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Affiliate Marketing

We’ve talked about how search advertising and display advertising can be used by marketers to communicate offerings and drive transactions, but there’s another way to do this by involving online influencers and bloggers: affiliate marketing.

Affiliate marketing is the process by which an online merchant provides commissions on purchases made by traffic originating from affiliated websites or social media accounts. Blogs, videos, social media posts and other content that are used to review, endorse, highlight or just plain talk about products are easy to monetized with affiliate marketing. 

Amazon pioneered this online business model in 1996. There were earlier affiliate programs, but Amazon created a system that made it easy for just about anyone to participate. In Amazon’s program, affiliates operate as a selling agent for Amazon’s products. As this is a form of advertising, Amazon categorizes its Associates program as a marketing expense in their investor reports.

How Do Affiliate Marketing Programs Work?

So how do affiliate programs work?

Every affiliate marketing program has three actors. The first is the consumer. This is the online shopper or, hopefully, buyer. The second is the publisher. This is the person who signs up to be the affiliate. They might run a blog, record videos, or post to social media. The third is the Advertiser or Merchant. They are trying to drive traffic to their site so they can sell their products or gather valuable leads. 

Let’s look at how this might play out. A Consumer is looking to buy a new laptop. One of the first places a consumer may visit in their search for a new laptop is Google for product information, or YouTube to watch product review videos, or even social media to hear thoughts from online influencers. In this scenario, the Publisher or Affiliate runs a blog and is looking to monetize the content on their website. The Publisher would likely join and affiliate program from the third actor, the Advertiser. The advertiser is an online merchant looking to sell laptops in their online store. 

So the Consumer visits the Publisher’s blog. The Advertisers runs advertising on the Publisher’s blog and after the Consumer clicks an affiliate link on the Publisher’s website leading to the Advertiser’s site and buys a new laptop, the Publisher then will collect a commission on the sale.

Now this is the exact sort of scenario you might see with a Publisher that belongs to the Amazon Associates program. Since Amazon operates their own affiliate program they can signup publishers directly. But creating and operating your own affiliate program can require a lot of resources, which is why many Advertisers decide not to create their own affiliate programs from scratch and instead work with a third party to manage the affiliate relationships and technical components. 

Affiliate Marketing Brokers

These third parties are called brokers. Advertisers sign up with Brokers to have them manage their affiliate programs and Publishers sign up with Brokers to help drive profitable traffic to the Advertisers through the Broker’s network.

CJ Affiliate is an example of an affiliate broker. They cater to both the publisher and the advertiser helping to promote a variety of products. 

At this point you might assume that all affiliate programs work basically the same. A Consumer has an interest in some product, encounters a Publisher’s site where the Consumer might click on a link that leads to the Advertiser’s website. While that may be true for a lot of affiliate programs, not all affiliate programs are based on a pay-per-sale model. In other words, not all programs benefit the advertiser through product sales.

Affiliate Marketing Pay Models

Let’s look at the different forms of Affiliate Pay Models.

First, is the Pay-per-Sale, which we’ve already discussed. If a consumer purchases something on the Advertiser’s site the Publisher will get a commission.

Next is Pay-per-Lead. Quite a few Affiliate programs are not based on getting someone to buy someone, but instead getting someone to try something, or ask for more information about something. In other words, affiliates are paid to generate leads. Often these are going to be leads for services that cannot be fulfilled through digital means.

Advertisers may also choose to run their programs using a pay-per-click model. If you recall, pay-per-click or cost-per-click is the model used in search advertising. So affiliate hyperlink that appears on the publisher’s website is tracked the same way as a search ad on a search engine results page.

Finally, pay-per-impression uses the same model as display advertising, but often without the graphical element. 

Pay-per-sale and pay-per-lead are very common forms of affiliate marketing, while pay-per-click and pay-per-impression are uncommon. Pay-per-impression is especially rare.

