He was interested in developing his own revenue-sharing
program to drive users to his website. It was obvious, he said, that the revenue-sharing
model could dramatically lower his cost of acquisition and allow him to all but
eliminate his traditional marketing and advertising budget.
What he
wanted to know was how to structure the deal..... 1998 has been proclaimed "The
Year of E-Commerce." Amazon.com now has a $4 billion valuation ($1.7 billion MORE
than Barnes & Noble), CDNow and Music Boulevard each raised tens of millions of
dollars in their respective IPOs, and Yahoo! (with a $7 billion valuation) just
purchased Viaweb (which hosts 1000 small e-commerce sites) for $49 million.
Much of these astronomical valuations is based on a vague concept of Internet
presence: with no physical stores or inventory, many of these online retailers
are essentially Marketing companies -- worth their weight in page impressions.
To extend the visibility of their brand and increase online sales, many of the
larger retailers have embraced a revenue- sharing model, giving away a percentage
of the sale to grab all- important marketshare.
By paying individual
website owners commissions for sales that they help drive, a site's cost of acquiring
new customers can be reduced substantially. For these retailers, the decision
to give up 5% to 20% of the sale price is a no-brainer. Not surprisingly, a growing
number of online retailers are following pioneers like Amazon.com and One and
Only Internet Personals into the fray. Refer-it (http://www.refer-it.com) lists
hundreds of programs that offer everything from free streaming content to hundred-dollar
bounties for new accounts.
It would seem that the latest mantra of e-commerce
might be "It's revenue-sharing, stupid!" But finding the right formula for both
the site owner (the affiliate) and the e-commerce provider (wholesaler/retailer)
is less obvious. There are two major types of revenue-sharing programs -- affiliate
(also called associate) programs and bounty (also called referral) programs. Music,
book and vitamin retailers tend to offer affiliate programs, telling their associates,
"I'll pay you a percentage of the sale when a visitor to your site clicks through
and buys one of my products."
Sites like Music Boulevard, Autoweb and
Darwin Keyboards, which pay website owners anywhere from a 5-15% commission, best
exemplify the affiliate model. The advantages of affiliate programs are that,
in theory, a site owner can continue to earn money from the same "customer." That
is, if a visitor continues to come to an affiliate's site to make his online purchases,
the site owner will earn a commission on every sale. Well, maybe. And this is
where it gets tricky -- who owns the customer?
This is the hardest question
to answer in this model. Some programs pay forever, others only for the first
90 days, others only on the FIRST purchase. And what if the visitor clicks through
to the retailer's site, "window- shops" only, then returns directly to that retailer's
site 10 days later and makes a purchase?
Does the referring site still
get the credit? Not only must the above policy questions be answered, but the
technology behind them must be developed. No small feat when you consider that
Amazon.com has more than a million items for sale, and over 40,000 affiliates.
Keeping track of which affiliate the customer comes from, what he buys, and
when he buys it can quickly become more complicated than building the storefront
itself!
Enter the bounty model -- one that has existed in the off-line
world, formally and informally, since the beginning of time. Bounty program managers
say, "I'll pay you a fixed price for bringing me a new customer or a 'hot lead.'"
Let's pretend you own a florist shop and you partner with the local undertaker.
For every grieving family he sends your way, you pay him a one- time bounty of
$25. After that, presuming your crocusses didn't wilt, that family will return
to you the next time there is a bereavment.
It works just as well online
as it does off. WebCards (http://www.printing.com), which puts homepages on postcards,
is a good (and more cheery) example in the online realm. They pay the website
owner $1.00 every time a visitor to his site clicks through and fills out an online
form requesting further information. It's the site owner's job to deliver the
person to them; it's WebCard's job to convert the lead to a paying customer. With
a bounty program, that's all there is to it. No issues about who owns the customer
(WebCards does), tracking individually priced items (it's always $1.00), or trying
to lure the customer back to buy from you instead of the retailer. And from a
technology standpoint there's no contest -- any small retailer or business owner
can easily develop and maintain this type of program.
The obvious difference
for the website owner is that she needs to continue to attract NEW visitors to
her site -- she can't "retail" this particular offer to the same visitor again.
I was glad to see that that web executive from the content provider was giving
some serious thought to his revenue-sharing plan. With the e-commerce boom, the
idea-of-the-moment is often portrayed as a quick fix, requiring little thought
to magically turn silicon into gold. The fact is, revenue-sharing isn't web alchemy,
it's real business. And those who set about implementing such a program should
pause to consider the strategic implications.
For your business, it
could be the difference between IPO and R.I.P. (I know a good florist...)
James L. Marciano is the CEO of Up-Set, a NYC new media company founded
in August 1996. In addition to building online communities (or "intersets") such
as TheSquare - http://www.thesquare.com, for Ivy League grads, and i-Site - http://www.i-site.org,
for the blind, Up-Set has created Refer- it - http://www.refer-it.com the definitive
guide to revenue- sharing programs on the Internet. Prior to founding Up-Set,
Mr. Marciano was a strategy consultant for seven years; he received an AB in Social
Psychology from Harvard College in 1988, and an MBA in general management from
The Amos Tuck School at Dartmouth College in 1993.
