Marketing Digital Report: Affiliate - Reward is its own virtue

Rewards sites have provided a major fillip to the £3bn UK affiliate marketing sector. Whether cashback or voucher, it is proving a potent draw, writes Andy Fry.

There are many ways for brands to generate customer leads online, but one of the fastest growing is affiliate marketing - estimated to account for 10% of all UK online retail sales, according to the Interactive Media In Retail Group. That equates to about £3bn, according to E-consultancy.

The Internet Advertising Bureau (IAB) defines affiliate marketing as 'a relationship whereby an online shop or advertiser has consumers driven to it by adverts on an affiliate website'.

The definition goes on to state that the affiliate receives a payment if it drives a consumer to click on an ad and perform a predetermined action on the advertiser's site, such as a purchase.

In other words, marketers pay only for results, with their affiliate marketing budget directly related to performance.

Recently, affiliate marketing has experienced another surge, thanks to the growing popularity of reward-based websites such as Quidco, GreasyPalm and Rpoints.

These sites take a brand's affiliate marketing spend and hand a percentage of it to consumers as cashback. The result is that savvy shoppers can build up cash or points while buying anything from motor insurance to white goods.

Exact numbers are not available, but industry insiders estimate that spend on cashback sites will top £700m in 2008 as consumers become more budget conscious. In terms of users, one of the sector's pioneers, Submission Technology co-founder Neil Durrant, claims up to 2.5m UK consumers have tested the water.

Durrant launched GreasyPalm five years ago and has just acquired the Cashback.co.uk name. His data shows how cashback boosts conversion across numerous sectors. 'Cashback pushed car insurance conversion up by 500% and white goods up 300%,' he explains. 'Business has grown so rapidly that cashback sites are now among the main affiliate marketing categories.'

Quidco, which charges people £5 a year to sign up as members, is also reporting uplifts. Founder Paul Nikkel says his company paid out £5.6m to members in the third quarter of 2008 - up 80% on the same period last year.

With about 10,000 transactions a day, according to Nikkel, word-of-mouth is a major driver of traffic. 'We also benefit from press coverage, which often cites Quidco as a way to beat the crunch,' he adds.

The rewards industry is further reinforced by sites that offer vouchers (see box, following page) or points rather than cash. Mutual-Points, for instance, encourages users to collect points which can be traded for cash.

Durrant's view, not surprisingly, is that punters prefer cash. However, digital agency agenda21's head of affiliates, Lyndsey Best, says points partnerships that can be redeemed for cash or goods have their place as they 'incentivise users to repeat purchase at the same place, encouraging loyalty'.

There is an argument that rewards sites are just another hit on a marketer's bottom line, but that hasn't stopped them joining in. Quidco, for example, is affiliated with more than 1500 online retailers, including Apple, Boots, HMV, Marks & Spencer and Tesco. For many brands, opting out of reward sites isn't an option.

Durrant and Nikkel point to conversion and volume figures in defence of their role - and research backs such claims.

Digital media specialist agency i-level, meanwhile, says order values on incentive programmes are 32% higher than those on other affiliates.

In fact, some marketers have welcomed the growth of cashback sites, such as Chris King, head of affiliates at BT Retail. 'We see affiliate marketing as part of a digital mix that definitely enables us to reach new sections of our audience,' he says. 'Within that, we can confirm that cashback sites do boost conversion rates.'

King has no doubt that cashback sites will grow in significance 'because of the loyalty they inspire among their users'.

However, there are potential downsides. The sector occasionally has to deal with fraudulent sales or disgruntled shoppers who moan about brands or rewards on open forums. King acknowledges these issues, but points out that these sites do not suffer more than any other channel. 'This is just part of a wider debate,' he says.

Crucially, reward sites also get on well with the influential affiliate networks. Although Quidco quit affiliate marketing network Affiliate Window this summer, the two sectors generally work well together, says Ben Wood, founder of TradeDoubler.

'I'm a big supporter of sites like Quidco because they drive volume and change consumer behaviour,' says Wood. 'Brands have to get used to using them.'

This view is shared by the client services director of Platform-A, Louise Green, who claims it is time for brands to begin calibrating their cashback strategies. 'How much do you want to give away, and to whom? Can you structure rewards in a way that incentivises users to become repeat purchasers?' she asks.

