site significant search engine optimization (SEO) benefit from the increased traffic from multiple sources. Incoming links are one of the most important factors in achieving higher rankings within search engines.
The more affiliates you have, the more a Brand’s site and links will appear on multiple pages. This in turn pushes the Brand’s site and links higher overall in search results due to the high quality inbound links. Even if only 10% of affiliates generate revenue for the Brand, the other 90% are still generating significant marketing value — and you only have to pay for the results of the performing 10%.
Furthermore, some affiliates build third-party sites that provide additional credibility to the Brand. Rather than the Brand promoting itself on its own sites, the affiliates provide needed endorsement, reviews, and third-party endorsement that is not possible by the Brand alone. While this is quasi-ethical, affiliates sometimes use techniques that such as publishing reviews of a Brand’s products or services.
In this regard, affiliate marketing augments and often overlaps other Internet marketing methods to some degree. A Brand might find itself competing for SEO, advertisement placement, email marketing, and display advertising visibility with its own affiliates. But this is a good thing — it’s just creating more market share for the Brand at expense of competitors. This is why you should treat your affiliates well!
How do Affiliates Market a Brand’s Products or Services?
There are really two different kinds of affiliates. Those that run affiliate programs as a hobby or as an adjunct to their main business, and those that run it as their primary business. For those running it as a side business or revenue-enhancer, here’s how most affiliates market a Brand’s products or services:
- Posting affiliate-encoded links into their personal websites or blogs
- Adding affiliate-related promotional content and links into niche market websites, including product review sites
- Adding affiliate links into website syndication feeds
- Adding affiliate promotions and links into their existing web applications as up-sells or cross-sells, or as part of the registration path to sign up for access to the site, such as including offers from other merchants during the registration process
- Using advertisements or adbars to display context-sensitive, highly relevant ads for products on the site
For those who do affiliate marketing as their primary business:
- Utilize pay per click search engines to promote the advertisers’ offers (i.e., search arbitrage in which they would get more money from the link than the cost of the search)
- Creation and promotion of comparison shopping websites and directories
- Creation and promotion of loyalty websites, typically characterized by providing a reward system for purchases via points back, cash back
- Development of coupon and rebate websites that focus on sales promotions and really are affiliate marketing link havens
- Creation and promotion of content and niche market websites, including product review sites
- Creation and promotion of Brand-associated blogs and website syndication feeds
- Promotion and use of e-mail list affiliates and newsletter list affiliates, which are typically more content-heavy
- Directories that list merchants by categories without providing coupons, price comparisons, or other features based on information that changes frequently, thus requiring continual updates
- Developing video content which allows viewers to click on and purchase products related to the video’s subject.
According to Wikipedia:
- 80% of affiliates are paid on a commission (revenue-share) / CPS method
- 19% are paid on a cost per action (CPA) method
- 1% are paid on a cost per click (CPC) or impression (CPM) basis
- And according to Wikipedia, affiliates in China are paid per day (wha?!)
From our perspective, the economic value of marketing only makes sense if you’re paying based on a desired outcome, so CPS or CPA are the only models that make sense. Otherwise, you’re paying for the full 100% of affiliate marketing expense versus the 10% I mentioned above. So, let’s just toss CPC and CPM out of the affiliate compensation picture..
I know you’re going to ask: what are the typical commissions (CPS) or CPA paid to affiliates? And are these one-time commissions for single sales or recurring commissions over the lifetime of a customer purchase? The answer: there’s no set answer. Commissions range everywhere from 5% to 100% and are one-time, recurring, or even things in the middle.
But that’s not all. Most Brands set some controls on the affiliate marketing program to make them more easy to manage. For example, most affiliate programs require the affiliate to earn a certain amount of commission before those commissions are paid. For example, an affiliate might need to earn $100 in commissions before they receive their payment.
This also means that many affiliates are paid on Net 30 or 60 day terms from the end of the month in which those commissions are earned, assuming the commissions payable are above the threshold defined above. Payments can be made via Paypal (the easiest) or via paper checks.
For retail and one-time purchase products, this is pretty much the end of the story. But what about products with recurring revenues, such as SaaS or other subscription offerings? How are affiliates compensated in those situations?
Here are some examples of how other SaaS providers run their Affiliate programs:
- 37Signals: Commission is 50% of their first monthly payment plus 5% of their subsequent monthly fees as long as their account is open. Commission is earned 30 days after a customer has signed up as long as they don’t cancel before that. Monthly recurring payments begin on the second payment the customer makes (60 days post sign-up) and continues as long as the customer makes monthly payments to keep their account open. If a customer upgrades their pay plan later on, affiliates earn the recurring 5% payment on the new plan starting with the customer’s second payment, but don’t earn a one-time commission on the upgrade. Downgrades are handled similarly. Affiliates are tracked both with affiliate links and affiliate codes. Payments are made once the affiliate has earned more than $100. If they never earn more than $100 they are never paid. Subsequently, payments of the balance are made roughly every 45 days as long as the balance is over $100. Payments are made only via PayPal. They only allow US-based affiliates that are age 18 and over, and must provide tax ID information.