Let’s look at an example from the advertiser’s side and revisit the Amazon Associates program and look at what pay models Amazon uses. As you can see from their Program Fee Rates schedule, that they pay out at different rates based on the product category with Luxury Beauty product paying the highest commission rate at 10% and video games and video game consoles paying the lowest at 1%. If we scroll down the page and look at Amazon’s Special Program fees, you can see that Amazon will pay out dollar amounts for specific actions that a consumer might take, in other words pay-per-lead. For example, if you’re running a website and include a link to Amazon Business and your referral turns into a successful registration for an Amazon Business account, Amazon will pay you $15. Not too shabby.

But what do things look like from the Publisher’s side? 

Let’s visit one of the biggest Amazon Associates affiliates out there, Wirecutter. Wirecutter is a product review website that was purchased by the New York Times in 2016. The review a wide variety of products, but tend to focus on electronics and home items. As you can see, they review items and make their recommendations and—surprise, surprise—the links they embed take the user to Amazon. But how does Amazon know how to credit Wirecutter with a commission on a sale when the Consumer buys this product? 

Affiliate Marketing Tracking Mechanisms

Well, here’s a hint on the first method. There are actually two different affiliate tracking mechanisms used to accomplish this. The first is the Affiliate URL. When a hyperlink is embedded into a Publisher’s website, it contains a number of extra elements that tell the advertiser or merchant about the affiliate and other information. Let’s breakdown the elements of an affiliate URL. The first component is the Product ID. The is the most basic part of the URL and absolutely required for the URL to get the consumer to the product page. Next, is the affiliate ID. This is everything assigned the “tag” parameter, in this case “thewire6-20”. This is the minimum required for the advertiser to be able to assign a commission to an affiliate. The next two parameters are optional. The Campaign ID is useful for a Publisher to track commission income categorized into different campaigns. and finally, for established affiliates with a large number of repeat customers, like Wirecutter, the Customer ID allows the affiliate to break down their income based on specific customers.

The second mechanism used is a bit easier to implement and is typically used in places where a hyperlink might be impractical. Think of a sponsorship in a Youtube video. Affiliate code may often be referred to as coupon codes, but in addition to providing a discount to the consumer, they also provide referral income for the affiliate associated with the affiliate code.

Affiliate marketing has become a very attractive source of passive income for many online entrepreneurs and just going on the thousands of videos on the subject on Youtube, it shows no signs of letting up. Whether you’re an advertiser, publisher or just a consumer looking to buy something, affiliate marketing might be a great digital marketing solution for an additional revenue stream.

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Important Questions about Online Experimentation

To supplement our reading this week. I wanted to highlight on some important points that the article brings up, but I feel deserve a bit more time and explanation.

Why do most online experiments test a single variable at a time?

Well, this comes down to basic scientific principles. To determine causality of an outcome, we must be able to narrow down what change in the environment led to that outcome. 

Maybe you’ve heard the latin phrase “ceteris paribus” or more likely its English translation “holding all else equal”. Well that’s what we’re talking about. Holding all variables except our focal variable equal or in their current state. For example, if I want to figure out if adding a rocket ship emoji to my email subject line will result in a higher number of email opens, well I would send the exact same email to two statistically equal audiences—which we usually do through random sampling—

but the only difference would be that minor addition of the rocket ship emoji. If we then see a statically significant change in our email opens, then we can deduce that the emoji addition that we made actually caused the uptick in email opens. At this point we’d probably integrate that change into our email campaign and then send then email with the emoji addition to the remainder of our email marketing list.

If we change multiple elements of our email. For example, we added the rocket ship emoji and we also changed the font we used in the body of the email or the call-to-action label we used or heck even the time of day we sent the email then with most email management systems we have no way of knowing whether it was the emoji or the other element that we changed that caused the uptick in email opens. 

So, if you’re going to do online experimentation, only experiment with a single variable at a time. Once you’ve established the source of a positive effect, incorporate that change and now test another variable. Firms like Google and Amazon run thousands of these types of experiments every single day. Can you run experiments with multiple variables simultaneously. Yes! But systems that can properly analyze them are expensive and these experiments are more difficult to interpret. 