There's also support for this view from agencies such as LBi. Affiliates manager Sarah Bird says: 'If the objective is repeat purchasers, commissions should be higher on later purchases. If new customers are more valuable, a higher rate should be paid on a first sale,' she says. Either way, adds Bird: 'The majority of high-street retailers work with these sites, so brands and merchants could stand to lose traffic if they don't.'

The jury is out on how big the cashback sites can get. Durrant expects sectors such as FMCG to follow ecommerce, travel and financial services into this space, stimulating growth. Nikkel is taking Quidco toward social media. 'We launched Quidclans, a service that allows members to build discussion forums around topics,' he says.

Observers also expect rewards sites to evolve, for example, through cashback destinations that allow consumers to offset carbon emissions or make contributions to charities.

Of course, cashback's potential has not gone unnoticed by other brands in the digital space, says Agenda21's Best. 'Microsoft and Yahoo!-owned Kelkoo have seen the growth of Quidco and GreasyPalm, so are also circling this area,' she says.

Trends to watch include the prospect of MSN integrating cashback within tools such as search.

Kelkoo's interest is significant, because comparison sites are concerned about brands such as Quidco. 'Some people argue that price-comparison sites do the legwork but cashback sites benefit because they are the last click to the client,' says Wood. 'So we are analysing the consumer journey to see if there is substance to this. It's early days, but affiliates who can prove they have a role in the sales journey may start to share in the rewards.'

It's also noteworthy that mainstream media-owners are starting to integrate cashback into their proposition, says BT's King. Durrant, who operates both branded and white-label services, already provides a cashback service to GMTV.

This is blurring the distinction between media-owners and affiliates. It also has implications outside digital media, says Wood, who is starting to explore whether affiliate marketing's partnership model can be applied to media such as radio.

Green believes this trend is important because it is a reminder that rewards is just one element of a dynamic sector.

'Being part of AOL has been great for us,' she adds. 'We no longer view affiliates as unconnected to the rest of the digital mix. The market is becoming more holistic.'

As to the future, LBi's Bird expects incentive sites to prosper. She also predicts consolidation, however, with a few players dominating the market.'We will also see combination sites offering a one-stop shop for consumers, with price comparison, voucher codes and cashback,' she adds.

HOW CONSUMERS ARE USING ONLINE VOUCHERS

One of the flourishing categories within affiliate marketing is online vouchers.

Robin Goad, research director at online market researcher Hitwise, says there has been a 12-fold increase in searches for the term 'vouchers' over the past three years. He also highlights an increase both in viral voucher campaigns and the number of voucher aggregation/affiliate sites.

One of the biggest of these affiliates is the site MyVoucherCodes, founded by Mark Pearson less than two years ago. He says the voucher market is booming, with 4.5m users visiting his site in September this year. Christmas, meanwhile, is set to be a huge boom period.

Retailers have taken notice and now ensure they have a strong presence on the site, says Pearson. 'This can act as the basis of a viral marketing campaign. Users come to us, then send discounts to friends or post them on forums, which is great for merchants,' he adds.

Pearson's advice to clients is that they should keep the length of discount windows short, to maximise the 'excitement'.

Vouchers have, occasionally, had some bad press, usually when codes are passed to people who are not entitled to them. Threshers, famously, offered a 40% discount, which it claimed was for a few friends and family members, only to see it downloaded by millions. Similarly, Sainsbury's was forced to intervene in 2004 when its codes were circulated by forums and email.

Pearson ensures the discounts he posts comply with merchant restrictions. However, he also advises merchants to run clear terms and conditions. That way, if they encounter a stock shortage, they can react promptly.

Having said this, he believes that the technology is now good enough to exert control. 'If there is a viral breakout, it's possible the client is actually trying to generate PR around its offer,' he adds.

Platform-A client services director Louise Green agrees that voucher abuse ought to be controllable through the joint efforts of affiliates, marketers and networks. 'As networks we have a role to play - making sure affiliates aren't promoting voucher codes they aren't entitled to use,' she says.

- 10% of all online retail sales were achieved through affiliate marketing in 2007

Source: Interactive Media in Retail Group (IMRG)

- 45% - Growth of UK affiliate marketing sector in 2007

Source: E-consultancy report

- £3bn of online sales were generated by affiliate marketing in 2007

Source: E-consultancy report.

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