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Measuring Affiliate Channel Profitability

Posted on 3.03.2014

The age of simply subtracting costs from top-line revenue to determine the level of profitability of an affiliate marketing initiative is over.

Many online advertisers are second-guessing their affiliate marketing decisions. Advertisers are increasingly skeptical of how many orders, customers and/or sales they would have received without their existing affiliate partners and are growing tired of dealing with fraud, cookie stuffing, BHOs (Browser Helper Objects) stealing sales, one affiliate overwriting another affiliate’s cookies and more. Those issues aside, there are two things affecting their impressions of affiliate channel sales more than anything else. First, sales reported from the network don’t match the sales in their analytics software and, second, they see conflict between specific orders credited through the last-click attribution of affiliate networks and their other channels, specifically display, email and search.


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Last year, Widgets-R-Us, for example, reported $100,000 in sales for one month through their affiliate network, but their Coremetrics dashboard only showed $86,000 attributed to the affiliate channel. Not only that, but when they started digging deeper they saw that there was a 15 percent overlap of specific orders reported through the affiliate channel and orders reported in other online campaigns.

Looking at it from this perspective, it’s easy to see why they began questioning if they were truly profiting from their affiliate initiatives or if they were simply increasing their costs by adding affiliate commissions. Nine times out of ten, they aren’t, but “revenue-cost” simply won’t show them that.

Advertisers looking to determine their true profitability, identify partners that are truly successful and demonstrate their affiliate channel’s superior performance within their organizations, need to go beyond cost and revenue.

New Customer Acquisition: Many advertisers look at the number of new customers they acquired through a given channel and compare the cost-per-new customer acquired across all of their channels to determine which ones are productive and profitable. Advertisers measure this differently, but there should be consistency within each organization. For example, what constitutes a new customer? What if a person has purchased items from a retailer before, but then has no activity for 24 months, are they a new or an existing customer? Or, is a new customer only one that has never, under any circumstances, shopped with a merchant before?

Lifetime Value: Advertisers should always strive to place a monetary value on customers’ life span with their organizations, as it is useful to compare those values across partners and channels. How many times does a typical customer purchase in a year, in two years, in a lifetime? Many acquisition channels are known to only break even on the customer’s first order; is your affiliate channel measured that way? Are affiliate customers purchasing twice as often after that initial sale? Do they spend 75 percent more when they come through the affiliate channel? You may find that these values are higher/lower through the affiliate channel, as you may spend more or less to acquire them initially, thus each customer is worth more in the end.

Incremental Sales: This one is a little trickier to determine, but generally, advertisers are trying to understand how many affiliate channel sales would have only happened with the affiliate being involved in the transaction. E-commerce advertisers will probably face a lot of heat when a sale is registering in the search channel AND the affiliate channel, so they need to have a good handle on the path to purchase to determine “incrementality.” Why did the user end up purchasing? Was it because of the first search ad? The offer the affiliate had? Did they know they would receive a rebate through an affiliate site? Do they only shop through the affiliate site, so advertisers wouldn’t have seen the sale if they didn’t participate? It’s a calculation based on assumptions. There is no right or wrong answer, but at the very least, advertisers want to explore this information.

Channel Attribution: Many affiliate managers and affiliates fail to understand attribution and how it affects profitability measurements. Each advertiser has many channels — search, email, catalog, brick-and-mortar stores, display/retargeting, social, etc. As a user travels from intent to confirmation, or path to purchase, they will most likely interact with each of these channels in several different ways. Understanding this channel behavior will go a long way in determining which partners are vital and which ones are not. Again, assumptions must be made, but good data can help you fill in the gaps.

This is the “creative” portion of marketing — and there are as many right answers as there are marketing managers. The first step, however, is to collect data. It is important that an enterprise quickly becomes big advocates of leveraging data at the customer level. In the end, they are attempting to determine the value of that customer in relation to the channel so they need to spend some time determining what data is available before they determine how to incorporate it within the concepts outlined here.

Advertisers with Business Intelligence (BI) teams, should get to know those professionals better. They’ll need to know customer behavior by channel, the corporate profitability formula for a customer, how many channels a customer touches on his or her path to purchase and the average order values across channels. It’s imperative to work closely with other channel managers and learn how they are determining profitability. Once advertisers have that data, and the other channels’ profitability formulas, they can begin to utilize these advanced concepts to compare, contrast and measure their affiliate channel success.

 


About the Author: Jamie Birch is the CEO of JEBCommerce.com, an award-winning performance marketing agency. Birch has been running marketing programs for Fortune 500 companies for more than 15 years.

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