The big, ugly affiliate marketing scam

Ruslan Kogan is the founder and CEO of Kogan.com.

UPDATE: See the response, “Sorry, affiliate marketing actually isn’t a (big ugly) scam.”

After CES 2013 in Vegas, I stayed on after the show finished for a few days. An “Affiliate Summit” converged in Las Vegas. I was shocked to see the number of shysters involved in this growing trend. And I don’t use that term lightly.

A while ago, one of the marketing consultants at my company, Kogan, came to me and advised that we should get involved with affiliate networks to expand our digital marketing reach. I asked him, “Where do these affiliates get their traffic from? How will they drive traffic to Kogan.com?” He couldn’t really answer the questions, but I agreed to run a small trial. Based on our results, that marketing consultant is no longer with us.

To get started with affiliate marketing, we signed up with one of the world’s biggest affiliate networks and agreed to pay a 10 percent commission for their sites that drive sales and conversion to Kogan.

I was shocked when I saw that in the first week, affiliates drove about $200,000 of sales to the Kogan website. We were then able to generate a list of sites that drove the sales to Kogan. I had not heard of a single website on the list. “Where are these guys getting their traffic from?” I asked the marketing consultant again. “I don’t know. They must have people going to their site to look for deals,” he told me.

I decided to apply simple commercial market fundamentals to the situation. Essentially an “affiliate” is a digital salesperson working for your company, driving sales and getting commission. If you offer a salesperson a 10 percent commission to sell your product, assume they will sell $200,000 of product a week for you. What if you raised their commission to 20 percent? You’d assume they would work harder because they get more reward wouldn’t you? And if you lowered their commission to just 5 percent, they wouldn’t work as hard as they did before.

So I asked the Marketing Consultant to lower the commission we pay to the affiliate network to 5 percent. I wasn’t surprised a week later when he told me that we still did $200,000 of sales through them in a week. I then asked him to lower the commission to 1 percent. Once again, the affiliates delivered $200,000 per week in sales. Whatever these affiliate sites were doing to drive sales to Kogan.com, it didn’t change as our commission to them was lowered by 90 percent. This defied general economics principles, so I started to get very skeptical.

I then got the marketing consultant to lower the commission we pay to half the sites on the network to zero percent. Amazingly, they still kept driving sales. Something wasn’t right. Upon further investigation, I noticed that many of the sites that were driving sales were ranking highly for Google search terms like “Kogan Voucher” and “Kogan Discount Code”. The funny thing was that we rarely have any publicly available discount codes active on our site. These guys were all advertising codes that don’t even exist and capturing some of our brand traffic.

At this stage, we decided to remain active on the affiliate network because it was costing us two fifths of sweet nothing, and the effort to properly investigate it would be worth more than we were paying in commission.

The final revelation occurred when I was playing around with our Google Analytics account and analysing various trends (as I do at least 10 times a day). When I looked at our affiliate network in our Traffic Sources section, everything seemed legit. They drove a lot of visitors who spent a lot of time on our website and checked out many pages. Visitors from this traffic source also had a very high conversion rate. All seemed normal.

This figure shows the general stats from all visitors who came from the affiliate network. In general, these numbers look fine compared to other traffic sources:

That is, until I created a segment of people who had transacted on our website, and then looked at the stats for the people who came from the affiliate network:

The above figure shows the traffic coming from the affiliate network after a segment is created which only shows “Visits with Transactions”. The “% New Visits” is alarming.

The results were damning proof that affiliate networks are little more than a scam. Of all the traffic our affiliate network sent to us that had made a transaction, only 1.68 percent hadn’t been to our site before. This is more than 95 percent lower than our site average. Basically, of anyone coming to our site through an affiliate network, there was a 98 percent chance they had been to our site before.

If you were hiring a salesperson and paying them commission, you’d expect them to bring new customers into your business wouldn’t you? In this case, it’s the equivalent of paying a salesperson a commission to go out there and sell to people in your store that are already lined up in the checkout queue ready to make a transaction.

So here is what was happening:

1. Someone comes to Kogan.com and finds a product they want to buy.
2. They add the product to cart and start to checkout.
3. At checkout, they notice a “Discount Code” field.
4. They open a new tab and Google search for “Kogan Discount Code.”
5. They click around the various affiliates who claim to have a “Kogan Discount Code.”
6. When they visit the affiliates, they drop a cookie and tag the user as coming from that site.
7. They fail to find a discount code that works and come back to Kogan and finish their checkout.
8. Because the affiliate tagged the user, their reporting system claims that they referred the sale.

So basically, the affiliates are claiming commission on a sale that was going to happen anyway, and they did not provide any value to anyone at all. This is why I referred to them in my opening sentence as “shysters.” They all know exactly what’s going on and they’re happy to keep taking your money whilst posing as your partner.

I know there are probably some legitimate affiliates out there. For instance, someone who runs a fashion blog may talk about a certain trend, say black pants. If they showed their readers how black pants could be worn, and then at the bottom of the blog they linked to a few retailers who sell a large range of black pants, that would be a legitimate affiliate. This is based on the assumption that their blog gets a lot of natural readership and organic traffic. This would be a situation where prior to reading the blog, the visitor did not necessarily already want black pants.

Unfortunately, the shysters are ruining business for the rest of those legitimate use cases.

Be very careful when you sign up to affiliate networks. Do all your analysis. Profile the traffic, and then make an educated decision for yourself. Even though we were managing to get $200,000 a week of sales for all but nothing, this is not a sustainable business model.