Why the Performance Fee Model Is On Its Way to Extinction – Part 2

Why the Performance Fee Model Is On Its Way to Extinction – Part 2



Last week we addressed part one of this topic and looked at the history of the performance fee model and why it’s causing so many issues today.

This week we’ll touch on five trends that are very likely to bring an end to this common network fee model.

New challenges with the Performance Fee Model

Here are five trends that threaten to bring an end to the current version of the performance fee model.

1.  The dominance of mega affiliates   

As the affiliate industry progressed in the 1990s and early 2000s, “mega affiliates” emerged.

Mega affiliates are usually large coupon and loyalty affiliates often representing about 80% or more of the revenue for the largest affiliate programs. Consequently, they also drive about 80% of the performance fees.

Mega affiliates are not proprietary to any one network and, in many cases, work directly with retailers on a day-to-day basis.

Although mega affiliates represent a large volume of program sales, retailers are struggling to understand why these large relationships should demand a premium performance paid in perpetuity.

This was one of the driving reasons eBay and Groupon decided to build their own in-house networks when their programs grew big enough. It’s also why Software as a Service (SaaS) affiliate technology platforms have grown dramatically in popularity.

2.  The conscious uncoupling of technology & services 

SaaS affiliate platforms came onto the scene about three years ago and have had a larger presence in the U.S. market which has had a high degree of complacency and declining competition due to M&A. They immediately targeted programs that were paying outsized fees to networks for a few high volume non-proprietary publisher relationships.

Instead of charging traditional performance fees, SaaS platforms charge a fixed fee or a volume/transaction-based fee that is tied to product innovation. In turn, these platforms offer quality, white-labeled affiliate network technology to manage “direct” affiliate relationships for retailers.

By default, SaaS platforms provide price transparency to merchants for the technology aspects of their program. Subsequently, this then puts a de-facto price on the other services (publisher development and account management).

For example, consider a large retailer who currently pays $1 million in performance fees to a network with 90% of that $1 million coming from fees to access the 10 largest mega affiliates.

If that retailer compared that fee with what a SaaS affiliate platform offers, they’d likely find that it would only cost them about $250,000 a year to access their own private network. They’d also see that the network is essentially charging them about $750,000 for “publisher relationships” and “account management,” or approximately $62,000 a month.

The question is, how many retailers would pay a bill presented to them for $62,000 a month for “publisher relationships” and “account management?”

Many might, if the value is there. However, for most, upon closer inspection, what the network is charging them for these individual services doesn’t add up when looking at each component.

This is particularly true when the account team is made up of junior managers juggling 10-20 accounts at a time and the vast majority of revenue comes from just a few relationships that are non-proprietary.

3.  The rise of attribution

The current performance fee model is also colliding with cross-channel and multi-touch attribution.

Merchants have taken a hard look at last-click attribution and have discerned that not every sale is a “good sale.” They’re also seeing that affiliates are bumping into other forms of paid marketing, resulting in the retailer paying out multiple channels for the same sale.

Today, brands want to be able to better measure performance across all channels, gain a holistic view of their data and costs, and earn incremental revenue. This requires:

  • De-duplicating multi-channel payouts
  • Controlling fraud and off-brand promotion
  • Preventing the use of in-cart and invalid coupons
  • Blocking toolbars
  • Preventing cookie stuffing, etc.

Unfortunately, many affiliate networks have been resistant to giving their clients access to technology that offers these insights as it would significantly reduce commission payouts.

This means a significant hit to performance fee revenue without an alternative means to charge for these technologies.

Rather than addressing clients’ underlying concerns about revenue quality, some US networks simply changed their fee structure to be based on total sales rather than a percent of commission. This ensured their revenue stream was unaffected by clients lowering commission rates for large partners and was done under the vein of “aligning interests”, which could not be further from the truth.

Take for example a retailer that pays coupon partners 1-2% commission and then pays the network 1-2% of sales. This structure pays the network 50-100% of commission value or “spend” which is unheard of in other online channels.

This behavior demonstrates how the networks’ definition of “performance” is not always aligned with their client’s best interests and why brands are demanding new and different pricing models.

4.  Growth of nontraditional partners

Changing the performance fee model is not only in the best interest of the networks and their clients, it also has the potential to unlock the industry’s biggest opportunity for growth.

As advertisers move away from relying on mega affiliates for the majority of their program revenue, they are partnering with nontraditional affiliates.

Nontraditional affiliates can include content sites, digital partnerships, referral programs and even business development relationships managed via a single performance tracking platform.

While brands are very excited about adding these new types of partnerships to their affiliate program (relationships that they often forged and developed), they are not enthusiastic about bringing them to a network and then paying a 20-30% performance fee on them.

Advertisers want to pay a commensurate price for the value they are getting. These nontraditional partnerships need tracking, payment, reporting, account management and many other elements in order to be successful and effective.

While affiliate networks are in a great position to meet this demand, their current performance fee model will keep this new revenue outside of the channel — or drive retailers toward a SaaS solution.

5.  More program are moving than starting

In today’s mature affiliate marketing landscape, there are far more large brands switching networks than starting new programs.

When moving an intact program, the performance fee has interesting implications as program revenue is not at all indicative of effort or costs. While networks provide valuable services, there needs to be a commensurate price for the value being provided.

For example, a few years back, a large US affiliate program with hundreds of millions of dollars in revenue was looking for a new home and were wined and dined by all the networks. However, when this company was presented with the performance fee model, they asked two important questions:

  • Why should the network make so much in performance fees for these existing relationships?

  • Why would the performance fee not start at the baseline level of the existing program, with a fixed fee to cover all the current business that was in place?

The company asked for fixed fee proposals in its RFP, which most of the networks and participants balked at.

Ultimately, they chose a SaaS provider and were able to build-up their in-house and agency teams with more dedicated and strategic resources with the money they saved.

This situation was a watershed moment for the US affiliate industry. It not only propelled the SaaS movement, it also became an example for other large programs to follow suit.

The networks’ counterpoint

Many networks contend the outsized fees generated from mega affiliates allow them to offer important services in other areas, such as long tail recruitment, R&D and compliance – services that would otherwise be unprofitable.

I’m strongly of the opinion that this logic is flawed and that price and value should be correlated. If someone doesn’t value something because it’s not clear what it actually costs, then they either need to do it themselves or change their perspective.

As an example, US FTC and State tax nexus compliance eats up a lot of our account teams’ time and does not grow a program in any way.

If a client does not value this service, we’ll happily exclude it from our agreement, give them a credit and turn that responsibility over to them. We don’t over-charge them for something else in order to cover that service. Doing so would skew the relative value in multiple areas and create expectation and pricing issues down the line.

Disintermediation and price transparency are coming to almost every industry in the world, something that does not bode well for the current performance fee model. Industries that haven’t adjusted to similar changes are suffering at the hands of players such as Zillow, Airbnb, Uber and Craigslist.

Read on for Part 3 of this series to learn what the future holds for affiliate network’s performance fee model.

This article was originally published in PerformanceIn.