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ClickingThroughList 1.2--Legal Risks of Affiliate Programs

To the ClickingThroughList,

Welcome to our new subscribers!  For our second issue, here's another article I recently wrote, this time on something which barely existed at the time I was writing "CLICKING THROUGH": affiliate programs.  For those who may not be familiar with this term, an "affiliate program" is a way of matching online retailers (for the most part) with other Web sites who will send customers to the retailers via a link of some kind.  In exchange, the retailer will give the referring site a piece of the sale.  I believe that affiliate programs will explode in the coming year even more than they have in the past, as additional online entrepreneurs discover that active participation in an affiliate program can yield high margins from e-commerce without the infrastructure or management burdens of a full retail presence. Still, as the article suggests, affiliates are not completely immune to risk.  It's important to keep in mind some of the potential pitfalls discussed below in order to maximize the gain from an affiliate program.

For anyone interested in learning more in an intense environment, I'll be speaking as part of PlugInGo's Affiliate Program Bootcamp in two weeks in Newport, Rhode Island--check out <http://www.plugingo.com/index.cfm?Action=Seminar> for more details on that conference, which will also include industry experts like Declan Dunn, or click on <http://www.realvoices.com/goatisland/ezor.ram> to hear me speak about it.  I also recommend Allan Gardyne's excellent Associate Programs newsletter, Ola Edvardsson's Affiliatetips and Glenn Sobel's Affiliate & Domain Name Advisor Letter as sources of useful information--let them know I sent you!

As always, feel free to forward this newsletter (in full, please) to anyone you think would find it interesting.  Also, you can write to me with any questions, comments or suggestions on the newsletter or "CLICKING THROUGH: A Survival Guide for Bringing Your Company Online" at jezor@panix.com.  Enjoy the article, check out the recently revised Clicking Through Web site <http://www.clickingthrough.com>, and have a happy and prosperous new year! {Jonathan}

 Affiliate Programs--Building Instant Partnerships While Avoiding Long-Term Problems 
by Jonathan I. Ezor

                Recently, an interesting advertising and revenue sharing method has begun to explode throughout the Internet: affiliate (sometimes called associate) programs.  These can occur in a variety of forms, but they all share the same general characteristics: an advertiser (often, but not always, an online retailer) will pay a site for each qualified customer who the site sends to the advertiser.  The commission takes the form of a percentage of a sale, or even a payment for a clickthrough.  These programs can be run directly by the advertising site (Amazon.com, a pioneer of affiliate programs, does this), or managed by third-party companies like Commission Junction, BeFree or PlugInGo.  In many cases, the linking may not even be from a Web site; BN.com (the online branch of Barnes & Noble) has announced an affiliate program operated through e-mail links (see <http://www.bn.com/mybnlink/index.asp> for details), and many electronic newsletter authors include affiliate-based links to goods related to their articles.

                Why have affiliate programs caught on when pure clickthrough advertising deals (where a banner advertiser pays a site each time the banner is clicked on) have failed to?  In large part this is due to a greater sense of partnership between the advertiser and the site placing the ad, since they are sharing revenue from each transaction, and greater empowerment for the siteowner as well.  Unlike clickthroughs, which were usually placed on the major sites only by the largest advertisers, affiliate programs are targetted at smaller Web sites as well, which don't have large sales forces and many not be able to sell ad space profitably-affiliate programs allow a site to "sign up" for paid advertising from name-brand advertisers. Also, while traditional clickthrough ads are created by the advertiser and may be designed not to draw traffic (gaining the advertiser free brand advertising while losing money for the site on which the ad is placed), siteowners may have greater control over the formatting and placement, and therefore the financial return, of an affiliate advertisement (and may even get to choose which of a number of banners or text ads they feel will be most successful on their sites or other resources).  For advertisers, an affiliate program has the same appeal as clickthrough: it provides a predictable marketing method with guaranteed ROI (return on investment).

                Affiliate programs also allow a site to experiment with e-commerce without having to buy, store or ship inventory.  Siteowners are encouraged by advertisers to be (appropriately) creative, and active, in bringing qualified traffic, and through receiving a percentage of each sale, the siteowner can see direct results for its activities.  Also, beyond the large brands, many affiliate programs are offered by niche retailers whose products particularly appeal to a certain audience, thereby increasing the chances that a banner ad will result in a sale to that audience (and a payment to the siteowner providing that audience).

                All business relationships include risk, and affiliate programs are no exception.  Of primary concern is the compensation structure-a siteowner needs to know when, and how, it will be paid for each user it sends to the advertiser, and how it can verify or correct errors in transaction tracking. Privacy is always an issue whenever information about a site's users is shared with another site, both from legal and good will perspectives.  If the affiliate program requires proprietary software, there may be questions about the reliability and ease-of-integration with an existing site architecture.  For programs based on retail sales, additional concerns arise: while siteowners have very little actual connection with the sales process, other than providing a customer to the retailer, what happens if the order is mishandled, the customer unfairly charged, or the product itself defective or dangerous?  Siteowners considering joining affiliate programs may worry about being blamed by the customer, or authorities, for problems caused by the advertiser.

                Fortunately, the risks faced by Web site owners in joining affiliate programs are actually quite low and easily managed.  First, a siteowner considering a particular affiliate program must read the program's terms and conditions and specifications carefully prior to agreeing to them.  These will tell the siteowner how and when it will be paid; what software or special link configuration may be necessary to participate; how the linking must be formatted; how the relationship can be ended by either party; and what happens in the event conflicts or problems arise. Of course, a siteowner must comply with the terms and conditions in order to take advantage of any protections they offer, or even to continue to participate in the program, so it will need to be familiar with them in any event. The advertiser's privacy policy, if available, will show how user information will be collected and reused-be sure to ask the advertiser if there is no posted policy.  It is crucial that the siteowner accurately describe its relationship to the advertiser and its role in fulfilling any orders in the placement of a link-the more a user thinks that the siteowner (rather than the advertiser) is fulfilling a sales order, the more the siteowner will be held responsible by the user if something goes wrong.  It is also important for a participating affiliate to monitor the program on an ongoing basis, not only to watch for problems, but to tweak the placement or presentation of the advertisement to improve the likelihood of its generating real financial rewards for itself (and sales for the advertiser).

                As with all online business activities, the siteowner should check for proper liability insurance coverage prior to joining an affiliate program, particularly if the siteowner is not otherwise in a retail-related business. Affiliate programs raise liability issues from advertising to intellectual property to product-related claims.  Since the potential exposure, particularly on the product side, is fairly modest (given the remoteness of the affiliate to the actual transaction), affordable coverage can probably be found relatively easily.  Ultimately, a proper review and compliance with the advertiser's (or program manager's) terms and conditions, coupled with appropriate insurance, will make participation in an affiliate program a low-risk, simple way to make additional (potentially significant) income from a Web site, e-mail newsletter or other online resource.

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For more information on "CLICKING THROUGH: A Survival Guide for Bringing Your Company Online" or Jonathan Ezor, see the Clicking Through Web site at http://www.clickingthrough.com.

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