Monday, 19 March 2007

The affiliate marketing jungle

According to the wikipedia article on affiliate marketing there is a battle going on between the more established "cash per click" and the less familiar "cash per action" models for the market in online marketing. Most of my personal experience having been recent (having devoted my time entirely to trading futures for several years - now a part-time, but still important activity for me) I hadn't seen there was any conflict involved!

Clearly a participant in any market will tend to do what is in their own interest. With advertising, which is more of a commodity on the Internet than it ever has been before (i.e. lots of participants on both sides, whose services are to a large extent interchangable), a buyer of advertising will always want to spend his advertising dollars on the medium that provides the best value (i.e. the cheapest for a certain profit gained).

So sometimes CPC might be best, sometimes CPA may be best. The big difference is that with CPA, the seller knows from the outset exactly how much he needs to pay to get one sale at a particular price. This make him very comfortable about the cost benefit of the advertising budget (merely presuming he manages to spend it, which is not a triviality, of which more later). Of course the situation is not really a complete pig in a bag with CPC. An experienced user of online advertising from a consistent source (such as Google's adsense) will have learnt by experience how much bang he gets for his buck.

I described the CPA market as like a commodity market above and this is very close to being precisely true for the buyer of advertising space. However in a sense the uncertainty has moved to the party providing space for adverts on his popular webpage. With the declining model of "cost per impression" he knew exactly how much he was going to get if a thousand visitors came to a page. With CPC, another variable was added - the question of what proportion of readers would click on an ad. With CPA another level of uncertainty has arrived, with the question of what fraction of readers will buy (or subscribe) after clicking an ad.

Despite being a provider of advertising space, this seems entirely proper to me. The customer is always right. What the buyer of advertising wants is paramount, and it seems fair that the party putting up the cash should have security if possible. A bonus for providers of advertising services is that security in the cost benefit of advertising encourage aggressive advertising budgets, involving appropriate leverage to grow new markets before competitors.

A very interesting issue is how the new advertising market operates, by comparison with older markets. There is a continual competition on for advertising space, and advertisers need to be competitive to attract affiliates to form partnerships with them. This means that they have to have strong attractive products with adequate margins to get the necessary exposure. More so than ever before the marketplace is a jungle where the fittest advertisers will survive, and the fittest providers of advertising space will prosper.

To mix metaphors, but perhaps appropriately given the nature of Darwinism, the advertising marketplace is always going to be a matchmaking arena with buyers of advertising services needing to fight for the space on the pages of their service providers, the webpage owners.

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