Are Search and Affiliate Marketing Budget Cuts Irrational?

The way marketers think of their online, search, and affiliate budgets will often determine the way they react to macroeconomic factors and attack new opportunities in the marketplace. The moves of some major marketers in today’s economic climate are very telling, and one might even be described as irrational.

In tough economic times, many marketers cut back on advertising and marketing programs, eliminating as much fat as possible. While this makes perfect sense, I’m not sure advertisers and the agencies advising them are ready to deal with a weak economy in which consumers rely on the Internet, and on search engines in particular, to search out deals and best prices. Instead, these marketers are making decisions as if the media landscape looked as it did 10 or 20 years ago.

After 10 years of ROI (define) focused online marketing and paid search, I’m perplexed when marketers seem unable to make rational decisions about performance marketing. If we go by the PPC (define) search marketers who set annual budgets or the marketers who use affiliate marketing programs and customer acquisition programs on fixed budgets, we’d see a distinct lack of rationality driven partially by tradition, partially by corporate structure, and partially by lack of education and familiarity with the way consumers shop today.

For better or worse, current search marketing and affiliate marketing budgets are managed in a direct-response fashion, which means that measured ROI targets are set to make a campaign self-funding. (True ROI may be higher.) This means that each dollar spent has a positive net search profit. Here’s an easy way of thinking of a positive net search profit: as a marketer, you’re buying dollars for less than a dollar and making money on every transaction. I’ve also likened this scenario to a slot machine with positive odds, where you may not get a positive return with every spin, but overall you always win more than you put in. This analogy reflects the fact that you are buying clicks that have a predicted and predictable likelihood of conversion, revenue, profits, or lifetime customer value (LTV).

Yet when you ask many marketers how they account and budget for search and affiliate marketing (another form of performance-centric marketing), these marketers say search and affiliate budgets are budgeted just like other forms of advertising. That, in and of itself, isn’t a bad thing, but the thinking surrounding such a structure doesn’t fit the paradigm of managing and optimizing a spend that generates positive marginal profit or, more important, that maximizes net search profit. When search marketing budgets are viewed just like TV, radio, print, or other online marketing, the temptation is to cut budgets uniformly. And that may not be the best solution.

Among marketers I’ve spoken with, including clients, there seems to be a higher degree of spend volatility this year than in years past. Some volatility is driven by changes in supply (fewer searchers searching within a sector), but some volatility is driven by internal budgeting decisions.

In addition to being immersed in search marketing, I keep tabs on the affiliate marketing sector because the two are tightly linked. Interestingly, Staples recently announced within its affiliate program:

    Staples is experiencing short term budgeting constraints across all marketing programs for June and July. As a result, the affiliate channel will be affected and commissions will be reduced for the majority of our publishers over this short timeframe.

    Publishers will not be expired, as Staples wants to maintain the affiliations. However, some commissions will be reduced to $0 until August to ensure the program stays within its extremely limited budget.

    Please understand that this budget cut is not reflective of the performance of the Staples affiliate program or Staples’ affiliates. The program has been hugely successful thanks to our affiliates, and we intend to put the program on track towards the end of the summer

Is this a test by Staples to determine just how much incremental revenue is driven by affiliates, or is it an arbitrary decision? No one on the outside knows for sure. This kind of move is certainly a dramatic experiment to run (if in fact it is an experiment).

Many marketers account for the affiliate payments they make and the money they spend on search as a cost of goods sold (COGS), not a marketing expense. Clearly, though, if search and affiliate dollars are seen as a COGS or a commission of sorts paid to the media or publisher that delivers customers, then an arbitrary budget cut is the equivalent of marketing suicide.

Unless marketers are convinced that the marginal profit on their search or affiliate marketing spend is negative or that they have a far more effective media channel that delivers profit at a lower COGS — and higher ROI — it would be crazy to cut back on search or affiliate spending. Yet, clearly this is what some marketers are doing.

While more advanced marketers are working with technology and agency partners to build holistic marketing and media mix models that truly leverage search, display, and even offline advertising to influence and maximize consumer purchase behavior, some marketers are making arbitrary media budgeting decisions not supported by data.

Make sure you aren’t one of those irrational marketers.

Join us for SES Toronto, June 16-18 at Metro Toronto Convention Centre (South Bldg.).

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