And there many different variables you could choose to manipulate to see if there is room to improve the outcomes of your email campaigns. We’ve talked about the subject line. You can also change the sender name. Perhaps one name might resonate better with an audience than another. Calls-to-action are of course a really important element to promotion emails. What wording will work best for your customers? What about the button size or color? Personalization is another really important element. People tend to respond more favorably when their name is used, but what about incorporating information related to purchases they’ve made in the past? Retargeting emails like abandoned cart notifications fall into this area. Day and time can make a big difference. When do your customers tend to open their emails? The design of your email is a big one. More likely than not you would be test more than one simple tweak as part of a design change, so you may not be able to know whether it was the color scheme change, typography change, and use of images, but you would know whether one design was more effective than another. Frequency, or how often you send your emails could be another way to test, though this would be a little different that a typical A/B test. Finally, target audience is another element that can be tested. Think about breaking your audience lists into groups based on how they respond to your emails and you might also find other similarities that can help you define a new audience segment.

What is A/B/C testing?

We’ve established that the correct way to test elements to determine causality is to only change one variable and hold all else equal. So then what is A/B/C testing. Wouldn’t that be testing more that one variable. 

Well, no. Recall that when we engage in A/B testing we have one variable, again let’s say email subject line. But that one variable has two states or treatments: with the rocket ship emoji and without the emoji. 

Given a sufficiently large enough sample, we could actually test three maybe even four treatments of the same variable. So I could try the standard version of the subject line, one with a rocket ship added, and maybe one with a puppy emoji added…A, B, and C. This is still only testing one variable, but with more that two test treatments.

The is a common occurrence with real-time online testing. For example, Amazon might run a simultaneous experiment where they divvy up their online customers into multiple groups. The first group to whom they show the current variation of a page design (for example showing vehicle body styles in black&white, the other groups get different variation including an alternate version where the vehicles are in full-color). With real-time online experiments like this, a firm has the ability to immediately shift course and serve up a version of the page that is more successful, or in other words, leads to more conversions.

Do online experiments need to be driven by an underlying theory?

In the scientific method, we often start by forming a hypothesis about something based on existing theories. We then devise an experiment that we can use to test it, run the experiment, and analyze the results. Theory is the lifeblood of scientific research. But an email marketing campaign or a search engine website are commercial endeavors. We can use the scientific method to test variables, and we should, but that doesn’t necessarily mean that we have to have a theory that drives our initial interest in experimentation. 

Business is a fast-moving, highly-complicated environment. As marketers, we’re continuously looking for an edge to help improve our outcomes. Sometimes we have a gut instinct about what might appeal to our customers and that is a completely valid starting point for experimentation in the business world. If you’re in the healthcare industry and your gut feeling is your customers will likely stay on your website longer if you use a color palette of blues and not yellows, then that’s an easy thing to test and you don’t need to dive headlong into color theory to find justification for an experiment. These types of experiments are inexpensive and quick and they can often reveal surprising outcomes. 

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How Email Technically Works

For this video I thought I’d get a little technical. You already know the basics of how email marketing works because by now you have likely earned your HubSpot Email Marketing Certification, but do you know how email marketing technically works, the actual mechanism behind how we know when the user opens and clicks through on an email? Let’s get into it.

When the consumer receives an email from a marketer, there’s a lot going on in the background that you’ll never see. The consumer may or may not have an idea that their email address is part of an email marketing list that’s been segmented and profiled and sliced and diced in any number of ways. But what most probably don’t know about is the tracking technologies that make all of it work.

Mailchimp, Campaign Monitor, Emma, Constant Contact—All the major email marketing platforms work on the same underlying principle: beacons. Also known as web beacons or tracking pixels. What’s a beacon? A beacon is a small 1-pixel x 1-pixel graphic embedded into the email that recipients receive. 

For example, if I receive an email marketing message from Williams-Sonoma, within that email is a beacon. The beacon will tell Walgreens whether or not I opened the email, and of course if I click anything in the email then Walgreen’s analytics system will then be able to register a clickthrough of the email. 

You can’t see it, but the beacon is there. And it’s the most important image in the entire email. Now you might ask yourself how on earth does a tiny little graphic help them know that I’ve open the email?

