Adotas Spotlight

Part 1: The Future of Pricing Models in Affiliate Marketing


By Matt Gilbert, CEO of Pepperjam

When it comes to pricing models in the affiliate category, marketers have historically been limited to a service fee for program management combined with a “percent of” variable structure for conversions. As the renaissance of the affiliate category continues, these models are entering a period of transition.

For our part, solution providers must adapt to the changing needs of marketers as the category evolves from a channel dominated by last-click attribution. While the unit economics of our business are vital, marketers also must support their efforts with commercial structures that align with their competencies, growth plans, and budgets. Reconciling these needs will result in sustainable, high-performing partnerships for both parties.

Across the martech ecosystem, predictable pricing models are standard — think recurring software subscriptions with a fixed license fee or tiers based on volume. They are becoming more prevalent in the affiliate category as marketers have challenged the incrementality being added by the coupon- and loyalty-dominated legacy network models — all while simultaneously acknowledging the critical importance of subsidizing high-cost “pay for access” acquisition channels dominated by Facebook, Google, and increasingly Amazon.

As these dual forces compel marketers to rethink their strategies, the weighted value of the capabilities they derive from their solution providers will necessarily shift in tandem and cause commercial models to evolve.

Breaking Down the Affiliate Pricing Models

For digitally native brands and others with in-house aspirations, an understanding of the strategic importance of performance media, and the ability to hire subject matter experts to fill critical roles, it’s increasingly viable to handle program management internally. For those in this segment, the value of the underlying platform is what you are paying for — and the pricing model should align accordingly.

In this scenario, a predictable model affords you the ability to budget for the annual technology expense while allowing you to own the strategy, day-to-day management, and performance of your program. For the solution provider, it results in a shift in strategic focus; a prioritization of anticipating market need, product road map, and feature delivery; and a higher multiple to revenue for shareholders due to better margins and recurring revenue. While this model is attractive to both parties, marketers must actively acknowledge that program performance is now their primary responsibility. The platform provider, meanwhile, is responsible for enabling the in-house team to maximize the utility of the solution through training and ongoing enhancement.

Marketers considering this model should look past the perceived cost savings and be honest regarding their ability to be successful given the scarcity of qualified talent and the corresponding distribution of roles inherent in this structure. Solution providers should similarly be honest about our ability to become product-driven organizations and be realistic about how ready marketers are to embrace the shift (many are not ready, and many never will be). Failure to do so will ensure the relationship never meets the objectives of either party.

While there are clear benefits to predictable pricing models, the powerful premise of performance marketing is that payment happens only when a defined business outcome is achieved. When properly deployed, the performance model should be the most compelling approach for everyone. It allows marketers to replenish their budgets when a target is met, and it requires the solution provider to have “skin in the game” in exchange for the upside of exceeding targets.

As such, many performance marketers remain less inclined to buy on a fixed-fee basis. They acknowledge that the skill sets required to run performance effectively are highly specialized, scarce, and often better placed in the hands of an outsourced partner. Marketers gain visibility into their technology costs, avoiding the situation common to opaque models in which the supply chain consumes a significant percentage of every dollar spent regardless of whether it delivers the targeted return on advertising spend.

Adapting to the Evolving Market

Understanding incrementality is the key to embracing a pure performance model, and we all must do a better job of collaborating to measure and prove the lift. While fixed-fee might provide a detour around shortcomings in measurement competencies, it will often include complex fees for overages that risk undermining the trust between marketers and solution providers. Additional fees might also be required to unlock premium features, support hours, or strategic advisory services from your platform partner.

Further, fixed-fee models that aren’t supplemented by the additional budget to support publisher incentive strategies risk making affiliates (publishers) less motivated to maximize the performance of the marketer’s program. Without the program publishers prioritizing your value proposition to their audience, the marketer will not realize the return on spend. You still need a promotional budget to support program performance in a fixed-fee model, so make sure you’re considering the total cost of ownership when you evaluate your options.

Affiliate marketing is a category in transition. The legacy network model is evolving toward a programmatic structure in which data-driven custom networks are curated for advertisers and the commissions paid on conversion are adjusted in direct correlation to a predetermined probability of lifetime value of the new customer acquired.

Successful execution in this environment will require solution providers to remember that commercial models are at the will of the market. As such, it is incumbent on all parties to consider flexible commercial models that retain the integrity of the sector’s pay-for-results nature and respect the unit economics of both parties’ underlying business models.


Part 2: 4 Questions Marketers Must Answer Before Choosing an Affiliate Marketing Model


As the next chapter of affiliate marketing is written, flexibility will be a dominant theme. Answer the questions below based on your current state and your anticipated needs over the next 24 months. An honest assessment of these four primary drivers will put you in a position to make the right decision for your business.

1. Is your company equipped for in-house affiliate marketing?

Affiliate marketing programs are complex. Successful implementations will leverage a technology platform to create efficiencies in workflow, but the technology alone does not eliminate the need to maintain vigilant oversight. Marketers must engage in ongoing communication and collaboration with publisher partners, pursue the enforcement of program rules and brand safety, and interpret and act on the analytics and insights generated by the underlying technology solution.

If your organization does not have a committed strategy for performance marketing, the necessary expertise to execute, or access and a commitment to hire subject matter experts to own your program’s performance, fixed-fee models that rely on your in-house administration are not right for you.

2. How is your program budget funded?

Does channel performance determine additional investment or budget? How much can you afford to spend on commission payouts or paid placements? Do you separate technology costs in your budgeting process, is it funded by total program performance, or are you built to fund on a campaign or program basis? If you need the flexibility to fund your program based on generating business outcomes, a fixed-fee model will be less attractive, and it will be more difficult to gain the necessary internal approvals.

3. What are the total cost of ownership and ROI projections?

Is the technology fee in the fixed-fee model sufficiently transparent and predictable? Will tiers result in unexpected fees? Are you equipped to project and measure ROI effectively? Do you understand ancillary fee structures, and do you have sufficient advance visibility to account for all expenses required to operate a high-performing program?

4. Is your affiliate program mature or still growing?

As the underlying platforms enhance their ability to automate publisher discovery and recruitment, most programs should be in a position to grow. If you believe your current program is mature and you are inclined to move to a predictable fee structure because you view your needs as maintenance, consider that growth will come from the ability to identify and recruit incremental affiliates to your program while adjusting the mix of volume from your base publishers. This lends itself well to a hybrid model in which a fixed fee supports the mature segment and a variable fee supports the growth engine.

Commercial models are at the will of the market, and mutually sustainable partnerships between marketers and solution providers require flexible commercial models that retain the integrity of the sector’s pay-for-results nature and respect the unit economics of both underlying business models.