More Customers or Better Customers?

Affiliate programs began with a naive idea
– that more is better. With the recent shutdown of Capital One’s affiliate program because of poor quality Internet customers, clearly the early naiveté is being replaced by a new reality, based on standard business practices. Here’s what affiliate marketers have discovered:

Affiliate programs can generate quality customers if you look for them.

Affiliate programs can generate crap customers if you don’t qualify.

To get quality customers, you have to target and convert quality customers.

Managing the mass-market appeal of Internet affiliate programs is critical to your survival. You can’t just trust folks to slap your ad anywhere they like.
In the early days of affiliate programs, having more affiliates was supposedly a good sign. Back in 1998 at one of the first affiliate conferences, I met many of the growing affiliate networks bragging about the thousands, and soon millions, of affiliates they could sign up.

Credit card companies such as NextCard started signing up the masses in 1999. NextCard gathered about 800,000 customers with one of the most effective, well-executed affiliate programs ever conceived — as far as marketing is concerned. Four times, it was ranked the best credit card by Gómez. The company’s delivery and instant, online approval processes were top notch.

Automatic online approval gives you quite a buzz, but with it comes the cost of processing the application. Imagine the cost is $5, and you get 33 percent approvals — that means 3 out of 10 people are approved. But you pay $55 in application costs to get those three customers, and that’s beyond the $30 or so paid to the affiliate for each customer.

The acquisition numbers were high, but so were the costs. Super affiliates flocked to this like bees to honey. Bulk email lists, per-click affiliate masters, and every joke, astrology, and free stuff site were all promoting NextCard. Credit cards were one of the highest paying affiliate products during 2000 and 2001.

But the ease of converting customers through the affiliate program was not necessarily a good sign. High approval ratings for NextCard made this an easy process for an affiliate. Yet, NextCard’s conversion process was too easy; it approved customers with low FICO scores (which determine credit worthiness) and filled its coffers with subprime (high-risk) credit customers.

With the recent dip in the economy came a request from federal regulators for both credit card companies to increase their reserves to cover the increased risk such “subprime” customers bring. NextCard ended up dying on the vine, being absorbed by Merrick Bank. Capital One shut down its affiliate program in the U.S. (the U.K. is still open) and covered its reserves.

Yet, the message is clear for anyone in affiliate marketing. You get what you pay for. Everyone used to think the Internet was cheap. The way we all marketed through affiliate programs was cheap. Email was, and is, cheap to send. Pop-ups and banners can be distributed widely, almost for free. But free advertising doesn’t necessarily get you the right customers. What most of us have done is troll through the masses, the virtual National Enquirer of the Internet. What most have not done is look closely for the best customers.

Super affiliate lists used to be dominated by the lottery sites, joke sites, mass email lists such as Colonize.com, and others who knew how to attract thousands to an affiliate site regardless of quality. Affiliate programs are quickly getting smaller and more effective, focusing on yielding quality customers by qualifying affiliates.

Here are a few ideas for qualifying your affiliates:

Create private reseller programs specifically designed to qualify and select the best affiliates to work with on an ongoing basis. Advertise by word of mouth, not by announcements on the Net.

Profile your top affiliates. What sort of audience should they appeal to? What can you do to keep them running your program repeatedly?

Develop residual income opportunities with top affiliate channels. Like retailers, super affiliates have access to a specific audience. Well-positioned products that have a year-round sales cycle (e.g., online education, books, dating services, financial services, and small business products and services) should be developed through a reseller channel.

Pay a slotting fee to stay on these sites and build loyalty. Encourage them to send you better customers and reward them with higher margins when they do.

Develop a back-end system that lets you upsell products. Don’t be a one-trick pony with a single product, or, if you are, bundle your offer with other affiliate program offers to make it more appealing.

Build your conversion process to get you the kind of customers you want.
By focusing on volume more than quality, NextCard missed the boat. And many affiliate managers still don’t understand that an effective sales channel is founded on the most basic of business principles: The right offer to the right list at the right time generates results. The rest is just commentary.

By Declan Dunn, The ClickZ Network