Here’s how it works: When an email management program is used, each email that is sent out using that system has  Code for a beacon embedded within it. 

The act of opening the email starts the process of your email program requesting all of the graphics that were embedded in the email. One of these graphics is that invisible beacon. Because the beacon has a unique filename, the server that serves up the beacon 

now knows when, and in many cases where, the email was opened and clicked and by whom because that unique filename is tied to a specific account. By the way, it’s only when you actually open on the email to view it are the graphics loaded. If it’s just sitting in your inbox, no graphics are loaded, so no tracking information is captured.

Here’s an example email from Walgreens. Looks like a fairly normal, if not a bit bland, email. There are a few embedded graphics. One dominant call-to-action, the “Get offer” button. What you can’t see in this view is the beacon. But if we view the raw source for the email, we can find it. 

Let’s open the raw source…and scroll all the way to the bottom…and here it is. The email marketing system that Walgreens uses actually is nice enough to clearly label the tracking pixel or beacon. By they way, the reason you see all of the “3D”s in the text is because email uses a specific encoding mechanism for transportation because email is based on an early text-based format. 

Of course all of this works because we as consumers prefer to see emails with embedded graphics, or HTML-based emails. HTML emails are essentially little webpages that are sent to your email inbox. What would happen if we didn’t use HTML emails and instead used the old standard of text-based emails? Well, because you can’t embed graphics into a text-based email, you would completely disable the email marketing platform’s ability to track your mail opens. It used to be the case that when you signed up for an email subscription you were given the option to select whether you wanted text-based or HTML/graphics based email. Those options have largely disappeared as marketers have become more and more reliant on email marketing and value the advantages that HTML-based emails give them.

Remember, the next time you receive a promotional email, there’s a lot going on in the background to ensure that they send can track when you open and/or clickthrough that email. And if you don’t like, there is, of course, another option for you as well.

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Retail Site Location

09. Retail Site Location

Evaluating Areas for Retail

When a retailer needs to evaluate areas for potential siting of a brick-and-mortar location, there are four main considerations that must be made

  1. The retailer needs to determine is there is a strategic fit with the target market.
  2. The retailer needs to evaluate the economic conditions of the area
  3. The retailer needs to determine the cost of operating the store
  4. The retailer needs to evaluate the competition in the area.

Let’s look at each of these in depth.

Strategic fit is determined by ensuring that an area has consumers in the retailer’s target market. We can do this by evaluating the demographics, psychographics, size and composition of households in an area. How do we do this? 

We can look to the US Census site data.census.gov for demographic data for specific populations extracted from census data. But this tool only tells us who the populations are, not how they act.

We can also use ArcGIS by ESRI to run reports of demographics and many other factors. ArcGIS also includes Tapestry a tool to understand the demographic and psychographic breakdown of the entire United States. You’ll be able to understand your customers’ lifestyle choices, what they buy, and how they spend their free time. Tapestry also gives you insights to help you identify your best customers, optimal sites, and underserved markets. As a result you’ll get higher response rates, avoid less profitable areas, and invest your resources more wisely.

McDonald’s could use these tools determine where to locate its restaurant based on neighborhoods with high numbers of families with kids. 

REI could locate its retail stores based on the prevalence of individuals who are outdoor enthusiasts.

So if we were Costco and we were looking to open up a new location, what factors would we want to consider? We might look to current membership to determine the types of customers that are attracted to Costco and look for those same patterns in areas we don’t already service. We’d probably also want to consider that we will sell more to larger households and homeowners as opposed to apartment renters who don’t have the room for bulk products. We would also want to consider real estate needs. Costco’s are typically quite large, so we would like be in a suburban area where there’s still large tracts of land to build on.

Economic conditions are also an important consideration for determining strategic fit. 

We need to ensure that population growth and employment will sustain our business. We need to determine if there are enough qualified individuals who can be employed in our store. Census economic data for MSAs (we’ll touch on that in a minute) can help us here. How will the economic conditions affect demand for our products in the future?

