Many years ago I was involved in a profitability rationalization project at a large retailer. The assumption was made, by others, that affiliate sales were not as profitable as previously thought and that many sales would have happened already, or they were simply increasing costs of other channels. I learned a lot during that period, a lot of things I still use today. I’m extremely lucky to have had that experience as this type of thing is being discussed more and more these days. Many of our clients are now asking these questions, the most frequent being “Are my sales truly incremental?”. Some advertisers are even asking if they need an affiliate program at all.
I’ve written about this briefly in the past, but I’m sensing a trend that is fully “here” and not going to go away. The industry needs to hit it head on. Not sure what I’m talking about? I’ll do my best to give you an adequate primer into this topic, although I’m sure smarter individuals will be able to add more insight, so please feel free to add your thoughts to the comments.
What is an incremental sale?
The Business Dictionary has a great definition: “Number of units sold through a sales promotion offer in excess of the estimated number that would have been sold without it.” They pretty much hit the nail on the head there. For the affiliate community, this question often comes from executives. What they mean by it is this (in most cases): “the number of sales I wouldn’t have gotten if it weren’t for my affiliates and their marketing of my company and its products”. In essence, it’s the sales that only happened because I have an affiliate channel and am working with that particular affiliate. Affiliates generated these sales that I would not have gotten any other way, or they contributed to the conversion and without that contribution, the user would have gone elsewhere. In many cases you could argue that 100% of those sales are incremental, but in many other cases, the argument could go about the same way in the opposite direction.
Why is it important?
Very simple. At the end of the day, advertisers want/need to maximize my revenue and minimize my costs, don’t you? Every merchant, or anyone who manages a P&L, needs to make sure every dollar they are investing is bringing them the maximum return possible. So if there are channels, partners, or promotions that you don’t need because they are only adding to costs, or aren’t as valuable as you thought, you want to eliminate them or adjust their payout according to their value. You want to identify the promotions and channels that bring you those sales that you would not get otherwise. Affiliate programs are no different. And now, more advertisers are demanding more than just top line sales. As they look at their overall P&L each year, they need to see that top line revenue grow, not simply moving sales from one channel to the next, which many retailers fear is happening. Each marketing channel needs to bring in profitable (ie. incremental) sales and advertisers need to know how those channels work together. It will allow them to identify how a user is shopping and which initiatives/partners they need to invest more in and which ones they need to adjust resources spent on them or possibly eliminate.
Will that mean that some affiliates won’t make the cut with some advertisers or have their payouts altered. Yes, it does. Sites that are deemed to add little value to the consumer path to purchase are going to be the first to feel the pain. The affiliates that generate more value, more new customers and more incremental revenue will find themselves with more of the advertisers budget and more bottom line profit. The alternative may be for the advertiser to no longer play in this sandbox, and it most cases that is short sighted.
And it’s coming, frankly it’s here. Advertisers want to see value, and they are now able to better measure that and there is technology to assist.
We’ll be discussing this more over the next few days in this 5 part series. Please feel free to ask questions, comment and add to the conversation below. If you’d like more information, or think I’m off my rocker, please comment away.
Continue on to Part 2 – Ways to Calculate Incremental.