‘Affiliate marketing’ is not a sexy word. For many people, the phrase is synonymous with get-rich-quick schemes, gambling websites, or activities that otherwise feel shady. Despite this, some of the largest technology company exits in recent years have leaned heavily on affiliate marketing for their business model. This includes the acquisitions of both CreditKarma (acquired for $7.1B by Intuit) and Honey (acquired for $4B by PayPal). In this article, we’ll dig into marketing’s checkered past, the rise of venture-scale affiliate businesses, and affiliate marketing’s future as an instrument for disruption.
The Golden Promise
The original premise of affiliate marketing was simple and wonderful – a win-win acquisition channel where the publisher, the blog or website promoting the product, also referred to as the ‘affiliate,’ would be paid purely based on performance. For every sale the publisher referred, they received a revenue share from the brand as a flat commission or recurring percentage. Unlike Facebook or Google advertising, the brand is guaranteed a fixed cost per action (CPA), which is usually a sale. Unlike SEO, companies didn’t need to invest years of effort and substantial amounts of capital to start driving results.
Numerous startups rose up in the late 1990s and early 2000s to proliferate the model. LinkShare Corporation (now Rakuten Advertising) was acquired by Rakuten for $425M in 2005. Commission Junction (now CJ Affiliate) was acquired for $58M in 2003 by ValueClick, which in 2014 rebranded as Conversant LLC.
Then, the fraud began. Fraudulent sales, chargebacks, and various loopholes started tarnishing the promise affiliate marketing once had. Meanwhile, less than reputable industries like adult entertainment and gambling began to latch onto the term more aggressively. The term ‘affiliate marketing’ became so laden with baggage that the industry association for affiliate marketing is now called the Performance Marketing Association.
Despite its rough start and many problems, affiliate marketing has evolved significantly since its inception. New companies have entered the industry to provide significantly improved tracking, attribution, and fraud checks. These include Impact.com, founded by former Commission Junction executives, and TUNE, which was recently acquired by publicly traded Canadian company Constellation Software.
However, the companies that benefited the most from these improvements aren’t the underlying technology providers – it’s the affiliates themselves. Credit Karma and Honey are the two headliners (both were acquired earlier this year), but other successful companies leveraging an affiliate marketing model include Ebates (acquired for $1B by Rakuten in 2014), NerdWallet (valued at $520M in its last round of funding in 2018), Bankrate (acquired for $1.24B by Red Ventures), and Red Ventures itself (valued at $2B in 2019).
These super-affiliates can be segmented into three categories: content affiliates, cashback affiliates, and discounting affiliates.
Category 1: Content affiliates
Companies include: NerdWallet, Red Ventures, Bankrate
Value proposition: Use content marketing to acquire customers that are otherwise difficult for brands to target.
These companies follow a tried-and-true strategy. In competitive markets with minimal product differentiation, customers turn to Google to help them decide which product they should purchase. For comparative and review-focused search terms like “best credit cards”, Google’s algorithm generally favors third-party publishers over a brand that’s trying to rank itself.
This creates a perfect space where brands must partner with affiliates to reach customers, particularly those that are closest to the point of purchase. This model is prolific in the personal finance industry but also in lesser-known verticals like VPNs (virtual private networks), home security, and higher education.
Category 2: Cashback affiliates
Companies include: Ebates (now Rakuten Rewards), Honey
Value proposition: Split the affiliate commission received from brands with the end consumer, creating a cashback model.
This method of affiliate marketing has been controversial for a number of years, particularly as it relates to companies that leverage browser extensions. Although the value proposition for the consumer is strong, brands have frequently been concerned with the quality of sign-ups generated by companies like Ebates and Honey.
If a customer is already at the checkout screen when they interact with a cashback tool, does the affiliate really create any value? Proponents of this model argue that yes, offering cashback, a discount code, or both reduces cart abandonment and, therefore, is adding value. Those against this model argue the opposite, stating that these affiliates simply piggyback off a customer who was already going to convert, with or without the added cashback. For this reason, some brands refuse to work with cashback websites.
