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CPA Network Consolidation: Where Does CPA Marketing Go From Here?

Jul 6, 2010
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If you were to step into a time machine and travel back to 2006, the coolest role in the online marketing industry might have been to own an affiliate network. Fast forward to 2011 and it doesn’t seem as cool a prospect.

In the past year, affiliate networks, especially those focused on CPA (cost-per-action) offers have been facing increasingly tougher times brought on by a variety of factors including simply a glut of networks. To offset industry challenges larger networks are moving towards consolidation as a means of survival. Recent developments include:

CPA Boom and Bust

At one time there was estimated to be about 300 active CPA networks in the industry. With the actual tracking technology becoming commoditized setting up a network involved licensing DirectTrack or another affiliate network platform and brokering offers from a larger network.

In the land grab for affiliates, after all publishers are the lifeblood of any network, some networks got a little aggressive and offered 5 percent overriding commissions for affiliates who referred other affiliates. Referral commissions above 5 percent were not unheard of, especially for branded and big-name affiliate bloggers who might be able to refer their friends, followers and wannabe affiliates by the hundreds. Often these recruitment campaigns resulted in networks being overwhelmed by affiliate applications, accompanied by whining threads on popular affiliate forums containing accusations that the network was “sleeping on the job” or unresponsive.

In the rush to build up their affiliate base, some networks were willing to work on razor-thin margins in order to fill their affiliate ranks.

Hit on the Other Side

Another problem emerged when networks dealt with affiliates who were using paid forms of traffic promotion, such as pay-per-click, pay-per-view and media buy traffic. Because they’d often be incurring traffic costs upfront (or with a month’s buffer if you used a credit card), they’d inevitably run into cash flow issues.

In the hopes that this would alleviate situations where affiliates paused campaigns mid-month because the advertiser paid on a 30-day or longer basis, networks attempted to help their affiliates out by floating cash advances, paying balances on commissions accrued before they received payment from the advertiser. This inevitably only encouraged fraudulent practices up to and including credit card fraud by those looking to cheat to make a quick buck.

The ecosystem balanced precariously with the affiliate dependent on the network, and networks dependent on being able to get timely payment from the advertiser. Just one faulty element in the system, whether a fraudulent affiliate, a poorly-organized network or an advertiser which brutally scrubbed and sometimes shaved leads, could bring the whole system down like a house of cards.

The euphoria of getting affiliates to perform caused some affiliate managers (and possibly affiliate network owners) to place revenue growth above common sense and sustainability. In the boom time of 2005-2009 (before the FTC stepped in), it was not uncommon to hear of affiliate managers actively encourage their affiliates to promote using flogs (fake blogs) and farticles (fake articles) where deceptive content was created to entice visitors to sign up for an Acai weight loss offer or to sign up for a “Google bizop”.

Just like in the movie Wall Street, greed played the biggest role in contributing to the industry’s collapse in 2009, especially as credit card processors pulled their support for re-bills/continuity billing arrangement that some of the more predatory offers had relied on in the wake of Congressional pressure.

Being overly aggressively in offering referral commissions for recruiting affiliates to a network has come back to haunt the networks. From the generous 5 percent referral commission, the typical referral is in the range of 1-2 percent. Some networks have discontinued referrals altogether.

A number of smaller networks have either closed or collapsed due to generous cash floats where they paid out commissions to affiliates and for which they did not receive payment from advertisers.

What the Future Holds for CPA Networks

While affiliate management platforms like HasOffers have made it easier to start a network, making it profitable and creating a business model that operates in an ethical and sustainable manner is proving to be more than a can of worms for aspiring network owners.

We’re likely to see more “consolidation”, a nice term when a bigger (usually publicly-listed) business buys out a CPA asset walking on its last legs, in the industry. The smaller networks will either go for a firesale price or implode if their liabilities, especially from generous advance commissions paid out on a weekly basis, are stretched beyond the breaking point against the monthly payouts they receive from their advertiser clients.

