Surprisingly, few realise this: Successful businesses are always built around creative solutions to challenging problems.
Restrictions such as short resources, funding, or skills are a boon for the resourceful entrepreneur.
The Affiliate Business Model, which pays advertisers a percentage of sales revenue, was invented to allow new online businesses with useful products to profit from the advertising skills, time, and money of others.
However, I’ve been outspoken in my dislike of the Affiliate model.
I believe affiliate programs are unfair to advertisers. And that product publishers take NO risk while traffic providers risk everything. Indeed, the low success rate of even competent traffic specialists is a clear indication of how unfair the model is. Like me, there will be few traffic experts willing to risk their time and money to promote your products if offered only a percentage of sales as compensation.
Allow me to propose a new way which will lure expert advertisers to promote your products for you. With this new compensation model, even I would willingly advertise for you without any up-front cost to you.
I’ll elaborate momentarily and share with you my compensation model.
Affiliate Programs are Like Usury
Capitalist government is a wonderful invention; except for one problem. Capitalism depends on Interest-based loans for seed-capital.
Many monotheistic religions frown upon “Usury” – a term coined specifically for interest rates that pose unfair risk for the borrower who cannot realistically pay it off. It is supposed to be illegal in most states.
However, just like usury, affiliate programs are unfair to the advertiser. Product Publishers act as lending institutions while affiliates are their borrowers. Affiliates are expected to risk their cash, time, and list-asset for Product Publishers with no real hope of ever recovering their costs.
Interest is the one flaw of Capitalism.
Our economic system is breaking down because it became unfair. Interest rates increased while banks continued to loan money to borrowers who had little chance of paying. The Economic crisis has magnified the Interest-based loan problem and proved that in all its forms, Interest is really Usury.
Similarly, the affiliate model is the one flaw of the Home-Based Business economy.
Online Marketing Systems are in a state of decline because they too are unfair. Advertising costs, similar to interest-rates have increased. Competition is cut-throat and search engines are eliminating affiliates left and right. It is becoming impossible for Home Businesses to recover their ad spend on products they promote.
The Affiliate Business Model is Usury!
Affiliates Pay Interest To Publishers
When someone joins an affiliate program, it is like applying for a business-loan.
Affiliates, much smaller than Publishers “borrow” a product and a sales process from a Publisher willing to loan them. Without something to sell and a way to sell it, affiliates cannot have revenue.
So let’s agree, no Online Business can profit without:
- A product to market
- A sales process that sells the product
- and, Some seed capital to advertise with
The Product Publisher who loans the first two items on the list is repaid with traffic and leads.
Traffic, like principle money is valuable; the more eyes a Publisher can get to an offer, the more sales are possible for them. Neither the Publisher nor the Affiliate can legitimately profit without all three.
By advertising, affiliates put eyes on the Publisher’s offer. However, affiliates are rarely compensated for the number of unique visitors they send to a website. Instead, they receive a pre-set percentage of the value of product sold with their traffic-getting service.
So in the first place, affiliates are getting a raw deal – essentially they provide more service than they are paid for. Not all traffic they send becomes customers. While Publishers can profit from all traffic sent.
Does this not seem suspiciously close to Interest-based loans, where one borrows one amount and repays more than they borrow?
Affiliates repay more traffic than they are compensated for. Let’s agree then, that affiliates borrow from Publishers and then repay the loan with interest.
Affiliates Assume All The Risk
Armed with a borrowed product and sales process, the affiliate starts to repay the debt with more traffic than they’re paid for at great risk to themselves.
Affiliates Risk Expertise
Advertising online requires valuable skill. If the affiliate does not possess the necessary traffic skills neither Affiliate nor Publisher profit. So the Affiliate begins to learn either paid or free advertising methods using search engines like Google and Bing, and social networks like Facebook and Twitter.
This is a risk – It is possible that the search algorithms change and any skills they have become irrelevant over night. Should this happen, Advertisers must refresh their skills and start over.
Affiliates Risk Time
Starting any advertising campaign requires large amounts of time creating, sourcing, and publishing content to feed the search engines so the website of the Product Publisher is discovered.
Affiliates Risk Money
Paid advertising costs, and Affiliates must produce enough traffic for long enough to the Publisher’s website with no guarantee that the Publisher’s system will make sales. They may never recover their spending!
Even free advertising methods can add up in cost: tools, programs, and subscriptions are essential. Many Search Engine Optimisers also outsource content creation, social sharing, and more. All of these costs are risks to the affiliate’s money.
