The affiliate industry is buzzing this week after Michael Arrington of TechCrunch cracked open a long-simmering social network game affililate scheme that appears to have gone too far, and has now resulted in:

• Curses being exchanged
• A CEO getting"replaced"
• Former scammers coming out of the woodwork
• And more media industry names being exposed faster than germs at a swine flu party

I'm not going to rehash the content - you can read the posts linked below including the now-famous "CEO swearing" video with at least 3 versions of the word sh*t.

This is all directly a result of advertisers (merchants) having affiliate offers which in some cases are getting abused to the extreme. I'll explain below how this works, and how you can prevent it with your own offers.

Here are the links for background study. It should take you no more than 10 minutes to figure out what the scheme is all about.

The scam cycle explained - thanks to TechCrunch

The video (Warning: language from Ms. Shukla not appropriate for kids)

The root cause of this problem is that many affiliate offers are NOT "pay a commission for the sale" (CPS) but rather CPL/CPA which means "pay for the lead".

Now don't get me wrong - CPA offers are not bad. In fact they can result in a TON of good traffic and customers for your offer.

The reason affiliates love CPA offers is that they can get paid up front for the leads they send you. So they can monetize their traffic streams NOW and not wait for the sales to actually happen.

If you're paying "% of sale", then you should only pay when the sale $ is in the bank. This means waiting for the money to clear from the customer AND you are past the refund period.

This is a safer way to pay your affiliates since most scammers won't bother sending you sales w/ stolen credit cards that are found out before payout time, or "customers" who then ask for a refund after the affiliate has been paid.

But the huge traffic potential of CPA offers - where you pay a bounty on the lead - can result in shady operators sending you leads that are ultimately not worth the bounty you are paying them.

The problem lies in the fact that averages can kill some businesses ... on average :) i.e. If you've figured out that a lead is worth $100 to you on average, and you decide to pay $28 per lead, does that mean that ALL sources of those leads are worth paying $28?

No - some affiliates will send you traffic that converts so well the leads could be worth $50 or $75. I've often explained to some affiliate networks that my extreme long tail search marketing systems are sending them highly motivated customers so my traffic is worth 3-4 times the average. Some get it and give me a payout increase, and some don't.

But other affiliates are spamming or have other schemes to send you leads, get paid, while the leads turn out to be very low quality. These are the affiliates you need to watch out for, especially when you're paying for leads and not for sales.

These shady schemes, like the social gaming scheme mentioned above, rely on CPA offers and the concept of "incentivized traffic".

What this means is that the person submitting their information as a lead or offer signup + cancellation, are doing it because they are being rewarded in some other way by the affiliate - e.g. to get some points in some Mafia or Farming game that they've become addicted to.

The bottom line is that as an advertiser paying for leads, you need to be very diligent and review the source of your traffic but this is not always possible due to cloaking systems used by affiliates.

But there's no need to really worry about the traffic source if you do the ONE thing that will catch these people: confirm that the conversion rates of each affiliate's traffic are high enough to justify paying the CPA lead price.

This can be done by withholding the CPA payment or adjusting it up or down based on traffic quality. Most advertisers getting caught up in the CPA game forget that they have these options available to them.

They might also make the mistake of assuming the affiliate network will police the traffic for them. E.g. here's an affiliate CPA offer where the network says  "no incentivized traffic" allowed. But that isn't going to really protect you, as an advertiser.

You still need to do the math and work out if EACH affiliate is worth paying that CPA bounty to. Some might even have sub-affiliates who are sending incentivized traffic, and you'd never know it.

So the bottom line is to be very analytical re your affiliate traffic, and if you are going to play the CPA game make sure you know what a lead is worth to you, and payout only when you are sure that the value of leads from each affiliate is more than what you're paying out.

As for who is to blame - personally I don't blame the affiliates who are working with offers that allow incent. traffic and follow the rules of the social networks, affiliate network, and advertiser affiliate TOS. In those cases it's the advertiser's who are at fault for not simply tracking which customer streams are worth paying for.

Cheers,

Peter Koning

Affiliate-Software-Review.com

PS For more details on how to do CPA marketing right from A-Z, as an advertiser, this course is the best I know of.

PPS Disclosure - That is an affiliate link above but it's not "pay per lead" - It's "pay per sale" which means I get a commission if you buy the course.

--- (Edited on 11/5/2009 1:25 pm [GMT-0600] by Peter) ---