What is a good number of networks within the CPA industry? Since we’re talking about primarily the online channel (mobile marketing and pay-per-call-based business models haven’t made major inroads into CPA marketing yet), it’ll be a fraction of what you’d see in the online/offline Fortune 500 business world. My guess is that 5 major CPA networks would be a comfortable number and with 10 networks everyone will be barely chugging along. There could be a second tier ecosystem of small networks which primarily broker or syndicate offers from the large networks and anyway from 50 to 100 small CPA networks might be a sustainable number.

Filed under: Adware, Spyware, Greynets, & Internet Fraud + Affiliate Marketing + Lead-Gen Marketing + Legal Issues
  • http://www.mediatrust.com peter bordes

    Andrew this is and excellent post and good analysis of the state of the CPA industry that EVERYONE should read.You have captured every point of the past and where we are heading in the future. I agree with every point you have made.

    One main issue you touched on that is key is "greed". I was on the closing panel at Affcon2010 and Shai from Unique Leads was saying that greed was good and drives innovation. I completely disagree. Greed drives "bubbles" like the one we just went thru which interestingly enough was once again attached to the word FREE. Free ipod, free ring-tone and now free trail. We believe Capitalism NOT greed drives innovation and long term sustainable healthy growth. while greed ultimately causes short term thinking market volatility and havoc on everyone in the industry.

    In order to grow as an industry we need to look at the basic building blocks and fundamentals that drive long term sustainable business. "enterprise value" is a major factor in driving growth. we have very little of this aspect in CPA marketing because of all the companies sitting on rented back ends. if you don't have an invested interest in you technology then you don't have a long term enterprise perspective in creating shareholder value… CAPITALISM!

    This is one reason why there has been so little M & A in our industry segment. what are acquires going to be looking to buy? good companies with technology that have a long term perspective… not short term thinking "service oriented" that can disappear the next day after buying them. especially when most networks are all running brand-less brands that are all over every network. this does not create any kind of defensible position to invest in or acquire. we need to as an industry focus on moving up market and working with brands and agencies where there is stable, steady business with big margins and wont disappear over night.

    You are 100% correct in that there will be a few networks/platforms (3-5) who rise to the top by creating enterprise value and business culture that focus on building broader vertically and horizontally integrated and diversified performance driven platforms. These leaders will be safe haven beacons as reliable, solid and sustainable business partners.

    Affiliates, marketers, publishers and brands who see the need for a "flight to quality" will migrate to the top platforms further delineating the tiers and hierarchy of CPA and ultimately "performance marketing". Those companies in the top tier will continue to diversify thru organic growth and acquisition. they will offer a wide range of offers, transaction types and tools for their partners.Just having "highest payouts" and "exclusives" with tracking technology is not going to cut it anymore. Technology, innovation, and investment in enterprise quality platforms is the winning formula and the place that sustainable long term partnership for the future are made.that is the key to the future of our performance marketing industry.

    sorry for the rant. this is an important subject in camp MediaTrust. we believe the next evolution is here and all your points are key for all to learn from and grow..

  • http://www.experienceadvertising.com Evan

    It's an interesting issue for sure. "CPA Networks" will always be apart from Major Affiliate Networks like CJ, Linkshare, Shareasale, and Google because they don't necessarily cater to big Advertisers and brands due to the nature of the way they work, i.e. publisher transparency, ability to manage your own publishers, send newsletters, recruit, etc..on the network itself. These are vital components to growing an individual affiliate program on a network. This is only from my perspective and not any kind of negative thing. There is a fundamental difference between the 2 models which i think hurts a CPA networks ability to partner with big sites and companies. In some cases it happens but overall most companies/sites would rather launch on a network like CJ or Shareasale than any other CPA network. I think that you will see 1000s of CPA networks, which doesn't really mean much because if they have no publishers whats the point.

  • http://www.esilverbullet.com Jed@Affiliate CRM

    Very good read! Thanks! The next few years will be a shakeup for sure in the industry. Seems like the trend is fairing well to the OPM firms from those who are frustrated with performance marketing. They can team up with a TEAM that they have a relationship with in a direct manner. Long term sustainability will require more accountability and tracking on not just throwing darts at the wall practices.

  • http://www.whoisandrewwee.com andrew wee

    @Peter – Thanks for highlighting those points. I think the majority of network owners should be aware of them, whether they'd choose to take action is another matter.

