Jeff: Lack of innovation you say? Some of the industry’s most prominent names would argue that presumption. Unfortunately, I don’t think they argue it well. This worries me in that VP’s and Directors (the folks who hire affiliate managers, networks/service providers) see through it and laugh at us. They don’t take us seriously and can you blame them? Is that where we want to be as an industry? Innovation is about how companies leverage new technology to inject greater value into their customer relationship. It’s not about using technology for technology’s sake or pretending there’s value using illogical examples. It’s time we “grow up” but there are many in the industry who are very reluctant to do just that. They relish in their ability to partner with major brands, shuttle traffic and remain largely anonymous. Indeed, it’s cultural and when anyone (ie. Jason Calacanis) even approaches the subject of “maturing” there’s a landslide of backlash. My point is that this cultural backwardness doesn’t foster innovation. To mature into a serious business is actually viewed negatively.

There are other reasons why innovation hasn’t been occurring. False promises to advertisers, as an example. Infighting among all the middle-men — affiliates, affiliates of affiliates, search engines, affiliate or CPA networks. Advertisers are not to be left out, of course. Many times over-focus on hard ROI prevents risk-taking and empowerment of front-line managers. In most cases, I think affiliate managers are set up to fail. They’re given a goal of “create X revenue” but in reality that’s not the goal at all. At year’s end they find out that the goal post moved because of all the “bad actor” affiliates or commissions that were reversed for various reasons — reasons coming from the CFOs office (channel attribution, so-called “cannibalization” issues). Affiliate managers feel handcuffed in many instances. There needs to be a better balance between taking risks and maximizing revenue — one that fosters innovation.

So… considering all of this… why would we expect to see any advertiser-side innovation? There’s simply no demand for it. Or, Jivan, perhaps I should say that demand has been smothered (heh, heh) by powerful incumbents (i.e. CJ, PerformicsDoubleclick/Google, Linkshare et al). Yes… I think I should say that this may very well be the case given how innovation demands risk and risk-taking, broadly speaking, don’t flourish in large corporate environments. Incumbent networks have done “just enough” to appease advertisers in terms of some of affiliate marketing’s inherent flaws but overall they’ve not addressed the main concerns for advertisers: control, cost flexibility, scale. They’ve not innovated nor encouraged affiliates to innovate. If they did it would require some pain… some serious adjustment to things like revenue models.

I’ll be blunt. In many ways, mainstream advertisers have given up on us. It’s a real problem. Today, they’ve convinced themselves that they’re “just fine” with performance marketing being a “necessary evil” and operate it at a flat-line growth curve… or not operate it at all. Some are shutting down CPA affiliate programs or cutting them to pieces. Oh… how I long for the late 90’s when affiliate marketing was so sexy and CEO’s could be found stirring martini’s, comparing the sizes of their affiliate programs!

Ok, seriously… my point here is there’s a forced, *perceived* feel-good about the CPA/affiliate portion of performance marketing (among advertisers). It fosters the stagnation — the lack of innovation you reference, Jivan. Advertisers realize CPA affiliate programs aren’t perfect in “real life”. Yet they HAVE found comfort in the “performance-ness” of CPA affiliate programs. Sure… affiliate programs don’t scale very well (to make more you really do, as it turns out, need to spend more on program management!). Nor can advertisers get very creative when paying affiliate partners, etc. Yet they’ve learned to live with it. They’ve “settled” (for less than the initial rosy, unrealistic, promise). Hell, nobody likes to settle.

This rather “false love affair” (for lack of a better term) with CPA affiliate marketing is problematic when it comes to spurring innovation. It creates an environment that fosters a rather lax, “well, we’ll just learn to live with the deficiencies” attitude. There’s no pressure to improve upon practices, technologies.

Advertisers don’t take us seriously anymore for some fairly good reasons. First, the love affair with affiliate marketing was initiated by networks making what turned out to be false promises. You know, “free branding and pay-outs only when the desired action occurs.” All that babble. Not to mention tipping the scale toward the advertiser broadly speaking. They’ve been in total control here — it was a set-up to confrontation. The terms were too stacked and many affiliates took it as a challenge.