Affiliates Risk Reputation
Affiliates are viewed as recommenders of products that they represent. If a Publisher’s product is refunded because it does not live up to its promises, the Publisher deducts commissions from the Affiliate while tainting the name of the Affiliate recommending them!
Affiliates Risk Their Leads
When advertising for a Publisher, affiliates often send leads and traffic to the Publisher as subscribers in the hopes that some of them will buy the product they promote. However, the Publisher only pays for sales of a specific product – but they hold the right to sell anything else without compensating the affiliate.
So affiliates send traffic, the publisher gets all the leads and can make money on them with multiple upsells, while the affiliate risks never seeing a cent for the leads they send.
Affiliates Risk Not Being Compensated For Their Sales
In the first place, Affiliates must trust that Publishers are tracking sales and crediting them correctly. What if the Publisher is dishonest? Oh and there are MANY dishonest publishers!
Worse, Affiliate tracking technologies are ALWAYS unreliable and intentionally skewed in favour of the publisher. Meaning, when tracking systems fail, Publishers do not pay.
Cookie technology, is a kind of short-term memory for browsers, and it is commonly used to determine which customer were brought by which affiliate. Cookies only correctly track customers whose browsers have cookies enabled.
Not all Web Browser software is capable of storing cookies.
Additionally, not all customers buy from the same computer they were first tracked from. And not all customers use the same browser when purchasing as they did when they were first tracked.
Want to know the worst part?
Few Affiliates even know this, but tracking Cookies expire after a period of time. When a tracking cookie expires, even if a customer previously tracked to an Advertiser makes a purchase, the Affiliate will not receive credit for the sale. Why? Publishers justify this by saying that “too much time has elapsed since the prospect came into the system.”
On the other hand, Publishers know and have the ability to set the expiry of tracking cookies to any duration they wish. They only disclose this in fine-print in their obscure affiliate agreements.
Some Publishers try to say that their tracking system is RELIABLE because it adds another level of sales tracking by E-Mail address. Meaning, they keep a record of which E-Mail addresses were brought by each affiliate, and when an email subscriber buys, they will credit the tracked affiliate with the sale.
At face value, this seems very fair. However, most customers do not buy with the same Email as they subscribe with.
So what happens when the unreliable tracking technology fails? Who gets credit for the sale?
The Publisher. Affiliates bear the risk of the unreliable tracking technology.
Affiliates Risk Their Livelihood
Any advertiser who depends on, say, their Google traffic skills, may lose their advertising account if they promote a Publisher product deemed unfavourable by the search engine.
Considering that Google is the largest traffic supplier online, the risk of losing one’s account is a major gamble. Particularly if the Affiliate’s primary skill depends on their Google account.
I have turned down Clients and avoided advertising for some with Google because my main skills depend on Google. I may risk everything else, but my Google Adwords account is the one resource I will not risk for any Publisher’s product.
We agree then, that Affiliates accept a great deal of risk?
Is this not similar to the situation for a borrower who takes a business loan? Lenders ask borrowers to stake their assets, income, and life insurance and gamble on their job security and the fluctuations of Interest rates for the sake of a loan. Borrowers shoulder the greatest risk – and if they cannot afford to repay a loan, they and their families are screwed even in death.
Affiliates too risk EVERYTHING. If they fail to gain BUYING traffic for the Publisher, they will not receive a cent in compensation. Their time, energy, skill, reputation, and livelihood could be lost when they borrow from Publishers.
Publishers Assume No Risk
While affiliates assume all the risk, the Product Publisher accepts none. Even if the Publisher’s sales process is faulty or their product has no market, they lose NOTHING.
Publishers often call themselves or their affiliates “Partners”. This is a lie. Business partners are compensated in proportion to their stakes. How can we be partners when one person makes more with less at stake?
Because of the low risk, most Publishers prefer to use affiliates for traffic instead of hiring their own in-house traffic staff.
If they were to use in-house staff for advertising, they would need to pay the expense of an employee as well as the advertising cost.
On the other hand, businesses that have proven sales processes with legitimate products that sell profitably don’t mind hiring in-house advertisers and spending on advertising themselves, without affiliate middlemen.
Many Publishers have poor products, expensively priced, with no truly interested market. Their affiliates must not only provide traffic, but they should also generate interest in otherwise un-interesting products. The Publisher has no risk.
Very often, I have found that Publishers do not test their sales process. Why bother? They will only pay IF they make sales. Otherwise, they can collect leads and traffic to their websites virtually free from their active affiliates.
Is there ANY way for them to lose? No.