Category 3: Discounting affiliates
Companies include: Credit Karma
Value proposition: Heavily discounting a paid product or service by leveraging affiliate marketing as an alternative revenue channel.
When Credit Karma launched in 2008, credit reports were typically paid offerings. Although the FACT Act of 2003 allowed access to one credit report every 12 months, this wasn’t enough for many Americans. Credit Karma’s business model relied on providing credit reports for free, collecting data on that user’s credit profile, and then using that to target offers for credit cards and other financial products.
They expanded the free-first model with products like Credit Karma Tax (free tax filing) and an Unclaimed Money product that allows users the opportunity to claim money held by their state governments for various reasons. This included utility deposits that were never collected and cash from closed bank accounts, among other sources. By the time Intuit acquired Credit Karma earlier this year, it was generating upwards of $1B in annual revenue, primarily on the back of affiliate marketing commissions.
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Going to zero
The Credit Karma formula is a powerful one – use the fees generated from affiliate marketing to bring the price point of a traditionally paid product or service to $0. Far beyond credit scores, this model has the potential to redefine unit economics for industries in a way that are A) more favourable to the end consumer and B) provide an unfair advantage over the competition, particularly in markets that are highly price-sensitive. These are the four prerequisites for executing on this model successfully.
A tangential product ecosystem must exist
The success of this model relies on using a free product to drive top-of-funnel users, and then selling them valuable, tangentially related products or services from partner companies. Credit Karma found a natural fit by offering relevant credit cards to its users based on their credit scores.
The market must be commoditized
In commodity markets, customers value a discounted product because the functionality is already standardized and at parity with the rest of the industry. For example, when people purchase credit reports, they only care about one thing – seeing their credit score. Every credit report, regardless of where it’s issued from, effectively serves the same purpose. The impact of discounting a product in an un-commoditized industry is likely to be less significant, given that a large market subset may value differentiated features over price.
The value of the discount should be enough to threaten competitors
In Credit Karma’s case, this meant driving the cost of a credit report to $0. The more price-sensitive a market is, the lower the value of the discount required. In industries where the monetization opportunity of the affiliate channel is large enough, taking the price to $0 may be the better strategy.
Affiliate commissions ≥ value of the discount
For a model like this to work, the affiliate commissions should eventually offset the cost of the discount. That said, companies may require many years to reach this point, relying on venture capital in the meantime. Credit Karma was not profitable until 2017, a decade after their founding.
Another less-than-sexy, under-the-radar market is the moving industry. Moving is effectively a commoditized industry where the customer cares about two things – moving their items from point A to B in a timely manner and ensuring their items aren’t damaged in the process.
When someone moves to a different house, it’s likely that they’ll need to sign up for several new services, such as cable or streaming services, internet, phone plans, and home insurance. They may also require handymen, contractors, and miscellaneous other services. Moving.com estimates that the average intrastate move costs $1,250. Now, contrast that with the customer acquisition cost for some of these industries. In the U.S, the average cost of acquiring a cable subscriber was estimated to be $850 while Comcast’s wireless subscriber acquisition cost was as high as $1,260.
While I’m no expert on the moving market, these surface-level signals indicate that it may be possible to leverage a Credit Karma-esque play in the moving industry. By acting as a central concierge for utilities and other relocation-related services, this hypothetical moving company could offer short-term moving services either for free or at a steeply discounted rate by generating sales for home services companies.
A look into the future
While venture capital and affiliate marketing have traditionally been thought of as playing in two very different domains – the former being associated with unicorns or ‘venture scale businesses’ while the latter has become nearly synonymous with ‘lifestyle businesses’ – some of the most disruptive companies of the next decade could emerge through an unlikely union of both. These ‘discounting affiliates,’ like Credit Karma or my hypothetical moving company, could change the pricing dynamics of certain industries forever, given the time and runway afforded by venture capital to mature. With the acquisitions of Honey, Credit Karma, and Ebates providing some of the earliest validation of affiliate marketing beyond its niche following, I’m optimistic that the best is still yet to come.