EricEwe.com

I think this is going to be a big shakedown in the online realm with Rakuten Inc of Japan agreeing to purchase U.S. e-commerce site Buy.com Inc. The all-cash deal, valued at $250 million, will offer Rakuten its first major direct-to-consumer platform in the world’s largest e-commerce market. The move will give Rakuten a larger footprint in the U.S.

In 2005, the company made its first U.S. move via the purchase of LinkShare, but has largely focused on Asia. For instance, Rakuten and Baidu formed an e-commerce joint venture in China earlier this year.

Buy.com has yearly sales of about $500 million. The deal marks the second time Buy.com has been acquired all or in part by a Japanese company. In 1999, a group led by Softbank Corp. paid $165 million for a stake in Buy.com. Buy.com went public in 2000 and went private again in 2001.

Buy.com currently host its affiliate program on Commission Junction, and I think that in the very near future, they will migrate off Commission Junction to Linkshare, as Linkshare is part of the Rakuten web property.

I have been in the affiliate realm for quite some time and I have seen a lot of changes, from the rise and fall of cookie stuffing affiliates to networks imploding. Within the last 3 years, I have seen a surge in not just super affiliates like Fatwallet, SlickDeals but rather what I would call MEGA Affiliates that make those super affiliates look like dwarfs.

Don’t get me wrong, in order to reach a status of a super affiliate, that particular affiliate should be driving a substantial amount of traffic to the retailer and generating a decent revenue. Commission Juction categorizes larger affiliates as “Top Performers” and it order to qualify, one must have a CJ Marketplace account and have been paid at least $10,000 USD in commissions per month for the last three months.

Over the last 3 years, companies that are typically merchants are getting into the affiliate game. A good example is DiscoverCard. They came storming into the scene and in 2007, Discover was recognized as the “Best New Affiliate” in the Linkshare Golden Links Award in NYC on June 19, 2007. It is no surprise that they are not only a super affiliates but Mega affiliates with their millions of DiscoverCard customer. One of their biggest angle is to offer a CASH BACK to the consumer for their purchase by clicking through the Mega affiliate’s link. Another notable Mega Affiliate is Bing which is supported by Microsoft.

What really puzzles me is the fact that the retailers have with these Mega Affiliates. Yes, it is imperative to have a relationship with them but at what cost? If you are paying your public affiliates 2% on all goods bought on your website and you offer these Mega affiliates more than 10% commission, where is the logic behind this? I have worked at an electronics retailer and competition is fierce and consumers are not only price sensitive, most tech savvy consumers will scour the ends of the world to save a penny. Thus, one is often squeezed by manufacturers to be competitive. I noticed that there was an electronics retailer offering 10% cash back to Bing’s users when they purchased through Bing’s links.

Today, I noticed that Wal-Mart is offering 20%. Yes, 20% on Bing.com. If you do some quick math, 20% is basically 1/5 off on a product. On Average, they are offering 1%-4% through their affiliate program on Linkshare and have been constantly shaving commission via their Linkshare program. So if Bing.com is able to offer 20% kick back to their customer base, then either Wal-Mart is offering at least 20% or Bing is subsidizing 16-19% on each transaction for their customer base.

Let’s look at this in a logical way, I am a firm believer in rewarding for performance but not to the extend where it cuts into your profit margin. In the long run, this is not a sustainable strategy where the merchant will bleed to death. And if the Mega affiliate is dumping money to promote a merchant, that is a great relationship for the merchant.

I was helping a company do a competitive analysis on a pro bono basis, and I came up with a short page for “intro to affiliate marketing”. I thought that I will post it here to give merchants (advertisers) an idea of affiliate marketing and an illustration of affiliate marketing.

AFFILIATE MARKETING DEFINITION
Affiliate marketing is an advertising channel in which advertisers (merchants) pay publishers (affiliates) only for results, such as a visitor making a purchase or filling out a form, rather than paying simply to reach a particular audience. This “pay-for-performance” model is in essence the modern version of the “finders’-fee” model, where individuals who introduce new clients to a business are compensated. The difference in the case of affiliate marketing is that advertisers only pay their publishers when the new client introduction results in a sale or a lead, making it a low-risk, high-reward environment for both parties. (Source: CJ)

MODELS
The two most common models are:
- CPA (Cost per action) – Commission paid based off the % of a sale, it is sometimes called “Revenue Sharing”. A company utilizing this model usually carries products for sale. i.e. Wal-Mart, Target, Buy.com which might pay 3% on the total sale.
- CPL (Cost per lead) – Fixed commission paid on each completed registration.
A lead generation model program might include companies that offer services like Match.com, LendingTree.com, DentalPlans.com which might pay $15 per registration.

MERCHANTS
Merchants are basically advertisers. They are looking to drive traffic to their website by working with affiliates. Merchants would push out banners, text links, dynamic rich media, RSS, email templates, etc to assist affiliates with the necessary tools and content so that affiliates are able to drive traffic to the merchant’s website.

AFFILIATES
Affiliates are publishers that will take the banners/content of the merchants and publish it on their website or other channels with the goal to help the merchant generate a sale/lead, and in return make a commission.

NETWORKS
It is basically the market place where the advertisers and publishers are able to meet and conduct business. It is like an eBay for advertisers and publishers where advertisers are able to push out offers, find new potential publishers while publishers are able to login, look for appealing offers, check their commission and communicate with advertisers.

TRADITIONAL MARKETING vs AFFILIATE MARKETING
In a “Traditional marketing”, merchants would broadcast their marketing message to consumers utilizing some of the online marketing vehicles. With this method, it can get relatively expensive to reach a particular audience and there is no assurance of ROI.
See illustration below for traditional marketing.

1. Merchants

2. Broadcast

3. Audience / Consumers

In “Affiliate Marketing”, merchants are able to partner with affiliate and broadcast their marketing message to a particular audience. At the same time, the affiliates are bearing the cost to reach out to audience with the goal of making a commission. See illustration below for the affiliate marketing model.

1. Merchants

2. Affiliates

3. Broadcast

4. Audience / Consumers