Certain areas of the country see economic booms that impact large business as well as retail expansion. For many years, the Seattle area of Washington state has seen economic growth. First due to Microsoft’s ascendence and more recently due to Amazon’s growth. Some of the fastest growing cities in the US are now Austin, TX, Miami, FL; and Henderson, NV just outside Las Vegas.

Next, there are operating costs to consider. These costs can vary drastically depending on the area that you are considering. They are affected by proximity of area considered as opposed to existing stores. We look at metropolitan statistical areas to help us analyze these costs. 

MSAs are core urban areas containing at least 50,000 inhabitants. They can actually span across counties. They are economic in nature, not political. And they are often named for the major urban area located within the MSA. The Milwaukee MSA, which encompasses Milwaukee, Waukesha, Washington, and Ozaukee counties, being one example. Retailers can use the US Census Bureau reports or ArcGIS to understand the economic and workforce makeup for this areas.

Last, but definitely not least, there’s competition. We wouldn’t want to open a store in an area with tons of competition, just like we wouldn’t want to open a store in an area with little to no demand. Walmart, in fact, gained a lot of traction early on by locating in areas with very little competition. 

And they continue to innovate with their store formats by introducing the Walmart To Go stores.

Retail Location Considerations

So you’ve found the general area you’re going to use to site your new retail location, whether it’s choosing an MSA or other method. Now what are the considerations that need to be made when picking a specific location? They are numerous. 

  • Traffic Flow and Accessibility issues
    • How many cars drive by daily?
    • Is there access to major highways?
    • Is there pedestrian traffic?
  • Legal Restrictions
    • Is an area zoned for your type of business?
    • What type of signage can you have?
  • There are also  Costs
    • How much is rent going to cost?
    • How bad are the area’s taxes?
  • And finally, Location Characteristics
    • How many parking spaces are available for your customers?
    • How much visibility will your business have from the street or interstate?
    • What condition is the building in?
    • Who are the adjacent retailers?

That last one, adjacent retailers is an important one. It’s well-known that both complementary and competing adjacent retailers help build traffic to shopping centers both vehicular and pedestrian. Think of it as a rising tide lifts all boats. 

We even have a name for this phenomenon, it’s called Cumulative Attraction. As you can see with this shopping center signage example. BigLots, Save-a-lot, and Family Dollar are all direct competitors, but all serve the same customer. The customer may come for one store, but might wander into the others. A great example of cumulative attraction.

Number of Stores to Open

Now that we’ve determined the right area to move into, how many stores should we open? As retailers, we need to find the right balance of store saturation of an area while avoiding the associated risks . 

By maintaining a number of stores in one area you gain the advantage of economies of scale at many levels. 

  1. Your promotional costs are lower. An advertising campaign can run in one large area and benefit multiple stores. 
  2. You will likely be able to serve many locations from one distribution center, which lowers inventory and travels costs. 
  3. And you can provide customized assortments of merchandise to specific stores, though that might mean more inventory at the distribution center level. 

The biggest risk associated with over saturation of an area is cannibalization. Cannibalization is when one store starts to erode the profits of neighboring stores by siphoning off customers. One relatively easy way for a retailer to know when to stop opening stores in an area is keep opening them as long as profits continue to increase. 

To wrap up, to properly evaluate areas for site location, retailers need to determine strategic fit, economic costs, operating costs, and competition. When an area choice has been made, retailers must consider multiple considerations such as traffic flow and accessibility issues, legal restrictions, costs, and location characteristics. Finally, once the first store has been opened, retailers will need to determine if others should follow. Economies of scale need to be balanced with concerns of cannibalism.

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What is Strategy?

In 1996, Michael Porter, a professor at Harvard Business School, wrote a seminal article on business strategy. The article was titled What is Strategy? and Professor Porter did a pretty excellent job of answering that question.

