Affiliate Marketing vs. Network Marketing

Preamble - I want to say many thanks to everyone for their time at the show. More than one of you even gave a nice compliment on the blog. I'm flattered. We'll see if you still feel that way after this monster post :)

This post can also be found in the DMConfidential.com. The inspiration came from a friend's joining Quixtar and my sitting through the presentation. It's a compelling pitch of course but I left with a bad taste. I do my best here to explain what about network marketing and Quixtar had me ill at ease.

I remember my mother buying Amway soap during my childhood. I didn’t quite understand how the organization functioned then, and I still don’t today. Amway, now re-branded as Quixtar falls in the multi-level marketing category, and when I think of MLM, what comes to mind is this advertiser that spent hundreds of thousands of dollars per month with Advertising.com, paying ridiculous amounts for first name and email address for a work from home offer. No one in the office could quite understand the “wheel” they kept mentioning, their system for taking leads generated and distributing them to others, but, they kept buying, month over month. All of this without a co-reg path, thank you offers, etc.

Not that any in our space have much spare time, but if you did, Quixtar members will have you wanting to believe. I know this because two friends have bought into that dream, and while I currently view Quixtar with immense skepticism, I find it a fascinating subject when viewed through the lens of online direct marketing and lead generation. This piece looks at the differences between affiliate marketing and “network” marketing, paying particularly close attention to the “network” component. What we find is that somewhere at the intersection between affiliate and network marketing lies an immensely powerful business that someone will solve and earn the riches promised by the networking marketing lemmings.

Let’s start with the basics of affiliate marketing. Affiliate programs allow those not directly associated with a company to become an independent sales representative for that company, and more importantly, earn money on the sales that they generate. For whatever reason, this brings to mind a pajama wearing webmaster looking to integrate Amazon or eBay into their content. Affiliates are paid based on results. If they are promoting a product, they receive a percentage of the sale. If they are promoting a sign-up, they get paid a fee that translates to a percentage of the expected value of that new user.

Take Amazon and eBay for instance. An affiliate whose blog recommends a book will receive up to 8.5% of the sale price. With eBay, an affiliate whose actions lead to a new signup will receive a certain dollar amount (depending on volume) for that new user. With eBay, they will also receive commission for activity that user does on the site, e.g. bids, buys, etc. How affiliates drive traffic is entirely up to them, and whether they choose to stay active also depends on the affiliate. Amazon, who runs one of the top programs, offers on their sites an FAQ, along with a Performance Tips Section and Discussion Board. The Performance Tips section, for instance, offers tools to pick products to promote, links to websites to help the affiliate learn more, and best practices for getting traffic.

Amazon runs their own affiliate program, which means those wanting to promote Amazon products sign up directly with the company, whereas other companies, such as eBay run their program through an affiliate network. The structure is still the same for the affiliate – whether direct or through a network, i.e., they receive payment for revenue events, but working through an affiliate network often comes with additional benefits, including access to additional companies to promote, account managers to help with growth, and sometimes conferences the network puts on to get affiliates together and share information. The conference might cost a nominal amount to attend but becoming an affiliate does not. Smart companies and networks do everything they can to leverage this commission based, outsourced sales force.

Network marketing shares much in common with affiliate marketing. In fact, Quixtar (formerly known as Amway), operates much like a decentralized combination of Amazon and Commission Junction. The organization has exclusive products (their version of thousands of food and health products) as well as relationships with more traditional brands, e.g. Barnes & Noble, Circuit City, Blue Nile, Sony Style, 1800 Contacts, and FedEx Kinko’s just to name a few. Affiliates of Quixtar can promote both the exclusive products as well as those from it “Affiliate Partners.”

The terminology highlights one of the first differences. Quixtar calls its affiliates, “independent business owners.” Already, we can sense Karl Rove at work. Viewed from the lens of an online marketer, especially one even remotely involved with affiliate marketing, the independent business owner is really just an “affiliate.” But network marketing companies reserve that term for the third-party companies associated with Quixtar, the “merchants” in the affiliate marketing equation. They want users viewing the world a certain way, one that avoids parallels with online affiliate marketing.

