• by Ross Fadner , July 2, 2004

Forget pay-per-click (PPC)--pay-for-performance (PFP) is all marketers want to hear about from their advertising and publishing partners these days. And it's not just search and contextual marketing, either: Networks like ValueClick, 24/7 Real Media, and Advertising.com represent the major players in an emerging phenomenon that covers nearly all online sales channels.

One watershed moment for the phenomenon came recently when America Online announced its acquisition of Advertising.com. The effectiveness of the PFP model has long been one of the secrets of the affiliate marketing channel. The efficacy of the model was discussed recently at an invitation-only conference that was organized by performance-based affiliate network provider LinkShare Corp. last week and attended by more than 800 online executives.

Affiliate marketing is fast becoming a crucial means for online retailers to generate qualified traffic. LinkShare is one of the pioneers of the practice, whereby affiliates generate leads for their merchant partners, who subsequently compensate them if a lead generates a sale. The company said that affiliate programs could outpace search as the most cost-effective means to drive qualified traffic, and described pay-for-performance as the best way to motivate affiliates to drive that traffic.

"What search was for content, affiliate marketing is for commerce," LinkShare CEO Stephen Messer told conference attendees. Such a statement may presently be hard to qualify, but most panelists at the conference were bullish about affiliate marketing's prospects.

"Pay-for-performance affiliate marketing in the real world has a name. It's called commissioned salespeople, [and] they're the most productive people in your stores," noted Macys.com President Kent Anderson. "Our fastest-growing areas in the stores--our best-run stores--are typically commission-oriented, and I think there's an analogy [to affiliate marketing] there because you have a highly motivated sales force."

Carrie Johnson, senior analyst, Forrester Research, agreed--adding that successful online retailers treat affiliates like a sales force that needs to be educated, rather than a cost-effective media buy. Johnson cited the success of Overstock.com, a company with no offline component that effectively built brand awareness through affiliate marketing.

Buy.com founder and CEO Scott Blum noted that it will become increasingly important for retailers to switch from a PPC to a PFP model because it's much more cost-efficient. He emphasized that the recent growth and success of PFP affiliate networks like LinkShare's underscore the strength of the model.

However, there is one pay-for-performance sales channel that received nearly unanimous disapproval. Panelists agreed that the growing problem of online fraud, spyware, and spam are deterrents to the growth of online commerce, and could eventually keep consumers from shopping online. Because of its proven effectiveness as a low-cost direct sales channel, online retailers are among the heaviest users of adware and spyware. The panelists agreed that more legislation designed to confront these threats is inevitable.

Impact Venture Partners' Adam Dell noted that such marketing methods hinder the growth of the online sales channel because they violate consumer trust. "For the Internet to continue to develop and emerge as a viable distribution channel for retail commerce, trust is something that needs to be nurtured."

Adware, defined as legal ad-supported software because it properly discloses its practices in an end-user licensing agreement and provides consumers with measures for opting-out, is a target of interest for venture capitalists, according to online analysts.

According to Forrester's Johnson, the future for online commerce is bright, despite the murky areas of spyware and spam. Forrester forecasts 25 percent growth every year over the next five years for e-commerce; Johnson says she is "incredibly optimistic" about the next 5-10 years.