The New Lure of Internet Marketing

Web sites need customers — they just can't spend to get them. The result: marketing schemes in which companies don't pay until customers do. Welcome to the Kickback Economy.

Sure, the digital economy changed many of the rules of competition. But too many Web companies have tried to grow their businesses with marketing strategies that defy the laws of arithmetic. They've been willing to spend more than the lifetime value of a customer in order to acquire that customer. They've run branding campaigns on buses, billboards, and blimps — programs that attracted plenty of eyeballs but not nearly enough business to ever justify cost. Over the last few years, dotcom marketing has been driven by a giant leap of faith — the equivalent of a 7-year-old leaping from a tree house to prove gravity wrong.

Now that the digital economy has experienced a reality check, Net companies are getting real when it comes to marketing and are moving toward a model in which companies pay only for the media that sparks a desired action: getting someone to visit a site, subscribe to an email newsletter, or make a purchase. Forget Super Bowl commercials. The new marketing tools of choice are affiliate programs, and pay-for-performance deals such as revenue sharing and bounty systems. Welcome to the Kickback Economy: Merchants and media sites are forming alliances that refer customers back and forth — and are sharing in the spoils.

The Kickback Economy is driven by equal parts greed and fear. Most Internet companies still sense an urgency to get big fast. But they also feel the heat to keep their costs under control and (gasp!) make money. "The days when dotcoms were willing to spend money without calculating return on investment are gone," says Stephanie Healy, 31, CEO of WFS Direct Inc., an email-marketing firm based in Omaha, Nebraska, and a former interactive-sales manager at Omaha Steaks, where she established one of the first online-retailer affiliate programs. "You can't spend $5 million on a portal deal and only get $1 million in sales," she says. "The industry is starting to grow up."

Besides, maintaining a single outlet on the Web where customers can get information about an offering goes against the very grain of the Internet: It's just not distributed enough. "We have over 80,000 affiliates right now," says David Gitow, 40, chief marketing officer at enews.com, which sells magazine subscriptions. "Through our partners and affiliates, we can be just about anywhere someone would want to buy a magazine. When you go to Barnes&Noble.com and hit 'magazines' that's us. If Home Depot wanted to provide its visitors with magazines, we could put up a customized newsstand. All of our deals are commission-based."

In fact, Gitow says that enews isn't buying any impression-based advertising right now. "It just doesn't work for us when you spend a ton of money and then cross your fingers," he explains. In the Kickback Economy, even handpicking the sites that will form your referral network is considered counterproductive. Some companies, like Eddie Bauer, do so in an attempt to control the context in which their brand is placed. But most allow affiliate sites to pick them (reserving the right to eliminate inappropriate sites from the network). That sometimes produces surprising results. "We laughed about an affiliate site called Student Medical Informatics set up by some med-school students," says Kendall Fargo, 30, VP of e-commerce at Handspring. "But it's one of our best sites."

Fargo and others predict that referral fees increasingly will be paid to individuals, rather than to companies. "It'll become a lot closer to a 'tell-a-friend' program, where you get rewarded for introducing someone to a new product," Fargo says.

Scott Griffith, chairman and CEO of SoftLock.com, a company that helps control the dissemination of copyrighted material on the Web, sees a day when readers who buy an e-book might be rewarded — perhaps with a discount on their next purchase — for recommending that book to a friend who decides to buy it. The same thing could work with digital music: Buy the new Wallflowers release in MP3 form, tell your friends about it, and if five of them end up buying it, you get a pair of concert tickets. "That kind of distribution isn't about shotgun marketing, or targeting, or personalization algorithms," says Griffith, 41. "The content finds its own audience. What better form of personalization is there than hearing something from a friend or a colleague?"

The downside, of course, is that as more companies become involved in the Kickback Economy, the cost of a kickback will rise. More merchants will be competing for deals with the best partners, and they will be forced to pay more for every site visit, registration, and purchase. "If the lifetime value of a credit-card applicant is worth $81, and you're paying $48 to acquire them, then someone is going to bid that up," says James Crouthamel, 35, president and CEO of Dynamic Trade Inc., which creates custom-designed marketing programs.

There's also the chance that kickbacks will get kicked in the teeth by unrealistic expectations. "Let's face it: Marketing is math," says Tom Gerace, 29, cofounder and chief marketing officer of Be Free Inc., which helps Net companies wage pay-for-performance campaigns. "Companies that ignored that fact and talked a lot about building huge brands and creating buzz burned through a lot of cash. And now they're turning to performance marketing, thinking it can save them. It certainly won't save everyone. But I don't think that gives the idea a black eye."

Underhanded or under-the-table no longer, kickbacks on the Web are earning an honorable reputation — and may even help stabilize the foundations of some online businesses.

Scott Kirsner (kirsner@worldnet.att.net) is a Fast Company contributing editor.

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