The real differences start to emerge when considering joining Quixtar to promote products versus a company like Commission Junction. (For the purpose of this overview, pretend that Commission Junction had a division that created, manufactured, and distributed its own goods and services.) Again, in both affiliate marketing and network marketing, individuals act like an outsourced sales force. With affiliate marketing, joining is free, but with Quixtar, those who want to join must pay money, ostensibly to set up their independent business. And, while both affiliates and IBOs, as they are referred to in the network marketing world, have incentives tied to how much product they move, how they do it differs drastically.

With affiliate marketing, users receive cash for their efforts - whether it be driving sales or signups. With network marketing, users receive points first, then cash. What they physically earn is based on a complex system tied to not just how much product they move but how that product moves within their mini-organization. Network marketing revolves around how many people are actually in your network, i.e. how many you sign-up under you and how much product these people sell through their network. It’s like looking at two mirrors facing each other and trying to make sense of the almost infinite reflections.

A quick recap - so far, we’ve seen that affiliate marketing and network marketing sit on the same spectrum of generating revenue through an outsourced, commission-only sales team but that the two sit on opposite ends of that spectrum with respect to how they accomplish this. It’s free to join affiliate programs but not free with networking marketing companies such as Quixtar. Money comes through sales with both, but with affiliate marketing one earns cash only and with network marketing, one earns cash but the amount depends not on the product moved but on whether those sales come through a network of other people – their downstream. The two, affiliate marketing and network marketing, also differ on distribution, i.e. traffic, and the proximity of that traffic.

Affiliate marketers focus primarily on the web, and for the most part, on their ability to get people they don’t know to continue to a merchant’s site through their link. Network marketing couldn’t be further from that. As the term implies, it’s all about the network. In fact, Quixtar discourages anything but one-on-one selling and has set up their organization to make it difficult for those who can move a lot of product online to do so. Not only does Quixtar emphasize selling to your network, they go so far as to encourage personal use saying, “One key to your business success is to achieve profitability as quickly as possible. Converting your personal purchases to your own business as well as developing a customer base will give you adequate profit to pay for all basic expenses related to running your business.” Remember, the ability to promote Quixtar products comes at a cost. Because Amazon and others’ affiliate programs do not cost money, these companies do not suggest you purchase your products through your own link.

Using your own affiliate link to buy goods from places you already shop is actually a good idea, but it’s not common or actively encouraged within affiliate marketing. Why? Because doing so is the equivalent of receiving a small discount. Discounts are nice, but real money does not get earned that way. Real money within affiliate marketing comes from scale. Buying through your own link is in fact necessary within Quixtar, because you need the sum of these discounts to cover the cost of membership. In that sense, Quixtar is the equivalent of a wholesale club, except the savings come not in the form access to economies of scale (bulk discounts). The savings come in the form of a rebate. Again, it’s a valid thought – modify your buying habits so that you purchase certain goods through Store A (Quixtar) instead of Store B. Purchases through Store A might not cost less but you will at least receive a rebate check. The problem again is that you almost have to do so in order to make back the money you paid to join. It’s disingenuous, but it means for each member (who in theory is looking to earn residual income, etc.) they actually acquire a high value customer.

There are two other key distinctions between affiliate marketing and network marketing. The first touches back on an earlier point before the tangent on personal use, and that is the network. Companies like Quixtar, whom I highlight because they are arguably the least well understood billion dollar company, rely on direct selling – finding friends, business associates, church members, etc. and getting them hooked on the dream. You have to, because again, the real money only comes from how well one can recruit others, who then recruits others, and so on. But it’s not just how many you recruit but how much everyone buys themselves and sells to contacts. You need people to join your downstream, but you also need those besides yourself who aren’t necessarily members to buy goods.

The final distinction, at least for now, as this article has already tuned into a tome, and arguably my biggest personal rub against their form of network marketing, stems also from a previous point, incentives. It also merges incentives with the aforementioned points of selling to your network and paying to join. Network marketers receive nothing for getting others to join, and that conflicts with everything online marketers, especially those in lead generation, believe. Each new member of Quixtar pays an initiation fee and they typically buy a starter kit. The major add-on comes in the form of a personal portal site (no comment) for which you pay a not inconsequential monthly hosting fee. Nothing wrong with that, except members who refer other members do not receive compensation for new members. My back of the envelope calculations peg the value of each new member at $120 on the low side and $500 on the high end. Refer 10 people and you have earned the organization upwards of $5000 for which you receive practically nothing. Other work from home / network marketing offers will pay for the signup but none have the product depth and stickiness of Quixtar. Where that sign-up money goes is another huge mystery of Quixtar and a reason why they are so closely held.