Like a common Lender, Product Publishers have nothing risked besides the time it takes to throw up a sales page and to produce their product. Their subscriber list is built for them at someone else’s expense, and they can make plenty of money off the labour and risk of others.
A Better Model For Paying Advertisers
Earlier I stated that lending at an unfair interest rate and creating undue risk for borrower is called Usury. I hope too that by now you understand how risky the Affiliate Business Model is for advertisers and how close it is to usury.
In this section, allow me to show you a better model to offer advertisers.
As a faithful follower of a monotheistic religion myself I do not condone Usury. When I was a child, I announced to a very educated friend of my father’s that I wanted one day to build a billion dollar company without any business-loans.
His response was one that stuck with me into adulthood. In fact, I credit him with inspiring the idea for this advertiser compensation model.
The analogy he made was about Home Loans.
Suppose, he said, you want to buy a home for $1 Million. But rather than take a bank-loan, you found a rich Investor instead. This is not new. Investment has long-been used as an alternative to lending. Unlike a Lender who collects interest and risks nothing, however, an investor stakes a portion of the Principle and collects a share of business revenue proportional to their risk.
So let’s say you put up $100,000 which is 10% of the total price of the home. For the rest of the money, you found an investor willing to put up the remaining $900,000.
Before any money exchanges hands, you find out the rental price of the property. Shall we say, $5,000/month in rent?
Rather than pay a Lender some arbitrary interest rate, you would pay the investor 90% of the rental value each month: $4,500. You now have the choice to buy out the investor by repaying the Investor from your 10% share of the rent. This increases your share and reduces the Investor’s share, and in turn the amount you have to pay back each month.
Unfortunately, in a Home Loaning context, this model would not realistically work. Because the Investor is always paid a RATIO, they will always own some share of the revenue, no matter how small it gets.
However, for Business, there is no problem using the model – it is only fair that someone who contributes seed capital to your business remain a partner for life, even if their share becomes very small over time as your contribution increases.
Let’s explore.
Suppose you deem your product’s Intellectual Property value and sales process to be worth $1 Million in PROFIT over the next year. For simplicity, ignore expenses for now.
To begin with, you may not have much capital to pay employees. But you still need a REAL advertising expert to promote your product or there would be no business.
Instead of creating an unfair affiliate program because you can’t afford an in-house advertiser, you can simply find out the going advertiser rate and turn that into a share in the company.
Here’s what I mean: Let’s assume an expert advertiser’s time and skill is worth $5,000/month or $60,000 over the course of a year.
Since you can’t afford to pay this, you need to recruit an Advertising PARTNER; an advertiser willing to invest their skill and time in exchange for a share of your product sales.
Let’s go ahead and quantify the advertiser’s risk in time and money as 6% of all revenue, by dividing $60,000 (their contribution) by $1,000,000 (your Intellectual Property contribution).
By quantifying the advertiser’s risk as a percentage of yours, we can now say that the advertiser is an investor in your business entitled to 6% share of profits.
Since we ignored expenses earlier and advertising will likely cost money, you can choose whether you want to take on advertising costs yourself and add it on to your Principle contribution -or you can give the advertiser the option to pay 6% of advertising costs too.
This way, if the advertiser likes working with you and the product sells well, they can increase their share by paying more of the expenses or by helping increase your business’ value. Similarly, you can buy out their contribution by repaying some of their advertising skill and time Principle.
Trouble With The New Advertiser Compensation Model
For every innovative solution, there is a counter-challenge that rears its ugly head.
The problem with this model for advertiser compensation is – Where are you going to find competent advertisers who are willing to invest in your business with their time, traffic skills, and possibly advertising money?
At YaghiLabs, we created the Internet Business Academy community where we only do business this way – as investors in YOUR business.
To access our community, you must be enrolled in the YaghiLabs Internet Business Academy. Learn about it and enrol at the link below:
~jim
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Here's one reader's opinion - Do you agree?
Actually, the product publisher risks a lot when it comes to affiliates. Product publishers are held liable by the government and in lawsuits for false and deceptive claims made by affiliates to promote products even though the publishers knew nothing about the misconduct. Product publishers also risk their reputations when an affiliate creates an online scandal and is publicly tied to the publishers. Product publishers also risk affiliates creating fraudulent sales, grabbing the commissions, and then disappearing before law enforcement and credit card companies and resolve the theft issue. Three guesses who ends up reimbursing the defrauded credit card owner after already paying out the affiliate commissions. Yes, there are better business models than affiliate programs. But to claim that product publishers have no risks in affiliate relationships is missing key parts of the picture.