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Tuesday, Aug. 15, 2006
Affiliate marketing now coming of age
"Half my advertising budget is wasted, but I don't know which half," goes the old retailer's quip, but this dilemma may someday be a thing of the past. If so, affiliate marketing, a type of pay-for-performance advertising, will get some of the credit.
It is an approach to marketing that is rapidly catching on with companies looking for a new, cost-effective way to reach customers.
Leading the charge are companies like Tokyo-based ValueCommerce Co., whose president, Brian Nelson, explains the idea behind affiliate marketing: "(Clients) don't have to waste money on advertising. You're only paying for the benefit."
Nelson was confident enough in his business model to list ValueCommerce shares on the Mothers market for startups on July 31.
In affiliate marketing, someone might write about a new product on a blog. If someone reads the blog and purchases the product, the blogger, or affiliate, gets a commission on the sale.
ValueCommerce, a pioneer in affiliate marketing in Japan with a 25 percent market share, makes money from commissions it receives by linking affiliates with online shopping malls and other e-commerce firms. Nelson became the chief operating officer in 2001, two years after the company was founded.
Business has been good. The company posted a net profit of 173 million yen on sales of 4.0 billion yen in the business year through December. This year, ValueCommerce expects to make 497 million yen on sales of 5.4 billion yen.
Unlike traditional advertising, where sellers pay a fixed price for space in a newspaper, magazine or Web site, in affiliate marketing the advertiser pays only when a sale is made, assuring the advertiser that its money is well spent.
Nelson, a native of California, said the affiliate marketing industry is underdeveloped in Japan and has huge potential to grow.
"People have only understood affiliate marketing over the last two years," Nelson said in a recent interview. "A lot of companies are starting to understand the benefit they get by using a pay-for-performance model."
According to Nomura Securities Financial & Economic Research Center, the affiliate marketing industry in Japan has grown nearly eightfold in the last three years, from 5 billion yen in 2002 to 39 billion yen in 2005. It forecasts sales of 76 billion yen by 2007.
Although affiliate marketing had already taken off in the United States and Europe when ValueCommerce was founded in 1999, it was slower to catch on in Japan.
"The Japanese market was not using as many credit cards for online payments in 1999," Nelson said. "There were still many bank transfers and postal transfers, so we had to build a system that worked for the Japanese market."
Seven years on, ValueCommerce has some 175,000 affiliates, of which 80 percent are individuals, and 1,650 e-commerce companies as clients. Last year, it entered into a tieup with Yahoo Japan Corp.
Despite the growth, and perhaps because of it, the market has had teething problems. Some shady affiliates, for example, impersonate others to try to cash in on their hard-earned reputations.
ValueCommerce and six other major affiliate marketing companies responded by setting up the Japan Affiliate Service Kyokai in May. The association will draw up guidelines for business practices by fall, monitor unethical behavior and educate the public about the industry.
These challenges have not daunted Nelson, who remains optimistic about his company's future. His next target is to expand into other Asian markets, including South Korea and China.
He noted that South Korea's high Internet penetration makes it easier for ValueCommerce to operate there. China, on the other hand, presents more of a challenge. Although there are about 40 million broadband users and 100 million Internet users in China overall -- mostly cell phone subscribers -- there are only 2 million credit card holders, he said.
Coming up with a payment system for those cell phone buyers is the key. "There is a unique opportunity to think about how to make payments and different ways to advance pay-for-performance models in China," Nelson said.