- Lokad has an example of a SaaS company that has a regular monthly commission and a fixed timeline. They pay between 5% and 20% of a customer’s monthly subscription revenues for up to a year, with no one-time upfront bonus.
- Zoho offers a blend of the above two models. Affiliates earn a one-time sign-up commission and a recurring commission starting from the second month, and running until the 12th month (up to a year), unless the customer terminates sooner. If the user upgrades to a more expensive plan, affiliates earn a higher recurring commission as well as a one-time upgrade commission. Currently, sign-up commissions are 50% of the first month fee, and recurring commissions are 10% of the subsequent monthly fees up until the 12th month of the subscription. The upgrade commission is 50% of the difference between the old and new plans. Earnings are credited to affiliates 45 days after payment is made (to account for refunds), and commission payments are made on the fifth of every month a long as the total unpaid commission balance is over $100. Payment are made only via PayPal. There don’t seem to be any limits on age or geography.
Technical Details: How Does Conversion Tracking Work?
Of course, in order for this all to work, we need to be able to accurately track which sales are a result of particular affiliates’ actions. The most common way to do this uses the following steps:
- Tracking URL- Each affiliate is given a specific URL, usually in the form of http://www.example.com/?aid=XXXX which indicates to the brand, or to the affiliate network doing the brokering, that an affiliate is passing traffic to the brand.
- Tracking cookie – Once the traffic reaches the merchant or affiliate network’s site, a cookie is placed on the customer’s browser that identifies the affiliate (and the Brand/advertiser in the case of an affiliate network)
- Tracking pixel – In order for transactions to be tracked, a 1×1 pixel-sized image is placed on the final confirmation page of the desired outcome reached on the Brand’s site. For example, if the desired outcome is a purchase of products from a retail merchant, the confirmation page will be the page that comes after the purchase is complete, typically a thank-you or receipt confirmation page. Visitors can only reach this page by completing the action that the advertiser has designated. The pixel, which is many times actually a server-side script run by the Brand or affiliate network, checks to see if any tracking cookies have been set for the visiting customer, and if so, credits the associated affiliate with the sale based on the agreed-upon commission or CPA rate and records details of the transaction.
This system has proven to be fairly robust. Only the issuing domain can access a cookie, so affiliates can’t tamper with cookies set by the Brand or affiliate network. As long as the Brand or network sets the cookie based on the inbound tracking link, then it will be able to track a customer’s activities all the way to conclusion.
There are many variations on this theme, including the use of iFrames for embedding Brand’s tracking pixels directly on a site thus not requiring special tracking URLs, using Flash cookies instead of regular browser cookies, SEO-friendly tracking URLs, and the use of postback URLs instead of cookies to affiliate network sites in instances where pixel placement is not possible.
Managing Affiliates: Running your Affiliate Program vs. Affiliate Networks
In order to be successful, an affiliate program require significant work and maintenance. Especially with so much choice available to affiliates, getting motivated, successful affiliates on board with your program and making sure they continue to produce can be a full-time job in itself. There are two reasons to effectively manage an affiliate program:
- Most affiliate programs won’t generate considerable revenue with poor or no management. A crowded marketplace filled with affiliates and competitors of different quality and size makes it more difficult for Brands to be noticed.
- Automated, uncontrolled affiliate programs encourage and aid bad behavior from “rogue” affiliates who often spam, violate FTC rules on false advertisement or trademark laws, domain or typo “squat”, and produce poor, cookie-cutter style websites that can actually decrease the value and overall revenue for a Brand.
There are two different ways a Brand can manage their affiliates: running their own affiliate management software on their site or using hosted affiliate management services, called affiliate networks. Merchants that choose the self-administered direction will need to develop and manage the entire affiliate program themselves, from building the technical infrastructure for tracking affiliate clicks and sales, to determining optimal commission and payment structures, to to drafting legal agreements and determining evaluation criteria for membership. The advantages to this model is that you retain full control, minimize fees and commission sharing with other parties, and can build a direct relationship with affiliates.
A more popular alternative is to use one of the dozens (hundreds?) of affiliate networks whose sole purpose is aggregating affiliates (publishers) with merchants and Brands (advertisers). An affiliate network acts as an intermediary between affiliates and Brands by allowing affiliates to more easily find and participate in appropriate affiliate programs. Likewise, they allow Brands to reach a larger audience of potential affiliates who have already been qualified and shown to perform.
