In this post I want to look at why advertising rates are so much lower online than in print, and show why affiliate revenues are part of the answer for online publishers.
Before many people had access to the internet, advertising media was relatively scarce. If you wanted to reach people in a certain niche, let’s say people who like Formula 1 motor racing, you only had a few options. There were magazines such as Autosport, Motorsport and F1 Racing, maybe five or six in total, and then the mainstream newspapers. Prices were high because advertising space was scarce. As an economist will tell you, it was simple supply and demand, and with this market the power was with the publishers – the supply. While the media wasn’t a monopoly, it wasn’t easy to start a new publication and this helped to keep prices high.
Then the internet came along. Today, if I want to follow Formula 1, not only are there the magazines and newspapers from before, but literally thousands of websites to choose from. And therein lies the problem – and also the opportunity! Now there are huge numbers of publications chasing the same ad spend. Things have flipped: the power is now with advertisers – the demand. That’s the fundamental shift.
What does this mean for the wider economy? If advertisers, such as retailers, can achieve the same marketing result with just a fraction of their former advertising budget, due to lower ad prices, they can either lower their prices, pocket the difference as profit, or move ad spending into new areas of marketing. In practice they do all three, but it’s these new areas of marketing that are the big opportunity for publishers.
Rather than spending on ads, a retailer can operate an affiliate scheme. Here, someone gets paid by the retailer when that person’s recommendation leads to a sale. Most people believe that word of mouth marketing is not only the oldest but also the most effective method of selling, and I agree. You are much more likely to buy a new type of phone if your best friend tells you it’s the one to get, rather than a man in the shop or an advert in a magazine.
Having run affiliate schemes myself in the past, I know that the one big advantage is that you only pay for the sales you actually make, rather than with ads where you pay up front for sales you might make. It helps cashflow immensely, because you’re paying out of existing takings, rather than giving cash up front before the revenue rolls in (and with lots of advertising the revenue doesn’t roll in anyway). Also, as a retailer I’m happy to pay a relatively large commission on an affiliate deal, because I know 100% that a profitable sale has already been made, and I can very accurately track the efficiency of each penny of marketing spend.
The challenge for the affiliate is to build a strong enough reputation with the customer that the affiliate’s recommendation to buy a product will be acted upon some of the time. It’s really about becoming a friend to the customer, so that word of mouth takes effect.
It should be clear by now that affiliate deals are a massive opportunity for publishers if they can build a strong enough reputation and bond with the customer that the affiliate recommendations are acted upon. This requires a genuine and honest commitment on behalf of the publisher to help their customers, not a mercenary attitude where money rules at all costs. In future posts I’ll look at how this relationship can be built and strengthened.