    From a business consulting perspective, I feel that most networks are run like a sole proprietorship or a partnership, rather than like a biz entity. Hence, some issue like risk management (esp in the management are cash floats) aren't closely monitored, leading to the "house of cards" syndrome I've mentioned.

    You're also right in highlighting several of the growing pains that CPA networks especially are facing, beyond just "Who has the most (active) affiliates?" and "Who is driving the most volume?". It's very much like the dotcom bubble in 2000 where early boomtimes were followed by the dot-crash later.

    Hopefully we've all learned from the past and things end up better this time.

  • http://www.whoisandrewwee.com andrew wee

    @Evan – I'm seeing a number of CPA networks take CPS offers (especially from the big affiliate marketing networks like CJ) and repackage and list them on their networks.

    I've also seen some CPA offers make their way on CJ. CPS offers are cross-promoted by CPA networks and vice-versa, but I'm not sure how well this works in practise, the promotion methods can be quite different.

    -

    As for big brands working with CPA networks, I don't see any issue if there is a concrete strategy in place.

    The issue is that the way the CPA offers are packaged and the way they're presented to affiliates, it doesn't seem very appealing to big brand advertisers.

    So it's not that the CPA model is a broken one for the Fortune 500, it can work. The problem is that you can't package and promote a Lexus affiliate program the way you do for an iPad zip submit.

  • http://www.experienceadvertising.com Evan

    Thanks for responding. From my experience, it's risky when networks take offers from major networks and list them with their publishers, that can go wrong. I've always been a fan of the CPA offer and spent a lot of my career promoting one, but what I've come to realize is CPA offers or lead gen do well with CPA networks usually due to the type of publishers that drive most of their traffic/revenue. It really is a difference in the actual publisher make-up. But I see the same issues relating to quality and playing by the rules on the major networks. At the end of the day, any offer can do well through performance-based marketing if the site or landing page converts well, pays out well, and is somewhat in demand. But as far as large brands working with cpa networks, the glut has tended to put a "let's not touch that" air around syndicating the offer out more widely. Then again if the network can convince the brand to launch with them more power to them, but if quality can't be ensured the plug could get pulled quickly.

  • http://www.VitalyMakarkin.com/ Vitaly Makarkin

    Great Article Andrew. Very interesting to read. I'm new in this are of Internet Marketing, but post & comments like this add a lot of value into my brain what is going on the market.

  • http://insideaffiliate.net Josh Todd

    Having started and closed a network myself in 2009, I think this article is right on the money. I agree that we are seeing a re-balancing of the market with a lot of networks either closing or merging with other networks, but I don't think we will see as small a number as 10 networks. I would be shocked if there is ever less than 100. Now 10 networks may be doing the majority of business, but that's just like the typical 80/20 rule, or even 90/10 as seems to be the case in this industry.

  • Gregg_Sugerman

    Incredibly informative post as always. Thanks Andrew. I've seen a lot of this happen in other (completely unrelated) businesses. When companies start to work on thinner and thinner margins + hyper-competition = closed doors more often than not. It becomes a desperate race for more volume…

  • http://www.whoisandrewwee.com andrew wee

    @Josh – having had the opportunity to work with you as an affiliate manager last year, it gave me a fair amount of insight into how the industry works.

    By the "guess-timate" number I mentioned 5-10 major players who'll originate or be Agency of Record for many offers which other small networks (as many as 100) will broker/syndicate.

    The performance marketing/commission-only model does accelerate network attribution much faster in the CPA space compared to the pay-per-sale space since many networks carry the same offers and commoditize them by offering the "highest" payouts in order to get a slice of the action.

    -

    @Gregg – exactly, just like I mentioned in the paragraph above.

  • http://www.marketingrevenue.net Glenn Bossik

    The biggest problem is that most affiliate offers contain no ad copy. They only use a call to action. "Get my product" isn't ad copy. It certainly doesn't convince consumers to opt-in. Why should they? There's no discernible benefit.

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  • http://www.scotts-insight-reviews.com scott

    perhaps they should let those new in instead of competing over the same super affiliates? I mean does it matter as long they make money clickbank and other pay per sale networks don't care how new or expericed you are.