Affiliate Marketers: SEM Friend or Foe?

There’s a crisis brewing in many verticals in which marketers’ focus has been on outsourced lead generation. Entranced by the prospect of shifting risk onto external agencies and publishers, many marketers entered into lead-gen deals (paying for leads on a cost-per-lead-generated basis) in which the agency was in a non- or partially exclusive relationship.

Many of those same marketers now realize they want to engage in SEM (define) themselves. Once they enter the marketplace alongside their lead-gen partners, they find the keywords that drive the majority of volume and potential profit are locked up by those partners.

Today, I’ll discuss why this is and what to do about it. And, why you may want to think again before engaging in a lead-gen relationship with a third party.

If you already use either partner or affiliate marketing to generate search leads on a performance basis, the way your affiliates affect the marketplace will differ dramatically depending on whether the relationship you have with them is exclusive lead-gen, non-exclusive lead-gen, revenue sharing, or fixed bounty deals.

Commission deals and exclusive lead-gen or bounty deals have the least impact on the marketplace as a whole. All three require the third party only earn money from one interaction or transaction at a time. Only you get the order or lead; none of your competitors benefit from the affiliate’s activities. The affiliate acts on your and its own behalf. This is the most common affiliate marketing method.

Marketers often believe they’ve made their lives simpler by shifting risk to a third party. That may be true, but chances are in the typical affiliate relationship, the situation results in the affiliate just going after the low-hanging fruit. After all, the affiliate is likely involved in this style of SEM for several marketers simultaneously. Because it’s investing its own money and time in the campaign, efforts on the easy pickings.

The primary downside is you’ll be disappointed if you rely on your affiliate partner to be aggressive in the marketplace. You’ll miss significant upside opportunities you would have pursued had you controlled your own campaigns and destiny.

But another option is to use affiliates as a supplement while managing them to avoid conflict with the primary marketer or each other.

The traditional affiliate or partner model isn’t as potentially insidious as are partner arrangements in which leads are sold on a non-exclusive basis. When you compensate a third party on a per-lead basis but the leads are simultaneously sold to your competitors, the lead aggregator has an amazing economic advantage in the auction marketplace. Though many lead aggregators add value to the marketplace, they can also create a nightmare for the marketer looking to enter the marketplace directly.

Consider the following: An online university offers multiple lead-gen partners a per-lead fee of $75 on a non-exclusive basis. Let’s assume an average non-exclusive lead is actually worth $100 to the online university, but the marketing manager left himself a buffer in case the vendor’s lead quality is subpar. As the lead aggregator signs additional educational institutions all paying from $60 to $100 per lead, that lead aggregator gains a cost advantage in the marketplace. At some point, the lead aggregator can probably pay $300 a lead and still make $300 profit by selling that lead on a non-exclusive basis to several universities.

In some industries, the number of lead aggregators has skyrocketed into the dozens. This results in an efficiency war and a battle for scale among the economically advantaged lead generators. We now have several markets in which lead-gen partners have a chokehold on the search marketplace. Where does that leave a marketer looking to participate in the auction search marketplace directly? Squeezed out by partner sites.

The math works the same way with any lead-gen scenario in which leads are sold on a non-exclusive basis by the lead aggregator. Marketers can’t compete on many critically important keywords in their own industry.

There are no easy solutions. A marketer can pull out of lead-gen relationships, but this only slightly reduces the partner’s profit and leave the organization with far fewer leads.

Alternately, the marketer could apply CRM (define) and segmentation modeling to his campaigns to discover where the very best customers come from. These customers have five times the value of the average customer. In the example above, a great profitable customer may be worth $500 per lead. At $500, perhaps the marketer can compete directly for the few highly important customers. Simultaneously, he could roll out offerings the competition doesn’t have. In newly identified, sparsely competitive segments, keyword competition will be lower. If no competition enters the marketplace, no lead-gen partners have an incentive to be aggressive. You have the market to yourself.

The final option is to adopt an integrated marketing mentality rather than a pure direct marketing one. Consider buying keywords that tend to represent early buy-cycle research. Your objective is to build awareness and increase the likelihood your brand will be selected later in the buying cycle. Ironically, this holistic approach to keyword buying will often benefit your lead-gen partners as well.

The next two years will be critical to several industry segments that have given rise to non-exclusive lead-gen middle layers. It’s an area I plan to watch carefully.

Meet Kevin at Search Engine Strategies in New York City, February 27-March 2.

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