Build Versus Buy?

A common reader gripe goes something like this…

    My soon-to-launch company wants to use the power of affiliate marketing. We’ve looked at some of the solutions from folks like Commission Junction, ClickTrade, LinkShare, Be Free and Dynamic Trade. We really want to generate as much volume as possible so the fees will quickly add up. We just can’t see paying the 20 to 30 percent commissions these guys charge. Is it really worth joining?

    What do you think of our building our own in-house solution?

Honestly? I can’t think of too many situations where it would be advantageous to build your own program. Recently someone wrote in to express an interest in acquiring a large number of members for an opt-in, permission-based marketing program. Since this is a desire shared by many, we’ll use it as a hypothetical scenario.

Some Quick Math

Assume you were willing to spend $1 per member sign-up. The average affiliate network charges an additional 20 percent, or $0.20 per member sign-up. This means an affiliate marketer could sign up 500,000 members for every $100,000 in network fees it incurred. Now assume you wanted to achieve this volume month after month; that’s a total of six million members in your first year.

Where Do Your Affiliates Come From?

How many affiliates do you think you’ll need to recruit in order to drive 500,000 sign-ups monthly? If you’re not sure of the exact number, a bit of speculation should help. If a typical affiliate web site serves 10,000 page-views monthly and your offer gets a two percent CTR, followed by a ten percent conversion rate, you’re looking at 20 sign-ups per affiliate per month on average. That means you’d need about 25,000 active affiliates to generate 500,000 sign-ups. Recalling that the 80/20 rule applies, expect to recruit about 125,000 affiliates in order to net 25,000 actives.

If you’re paying $1 per end-user sign-up, how much will it cost you to recruit new affiliates? Maybe $5, maybe $10? After all, if you’re not in an affiliate network, how will affiliates find you? How much marketing will be required to attract affiliates directly to your program? Make sure to factor these costs into your “savings” estimates for going it alone.

Other Points to Consider

Does your company write its own payroll checks? If you don’t handle your own employees’ paychecks, why would you take on the task of writing checks to 25,000 affiliates?

Does your company run its own ad servers? In order to serve affiliate commerce offers, you’ll need some type of banner- serving capability. If you already outsource this capability, there’s no point in bringing it in-house. Likewise, the better affiliate networks serve your banners and offers as part of their standard commission. That’s a far cry from most third-party ad service bureaus, which charge on a CPM basis.

Finally, does your company have an existing customer service organization capable of answering technical questions about HTML code? For most companies this is the final showstopper. Even if you do have a great customer service group, odds are you don’t want to take them away from your true end-customer.

What Do Affiliate Networks Provide?

Service levels and pricing do vary tremendously from network to network. What you should be looking to get from your affiliate network depends on your exact situation. For my money, an affiliate network should provide a robust stable of affiliates. Next, an affiliate partner should be capable of handling check writing, 1099s, banner serving and frontline technical support.

Going back to our example, during the course of 12 months you could expect to recruit six million opt-in members for a cost in network fees of around $1.2 million. Then add to this the commissions paid to your affiliates. All told, $7.2 million has acquired you a meaningful base of members.

Not impressed? Consider Lifeminders, which just passed the 12 million member mark in March, a feat that took them a mere 15 months. For better or worse, Lifeminders spent an average of about $5 per member. Hmmm… $1.20 a member doesn’t sound so bad, does it?

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