Why the Performance Fee Model Is On Its Way to Extinction – Part 1

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This article was originally published in PerformanceIn.

In this article, Acceleration Partners’ founder and managing director, Robert Glazer, argues that, for networks to remain relevant and competitive, they will need to embrace significant changes to their performance fee model.

Due to the extensive and in-depth insights offered in this article, we’ve broken it down into three separate posts:

  • Part one will address how the current performance fee model came to be and the challenges it’s causing today.
  • Part two will touch on five trends that threaten the current version of the performance fee model.
  • Lastly, in part three, we will focus on the future and what networks will need to do if they want to continue meeting the needs of the market.

Ongoing Challenges

I am going on record and declaring that the traditional 20-30% affiliate network performance fee model is headed for extinction.

Currently, there are significant pricing and structural changes taking place in the US performance marketing industry that are signaling what may be coming for the rest of the global performance industry.

For networks to remain relevant and competitive as the market evolves, they will need to embrace changes to a model that has not evolved with the times and is hindering the industry’s greatest opportunities for future growth.

What is the performance fee model?

At its core, a full service affiliate network has historically offered three main components:

  • Technology (program hosting, tracking, payments & reporting)
  • Publisher development services
  • Account management services

These services are in addition to ancillary functions, such as fraud monitoring, compliance, etc.

Rather than charge for each of these services separately, full-service affiliate networks usually charge a single “performance fee,” or “override” as it is referred to in Europe. This fee is typically a percentage of program revenue (e.g. 1-2%) or commissions paid to affiliates (e.g. 30%). The idea is that it covers those three main service components.

This model came of age in the early 2000s when affiliate marketing was a new industry and the networks provided the majority of new publisher relationships for retailers. Networks also tended to have publisher exclusivity in the early days of the industry, which helped make this fee model so popular.

At the time, the performance fee model made sense because:

  • Retailers only had to pay the network when a sale was made.
  • They had little knowledge of the publisher landscape.
  • They were attracted to the wide base of exclusive relationships forged by the networks.

As a result, the performance fee model became the standard for the industry over the next decade.

Ongoing challenges with the performance fee model

There are two long-standing challenges with the performance fee model.

1. Conflicts of interest

In the performance fee model, networks represent both affiliates and merchants in a single transaction. This is comparable to financial advisors who get paid a commission based on their investment recommendations. Studies have shown that commission-based advisors dramatically under-perform those who are paid a fixed fee and are unbiased in their recommendations.

In online marketing, this is why no one hires Google to be their paid search agency.  They understand Google’s goal is to sell more clicks.

2. A lack of transparency & accountability

The typical service agreements in the performance fee model lack both transparency and accountability. Retailers receive a single bill from the network that does not include specifics on the actual costs, time and resources that went into each part of their program. These broad-templated agreements often don’t include service level agreements (SLAs) or contractual consequences if services go undelivered or standards/metrics aren’t met.

What happens if you need more account services? Or if your account team does not deliver or turns over? Or if the network missed fraudulent activity? In a performance fee model, these questions often go unanswered.

An example of a network that has done a good job with breaking these out is Affiliate Window. Their contract and SLA’s offer clear details about what their clients can expect of them for each component, as well as what the client’s responsibilities are.

This lack of price transparency has also resulted in many companies paying vastly different prices for the exact same service. It’s not uncommon for one company to pay a performance fee that’s 50-100% higher than another company – even when there’s no difference in the two agreements otherwise. Often the company paying the higher rate has an older agreement that auto-renewed or had not put the program out to bid recently.

Check out our other blogs posts to learn five trends that are threatening the current version of the performance fee model and what the future is likely to hold for performance fee structures.

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