One of the great lessons learned from the early days of online marketing is that traffic is not king.
Traditional retailers have long understood that bringing additional foot traffic through the doors of their stores is only profitable if the visitors become customers.
Foot traffic that produces no additional revenue is harmful because investments in infrastructure and personnel are required to manage that traffic.
The same rule applies to Web sites. Having a healthy amount of traffic is vital to their success, but to spend online marketing dollars attracting traffic that produces more expenses than revenues is foolish. If you're part of an affiliate program, it's also unnecessary.
Where's the Return?
Traditional advertising models applied to the Internet can successfully drive additional traffic to your site, but much of that traffic will not produce additional revenue. Online advertising has historically been purchased just like off-line advertising: Advertisers take on all of the risk and publishers take on none.
This is because advertisers pay to have their ads shown to a certain number of people, regardless of whether those people end up as customers.
Unfortunately, as with off-line advertising, the overwhelming number of people who see your online ads will never become your customers. Typically, only 0.5% to 1% of people who see an online ad will respond to it by clicking on it and going to the advertiser's site. Once there, only 1% to 2% will buy.
So, to get one or two customers to buy something from your site, you need your ad seen by about 100,000 people. If you pay the going rate of about $10 (U.S.) for every thousand people who see your ad, you'll need to spend $1,000 to acquire about one customer and 99 window shoppers. Wouldn't it be better to spend the $1,000 only on customers?
As one of the owners of CollegeRecruiter.com, a job board targeted to students and recent graduates, I faced this issue two years after our site launched. Traffic was increasing, but we knew we had to find a more efficient way of attracting customers.
The trick was how to purchase advertising in such a way that the traffic it created always produced additional revenue.
By definition, affiliate programs pay for performance. The merchant only pays the affiliate when the affiliate accomplishes some performance metric. Sometimes that metric is defined as a click-through and sometimes as a lead, but usually it's defined as a sale.
We decided to turn the affiliates we were paying to run our ads into commissioned sales representatives. We started paying them only when they sent customers to our Web site. The effect was to eliminate our marketing expenses by shifting those costs so they became costs of goods sold.
Good Numbers Regained
We now purchase our advertising from the 16,000 Web sites that belong to our affiliate program. We pay them a commission of $100 whenever someone they send to our site buys something from us.
When that happens, we also pay a $20 service fee to the affiliate network Commission Junction, which manages almost all the technical and administrative aspects of our affiliate program.
Because the items we sell on our site range in price from $125 to $4,995, we make a guaranteed gross profit of between $5 and $4,895 per item sold through our affiliate program. More importantly, we acquired new customers without having to incur any marketing expense.
When you start an affiliate program in which you pay only for sales, you won't feel burdened by your online advertising expenses. Every time you pay a commission to one of your affiliates, you'll know that you also just added dollars to your bottom line. And isn't that the bottom line of being in business?