The other thing that’s got advertisers feeling uneasy is how opportunistic, innovative and AGGRESSIVE affiliates have been. Hence, affiliate marketing is that pain in the rear… that thing you can’t control. Also, I think advertisers feel a bit of shame in having such a hands-off attitude about launching affiliate programs that have zero stewardship (no rules) and signing deals with networks that have an incentive to drive sales at all costs — including fraud! Hence, today, it’s relegated to the Junior Leagues of online marketing. It doesn’t get much respect given the reputation it’s earned itself. Who’s fault is it? Who cares really… I’m just reporting the news. Let’s fix it!

But how do we do that? Where to start? I include Google and pay-per-click in considering the answer, Jivan. From click fraud to relatively garbage traffic (at the same premium price) emanating from parked domains and “Made for AdSense” sits (a GROWING business). Performance marketing is — when you’re forced to look at the data — a cost of doing business that advertisers can feel moderately good about… if they work hard at it. It’s still kinda… you know… kinda… eeeew. Yet it’s not so bad if they consider traditional (non-Web) media (how expensive it is). In doing so, they look past some of the pitfalls. This part has to be fixed FIRST in my opinion.

In my opinion, it’s time for a new promise for CPA affiliate marketing. A promise that involves something innovative beyond a network making a coupon distribution deal with Yahoo or MSN… or buying up successful affiliates (owning the distribution). It’s not 1998 anymore. Why are we clinging to that same, silly promise? It’s one that advertisers don’t assign value to. The affiliate shake-out is over, search arbitrage is all but dead and Google is ‘going direct’ on a bullet. So whatcha gonna do about it? What are WE going to do about it? I say, it’s time to innovate… or die.

I should point out that affiliate-side innovation has been stifled by the fact that CPA affiliate marketing really does revolve around search at the end of the day. We’re all very busy grabbing for customers in the same place — search. Back in 2000-2001 we realized that search was where we needed to be at Performics. How? By looking at what affiliates were doing in the space. We were first to convert into a search (arbitrage) company. Performics essentially became an affiliate and cut out the affiliates… cut them out completely from grabbing all the candy (brand keywords/terms). Dozens of agencies followed. Now we see similar situations where networks like Linkshare are busting up deals like the one JP Werlin (BargainBetty.com) had with MSN Shopping and buying distribution (Mezimedia+Valueclick/CJ). Is this an environment that breeds innovation? Not really.

Now what about the approach Zanox is taking with its innovation summit? Hmm… a kinder, gentler and non-competitive (to its affiliates and advertisers) affiliate network.

Jeff: Well… we’re going through growing pains. We all know it’s an issue — the “reputation problem.” First, we’ve got to consider that this “transformative” state we’re in is typical and has been happening throughout time in business. It’s just like the industrial revolution — only today we live in the Information Age.

Ok… no excuse. To answer your question: I think they look down on us and I’ll back that up.

Look at how advertisers talk about affiliate programs in the most public of settings — at the Internet Retailer show last month. Look how advertisers talk about affiliate marketing in specific terms (fair, focused on the numbers) but also in terms of how they feel about it. I’ll ask that readers please resist the temptation to over-react and over-personalize (as the affiliate community has). I’ve been talking about this for YEARS so it’s not like affiliates haven’t been warned. Also, I continue to be disappointed at the lack of critical thinking in our industry. Thankfully we have sites like RelevantlySpeaking that serve as a haven to open, honest, authentic discussion.

So — why the nagging “reputation problem?” Historically speaking, advertisers have been burned — by SEO “experts”, their affiliates, heck even by Google and Yahoo. Both send fraudulent traffic and have historically asked advertisers to trust the “black box” (their algorithm). Advertisers have watched *how* companies like Google operate… how they automatically opted advertisers into the AdSense network as a single example. Oh, and let’s not forget how Google releases an API — the very essence of which is “open” in nature — and then slaps on a relatively un-known restriction to developers that prohibits them from developing tools that foster diversification of advertisers’ ad spend. The list goes on and on. It’s a long one! My point is this: advertisers are wising up and this kind of means of doing business doesn’t help the performance marketing sector. It boils down to business ethics and the “selectiveness” of what information we share with advertisers, when and why. I call the manifestation of this entire phenomenon the Ignorance Economy.

