Affiliate marketing in the upper funnel – a trend driven by multitouch attribution models

March 1, 2022
Blog Post

Over the past years, affiliate marketing has grown its importance as a marketing channel. According to BVDW figures, affiliate marketing triggered approx. 15%of the German e-Commerce GMV (Gross Merchandise Value) in 2019 and is expected to grow its importance within the overall marketing mix further.

More online businesses than ever are using affiliate marketing as a cost-effective way toreach targeted audiences and diversify their online marketing portfolio.

In this article, we will look into the evolution of marketing attribution models and how they enable a more holistic view of marketing channel performance, including upper funnel marketing activities and how this evolution supports the expansion of affiliate marketing.

 

What is affiliate marketing and how does it work?

Affiliate marketing is a form of online marketing, in which an affiliate (publisher) creates content to promote products and services of a retailer (advertiser) for a commission. The definition of affiliates comprises various forms of content publishing from media sites, blogs, product comparison sites, price comparison engines to influencers and social media.

To connect its content with the retailer’s offerings, the affiliate uses a unique affiliate link that sends traffic to the retailer website. As soon as a user (1) clicks on this link, the affiliate receives a fee (cost-per-click, i.e. a fixed price for each clickout) or (2) makes a purchase using this link (cost-per-order, i.e. a commission based on the order value).

Most affiliate marketing connections involve affiliate networks that act as a matchmaking platform and clearinghouse for both parties and connect the various publishers and advertisers. For this service, affiliate networks collect a revenue share of the fee paid by the advertisers – roughly 30%

Some larger retailers (e.g. Amazon, Otto group) also offer proprietary affiliate programs that allow direct agreements between their affiliates and them, cutting out the affiliate network.

 

Which models exist to attribute sales to affiliate marketing publishers?

One of the most critical topics in affiliate marketing is the measurement of the success of the affiliate partners. Proper attribution is crucial for two reasons. First, affiliates receive their commission based on the correct attribution of sales to their affiliate link (either directly correlating with the actual sale in a CPO-model or correlating indirectly, i.e. high-converting traffic will result in higher CPCs that the affiliate can obtain).

Today’s prevailing attribution model is the “last-click”-model, meaning that 100% ofthe sale is attributed to the last entity that provided the affiliate link that routed the user to the retailer prior to a purchase. However, this view neglects the steps of the customer journey that took place prior to this click, hence does not account for the other touchpoints that contributed to the eventual sale.

The attribution model landscape ranges from single attribution to multi-touch models. The following models are amongst the most popular models used (non-exhaustive):

Single-toucha ttribution (full attribution to one specific click)

  • First-click: the first channel in the sales process receives 100% of the attribution
  • Last-click: the last channel in the sales process receives 100% of the attribution
  • Last-indirect-click: the last indirect click receives 100% of the attribution, i.e. direct traffic is completely ignored and the conversion is attributed to the last indirect source prior to the purchase (e.g. if a user clicks on social ad, re-enters site via paid search and eventually purchases after direct type in the revenue is attributed to paid search)

Multi-touch attribution (shared attribution across multiple clicks)

  • Linear attribution: all points of contact, be it the paid advertisement, social media, website, or multiple channels are equally credited for the conversion
  • Attribution based on position: all points of contact receive a share of the commission, however the first and the last point-of-contact are credited over-proportional as they are considered most crucial during the customer journey
  • Time-decay-model: all points of contact are credited for the sale, however the more time between the click and the actual conversion passes, the smaller is the share of the commission

Multi-touch attribution has the advantage that affiliates across the entire customer journey receive their share of the commission, i.e. are paid fairly and in accordance to their conversion contribution. For the advertiser, multi-touch models allow a more holistic picture of the performance of the marketing channels, which helps to improve the overall marketing efficiency and allocate budgets accordingly.

The biggest challenge for multi-touch models is the ability to identify, match and track the various touchpoints during the entire customer journey. Today, almost all marketing attribution solutions are able to track and analyze (online) cross-channel customer journeys on the same device based on 1st party user data. However, it is very hard or even impossible to track and attribute cross-device touchpoints or customer touchpoints with offline channels (print, TV, billboards) accurately.

To address the challenge of cross-device tracking (e.g. customer moves from desktop to a mobile device to continue the purchasing process), there are two main approaches:

  • Deterministic matching: user identification across different devices by connecting the same unique identifiers, e.g. the email address that is used to create accounts and log in to different websites and apps
  • Probabilistic matching: usage of a range of different data sets and algorithms to make probable connections between users, e.g. IP addresses, device IDs, browser type, location, or language settings. Probabilistic matching also uses deterministic data sets to help train the algorithms (machine learning) to identify the same user across different devices based on their behavior

The deterministic matching does only work for larger networks like Google orFacebook that can track their users as soon and as long as there are logged int heir ecosystem.

Most marketing/attribution providers are relying on the probabilistic approach that requires a solid data management platform comprising all collected 1st party data of users to allow the analysis and tracking of the customer behavior and touchpoints.

 

What are the latest developments for attribution models?

While most advertisers and the larger affiliate networks like Tradedoubler, Webgains and Awin are still using a last-click attribution model, some advertisers have understood the advantages of a dynamic multi-touch attribution model.

The German Otto group, for example, is using a dynamic attribution model for approx. 10 years already to track the marketing efficiency of its affiliates and offer a fair remuneration to its affiliate partners. Also, new and innovative software solutions, e.g. by the U.S. based company Singular, will further support the shift towards more holistic attribution models that allow cross-device and cross-channel user tracking to provide a comprehensive picture of the customer journey.

Technological development towards more accurate attribution across the entire customer journey is expected to penetrate the advertisers’ landscape more and more over the coming years resulting in shift away from today’s standard attribution models.

 

What does it mean for the affiliate marketing industry?

A holistic and comprehensive customer journey tracking is becoming more and more important for advertisers to identify and remunerate value-adding affiliates. Looking at the various affiliate channels like separate silos is no longer best-practice.

This has the potential to significantly change the affiliate marketing industry. Most publisher models are optimized for the last-click attribution and therefore located at the lower end of the marketing funnel (e.g. product and price comparison, cashback and vouchers).

The usage of more sophisticated attribution models ensures a fair remuneration of affiliates regardless of their position in the customer journey. Hence, affiliate marketing activities might increasingly expand towards the upper end of the marketing funnel where the customer journey starts.

In an industry where lower funnel campaigns are pre-dominant today, social media and influencers could become the next core of affiliate marketing.  

 

Why this matters for investors

In light of this trend, investors should look at the following aspects.

For their current portfolio companies, investors should make sure that the companies’ attribution models can track as many customer touchpoints as possible to be able to optimize the marketing mix and credit the right amount of value to the upper funnel (affiliate) marketing activities.

Potential investment targets with affiliate marketing-based business models that are optimized for lower funnel activities are working well today and will continue to work tomorrow.

  • However, to optimize traffic of such a target, investors should assess if the business model also allows to generate incremental traffic in the upper marketing funnel (e.g. expansion of product comparison sites towards influencers testing products on social media channels)
  • Further, investors should be aware of a potential monetary risk of CPO/CPC reductions for last-click optimized targets when advertisers start weighting upper funnel affiliate marketing more and shift renumeration accordingly 

If you’re interested to discuss further, please reach out to us.

Sources: OMR, Singular, Otto, Clearcode, Ryte