Affiliate networks have already-established large pools of affiliates who can be turned onto a new merchant very quickly. They already have weeded out the poorly performing affiliates, qualified new ones, entered into legal agreements with them, and established a payment policy and practice. Rather than managing dozens or hundreds of affiliates, a Brand simply needs to manage their relationship with an affiliate network. They only need to pay this network and everything else will be handled. Likewise, affiliates only need to have the relationship with the affiliate network and their lives are similarly simplified. They have an already established payment practice and a long-term relationship with the network, even if the merchant no longer is working with them. A win-win for everyone, right?
Well, affiliate networks often come with significant costs. Affiliate networks often charge a one-time set up fee that can be very significant (in the thousands of dollars) as well as ongoing monthly maintenance fees. They often also require an escrow payment to ensure that you will indeed make the payments to affiliates. Furthermore, they take a percentage of the commission pay-out. This makes it a lot more expensive for the Brand and can potentially ruin an otherwise well thought-out Customer Acquisition Cost (CAC) calculation.
Examples of affiliate networks and links to affiliate network review and discussion sites:
- Commision Junction
- Google Affiliate Network
- Offer Vault
- Affiliate Seeking
- Offer Buzz
- Affiliate Buzz
- Digital Point Affiliate Networking Discussion Forums
- Reviews of Affiliate Networks
Another option is to use SaaS-based, hosted affiliate management software. There are two of note:
- Appdoubler, which is claimed to be the first affiliate program dedicated to SaaS businesses
- One that seems to be getting started, and is focused just on SaaS-based businesses is Cloudomatic(flow), although it’s hard to tell if this is a real product or just an MVP currently.
You’ve Got Your Affiliate Marketing Set Up, Now What?
So, once you got your affiliate marketing program set up, how do you go about letting potential affiliates know about it? There are three primary ways to locate affiliate programs for a target website:
- Use affiliate program directories (listings of affiliate programs)
- Use affiliate networks as a platform to recruit affiliates
- Promote the affiliate program heavily on your site.
An additional option is to find “super-affiliates” who have managed to make significant businesses and revenue out of affiliate marketing. Some offer multi-tier programs that distribute commission into a hierarchical referral network of sign-ups and sub-partners. That is, they offer a program to their network of affiliates and share in any referrals and sales commissions. This is much like a traditional multi-level marketing (MLM) program where you can get others to recruit for you. As long as there’s a real product and customers derive real value, it’s all above board. Of course, many MLMs get caught into their own little world of recruitment and forget that it’s all about the customer.
Challenges with Affiliate Networking
You should be aware that affiliate marketing is not all flowers and candy. Indeed, there are some very shady characters in the affiliate marketing world who are out to make an easy buck, using whatever tools they have (legal, ethical, or not). Many bad actors have used spam, falsified clicks or transactions, forced customers to accept cookies, used adware, false advertising, and illegal promotional activities. Spam is a particular problem and can put your organization in trouble with the FTC due to CAN-SPAM laws. Even if you are not the perpetrator of these bad acts, you can still suffer if you ultimately benefit from these actions.
Google has in particular taken on the challenge of fighting affiliates. The latest version of their page rank algorithm penalizes sites for repetitive, computer-generated, or “low value” content which is clearly seen in their minds as affiliate link farms. They also downgrade ads they think are placed by affiliates, and penalize Brand sites that have too high of an affiliate-generated content to real-content ratio, however they figure that out. They’ve weeded out what they call “thin affiliates” that over very little website content outside of the link to the Brand site. To avoid problems, both Brands and affiliates must develop unique, quality content that provides real value and is distinguished from what link farms, spammers, and banner farms are doing.
One last note on affiliate marketing: it can cause a potential state sales tax headache. Amazon has recently had to grapple with a few states who consider affiliates that are residents in their state to provide enough “nexus” that it can charge sales tax for all sales happening in that state. In these states, as long as even one affiliate is active in that state, they can claim sales tax. This will need to be resolved in the future or can potentially nix the whole affiliate marketing value.
Another option? Motivate your Existing Customers: Work those Referrals!
While this whole blog post was about affiliate networks, we must mention that there’s another way to get others to talk about and sell your service: motivate your existing customers! While affiliates are disinterested third parties who see your site as a way to make a buck and otherwise have no interest in what you’re selling, your customers do indeed have an interest in your products. If you can provide incentives to your customers in the form of discounts on their monthly subscription fees, free months, bonus products, or other goodies as a result of their referring new customers, then this is a win-win.
First of all, it’s much simpler to administer a customer-based referral incentive program, and second of all, these are people with a much more vested interest in your success. In any case, this is not an either-or proposition. Affiliate marketing and customer referral programs should be a part of every company’s marketing efforts, and if managed properly, can multiply your overall success.
Interesting little addendum: SaaS, Affiliates, MVP
Earlier this week, we wrote a widely-read piece about Minimum Viable (Valuable) Products. Tying in that story with this one, the Cloudomatic folks have written a nice blog entry about how they developed the MVP for their Cloudomatic(flow) SaaS Affiliate application in just one weekend. It’s a good read!