The reality of affiliate marketing
Are your customers overpaying?
Affiliate marketing schemes give generous payments to influences to recommended goods and services, but who pays?
There are plenty of people promoting the advantages of affiliate marketing, or its scammy parts, but from the point of view of the referrer, and usually as to how much money can be made and how quickly. This article is about what value such schemes are to those being referred to a business, rather than its value to the referrer. Are such schemes really providing any value for them?
Affiliate marketing is taking advantage of the plethora of influencers that have huge followings on social media, and so their recommendations can throw a lot of customers a business' way. For large companies, the total payouts to influencers can be in the millions per year. However, such payouts are overheads, and so will have to be recouped somehow, and the only way that can be done is from at least the customers signing up as a result of the influencers' recommendations. There is no such thing as a free lunch, so are the customers actually getting a good deal? Probably not.
This will detail the affiliate scheme from A2Hosting, who is our site hosting provider, but such schemes are almost universal now, so expect that almost all businesses offering goods or services that you buy from will likely have such schemes in operation. Many will have a refer-a-friend type scheme, but as they typically only offer a credit, depending upon the value of the commissions and what they offer, it may not take many recommendations to have too much credit to offset against costs.
It is the affiliate schemes where some serious money can change hands. A2Hosting offers US$55 to an affiliate for each hosting plan that is signed up to. I was considering offering a free Smallsite Design license in return for the signup. However, that leaves me with a US$45 net advantage, but the customer ends up paying 5.5 times as much for the license, assuming that A2Hosting recoups all their outlay on the payout to me as an influencer. So let us see where that recouping is actually likely to happen.
A2Hosting offers substantial discounts for plans when signed up to for one to three years. For example, their shared hosting plan discounts range from 76% for the lowest, to 50% for the highest. The cost of those plans will have to cover the equipment and staff costs to provide the service, so if those initial plane prices are low, they might be only cover those overheads.
Taking the lowest plan at US$2.99 per month, that comes to US$107.64 for 36 months, but the renewal cost is US$359.64 per 36 months after that. If the cost of the payout is not covered by the discounted phase of the plan, it will likely be covered by the cost of the first renewal. Now, the hoster is gambling that many of those plans have renewals taken out for them, but they will likely have built in a loading into the extended cost to cover plan dropouts. At worst, their expensive enterprise-level plans will be loaded to cover lesser plan dropouts, as per computer industry practice.
Typically, there will be no discount on the renewals for those plan buyers who did not go through an affiliate, so the hoster saves on those. A person going through an affiliate in good faith therefore ends up paying extra for whatever they are offered. Within the confines of the hoster providing a plan, the plan renter may well get a good deal if the influencer brings in so many customers for the hoster to have such an increase in scale that they can lower their costs enough to cover the influencer payouts and lower plan costs.
Do such economies of scale occur for a business with $millions in overheads actually come from using influencers, or is it marketers fooling themselves? Only they can answer that. But how is the situation from an affiliate's end? In effect, I have received 5.5 times as much for a license as I would get if purchased outright, but the affiliate arrangement is such that I would not have to even offer anything other than the referral to get the payout.
The referral certainly gets me a good payout, and it hopefully gets the business paying it out a better income, but the whole arrangement may not get the customer any benefit at all, especially since they likely will not get any discount if they do not go through an affiliate. Unfortunately, the process is a black box for them, with a real promise of nothing other than what I offer them, which in this case makes them effectively substantially overpay for it.
After thinking the whole arrangement through, I decided that I did not want to be an affiliate as I think that there was absolutely no benefit for whomever I refer, so I would not want to give a false impression that there is some advantage for them. There are many things that we cannot change in our societies, but if we choose not to do what we do not believe in, though our individual choices may not make a lot of difference, if enough do, businesses may find that such schemes do not really work for them, and thus abandon them, even if it cost us in foregoing generous payouts in the sort term.