Through his research he discovered that strategy is not just about creating a more effective and efficient enterprise. Operational effectiveness, performing activities better—faster or with few inputs and defects—than rivals is not enough. The problem is these best practices can be easily emulated by competitors. All this does is move the so-called “productivity frontier” or the maximum value any company can deliver at a given cost, given the best available technology, skills, and management techniques, ever and ever further out. Operational effectiveness may improve, but it improves for everyone. And what you end up with is a competitive convergence, competitors offering similar products/services in the same ways with the same value profile.

So how does a firm break out of this? We look to strategy. 

First, strategy is the creation of a unique and valuable position, involving a different set of activities. 

Porter describes the types of activities that businesses can partake in that will make a difference. A business can serve the few needs of many customers. For example, Jiffy Lube has a limited range of services they provide (auto lubricants), but they can provide those needs across a large population.

Or a business can serve the broad needs of few customers. Bessemer Trust, as an example, targets just high-net-worth customers, but they provide a broad range of services to that select clientele. By the way, these aren’t the only types of positioning activities a firm can engage in, but they are the most common.

When creating a unique and valuable position involving a different set of activities than your competition, what you’re really looking at doing is determining your retail mix. That specific combination of location, merchandise management, pricing, communication, store design & display, and customer service that defines who your business is as a retailer.

Second, strategy requires you to make trade-offs in competing—to choose what not to do.

Some competitive activities are incompatible; thus, gains in one area can be achieved only at the expense of another area. 

For example, Neutrogena soap is positioned more as a medicinal product than as a cleansing agent. The company says “no” to sales based on deodorizing, gives up large volume, and sacrifices manufacturing efficiencies. By contrast, Whirlpool’s decision to extend its product line and acquire other brands represented a failure to make difficult trade-offs: the boost in revenues came at the expense of operational efficiency.

We’ve also got to make important decisions about the target market we want to appeal to. Or put another way, what target markets must we say “no” to. If we look at this matrix of markets in retail fashion, you can see that the target markets are made up of which fashion segment to target as well as the retail format. If you can identify an underserved combination within a marketplace like this, then you have a better shot at competing and more opportunity for profits.

Third, strategy involves creating “fit” among a company’s activities. Fit has to do with the ways a company’s activities interact and reinforce one an- other. Fit drives sustainable competitive advantage. When activities mutually reinforce each other, competitors can’t easily imitate them.

Let’s look at an example:

When Continental Lite Airlines—what you don’t remember Continental Lite Airlines? Well you’re about to see why—when they tried to compete with Southwest Airlines’ by matching some of their activities the results were disastrous. It’s not enough to replicate the operational effectiveness of a competitor by copying technologies, skills, or management techniques, you must also copy the unique positioning of your competitor and the decisions behind that positioning, which is virtually impossible to do.

In this graphic, you can see an interconnected network of higher-order strategic themes in green and the tightly linked activities that identify and implement those themes in yellow.

Take for example, Southwest’s theme of Limited Passenger Service at the top. Surely that would be easy to copy. Just cut out some services your airline provides and voila you can now compete with Southwest. But hold up, it’s not that easy. Southwest is able to offer those limited passenger services at low fares because it also features point-to-point flights and not the hub-and-spoke system that other airlines use. This means there are also no baggage transfers so airport operations are simplified. The fast gate turnarounds also mean that they can have more flights leaving out of the same gate per day than their competitors. The problem was Continental Lite tried to compete with Southwest by copying the broad strokes of what Southwest was accomplishing, but not all of the interconnected activities that really made their strategy work. Continental Lite folded shortly after.

A firm like Southwest doesn’t just benefit from the sum of its activities. 

The reality is those activities interact or multiply their efficiencies. A competitor can’t just replicate the parts that they think they can execute on to surpass a superior competitor, they would have to recreate all of it: the system, processes, people, as well as the technologies and offerings. Strategy is about creating something more than the sum of a businesses parts.

So, in a nutshell, strategy is about: 

  1. Creating a unique and valuable position, involving a different set of activities than your competition. This is your unique retail mix.
  2. Making trade-offs in competing—choosing what not to do. This is selecting the right target market.
  3. Creating “fit” among a company’s activities. This is creating your sustainable competitive advantage though a tailored combination of activities that suits you and your customer’s needs.