What advertisers don’t know IS being used against them. In their rush to acquire customers they’ve adopted bright, shiny digital things. Trouble is, they’re never what they appear to be in the end. We (in the industry) have been tremendously opaque about the HOW behind what we do. From free Web analytics tools (Google Analytics) to sneaky auto-opting in to low-value/high-priced products to hiding client approval of “black hat” techniques into contracts… it all comes back to bite us. It’s a short-term wave we’re riding and some are riding it better than others.

Another example… comparison engines. Advertisers MUST work with them because their competitors are but in the end they truly HATE being price shopped! Retailers hate it so much that they sometimes hide the price itself (”click to see price”) which forces the click and tanks conversion rates. Aaargh! They can’t win. But wait — there’s more! As retailers have caught on to pay-per-click ads in Google and Yahoo they’ve found that it’s been a primary source of customers for guess who? That’s right — their CPA partners. How do they do the voodoo? Whaddayaknow, trademarks and brands! Arbitrage. Ask for them to stop out of competitive concerns all you want, they’ll just run ads at night and on weekends when you’re not looking. And the beat goes on. Then we have comparison shopping engines locking up all the performance data — not providing API and optimization tools for advertisers. Most just don’t provide them. Why? Because they can get away with it… until recently but the tone has been set.

With comparison shopping, it’s a lot like running an affiliate program in a fast-and-loose manner (where affiliates take advantage of all the low-hanging fruit without your permission). It’s a frustration point. Learning hurts and once advertisers have learned it’s too late — they’re entrenched and too scared to make change. Sometimes that fear is justified sometimes it’s not. In either case it builds this little thing we call resentment. Never good in relationships.

Not to play the blame game but let’s be honest — advertisers need to take their share of it. Those who operate affiliate programs at the trench level have no problem looking the other way at the inherent deficiencies involved with CPA affiliate programs; however, the bean counters always show up to spoil the party. They often make adjustments to tactics and this usually involves restricting affiliates… reducing their ability to compete with the advertiser in the same places for the same customer using the same bait. Look to multi-channel direct marketing companies and you’ll see the trend. Companies have all but shut down (and some HAVE shut down) their CPA affiliate programs — relegating them to a few dozen cash back and coupon sites. Of course, advertisers have a difficult time feeling good about those too given their discounting nature.

In the end, it’s not just about ethics and how advertisers feel. How we’re perceived as an industry is getting down to brass tacks. It’s about the numbers and ROI. CPA affiliate programs have undisputed effectiveness but what about efficiency? That’s where the action is lately and that’s where companies like ChannelAdvisor, Mercent, Omniture and others are aiming guns… but that’s another subject. My point is that the Web’s inherent interactivity is beginning to force internal conflicts between “artsy marketers” and “scientific finance” pros. We’re kinda stuck in the middle. In the end the performance (CPC+CPA) channel houses active buyers and in that sense it smells like a rose.

Finally, how do consumers feel about us? Or shall I call them customers? We need to consider that too… and some brilliant minds in our industry are doing so.

CHECK BACK SOON FOR PART II OF JIVAN’S DISCUSSION WITH JEFF.
——-
Jeff Molander is CEO of performance marketing advisory firm, Molander & Associates Inc. where he provides executive-level guidance on digital marketing and media to multi-channel retailers, entrepreneurs and investment firms. He’s also a principal of The Partner Maker LLC, a system used by affiliate managers to drive increased revenue through better affiliate management & communications. He is co-author of forthcoming book, Paying for Performance and helped found digital marketing services company, Performics Inc.; today a division of Google. He can be reached at jeff@jeffmolander.com.