If Quixtar were smart (maybe fair is the better word), they would have bought LinkShare and opened up the platform. Those behind Quixtar are undoubtedly brilliant because a select few make a disproportionate share of the money and they truly don’t have to work, which is unlike a normal executive or affiliate marketer trying to keep up with Google. Quixtar makes some good products, but like a drama, they make a select few wealthy by playing to the heart and not the mind. I wish I could promote some of their product, but, promoting it means not only joining the cult but having to work within rules designed to restrict normal business practices. If we thought AdWords was tough to figure out, just wait until you attempt to make sense of the individual business owner documentation. There is a lot to write on this subject, but it will wait for another time.

My judgments aside, the real opportunity comes from combining affiliate marketing and network marketing, and this is exactly what social shopping tries to do. One of my best friends, Alex Kim, has played a huge role in my purchase decisions. He’s an influencer and in all honesty deserves to receive some of the value that he has created for companies. Think of all the other occasions where individuals directly influence commerce – birthdays, receptions, etc., each represents a chance to receive a piece of the value. I have this image of a Prosper.com site where people form groups and buy through a group affiliate link, splitting the returns and where people buy through a group link / personal link that might have influenced their decision. While not related to my Prosper idea, David Lewis created a site, Cashbaq.com, that takes affiliate earnings and shares them with users (think Netflip but with more programs), and his is just the beginning. (I’d tell you another great idea immediately able to implement, but not here.)

When those in affiliate marketing and lead generation can do what network marketing has done – take the notion of affiliate and make it local, personal, we can create a formidable and open competitor to manipulative companies such as Quixtar. And, I think we will. Personal web portals just don’t work when it comes to making money. It’s time to learn from their success but build a site that jives with Internet marketing and the culture of transparency that comes with the Internet.

Comments

[Rob Deichert]

Jay great post - where would you place ebates? It seems they are similar to your convergence concept?

[Brian Caldwell]

Jay, great post, as always. I think the market is almost there. Sign up for this: www.mypicklist.com

[Michael]

There are plenty of affiliate opportunities out there but I found out that only a few of them can really generate enough interest and income from your visitors. Here are some of the affiliate programs that have excellent success with webmasters and website publishers:

Autos affiliate program – this is another extremely popular affiliate program category.

Computers affiliate program – computer affiliates are numerous and present some of the most dynamic market values in online advertising.

Fitness affiliate program – “fitness” is one of the most popular terms on the Internet. Many webmasters are making money from home with their fitness related websites, and you could be doing the same. Together with weight loss, this is one of the most competitive and rewarding affiliate program categories.

Real Estate affiliate program – when it comes to competitive affiliate program categories , real estate is one of the top examples. A lot of money goes through the real estate industry, and a lot of that cash also journeys online. By joining a real estate affiliate program you can transfer some of that money in your own account.

Hope this helps – let me know if you found other categories where the CTR and income are above average.

Thanks,

Michael Rad
Web2earn.com – online moneymaking opportunities

[Janet Meiners]

Great article. I've wanted to write an article like this.

I worked as an online marketing manager at a network marketing company. I never understood the business plan completely and the business owners were novices. However, the power of the network, of the downline and all sorts of motivated people, was amazing.

I like that being a customer of my own affiliate programs doesn't mean I become a long-term customer.

The key difference between the two is openness. The internet is all about sharing information openly and transparently (at its best). Network marketing is all about controlling information. They make more money if you need them (sales tools) to help you understand how to promote their business better. Nothing is free.

I'm not sure you could combine the business models. The distributors who made good money online do it by lead generation (the business pitch) not by selling product.

Best,
Janet
newspapergrl.wordpress.com

[TJ]

Interesting information, thanks.

[George]

I'd opt for Network marketing than conventional affiliate marketing in any minute of the day.

[Jerry]

Nice post. Just to quickly point out that the reason for lack of compensation for the simple act of referral is due to FTC rules in the network marketing industry (QUIXTAR in this case). The registration fee goes to maintaining the website, customer service, and also setting up and maintaining a host of affiliate links.

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