How To Reduce Affiliate Fraud – Delay Payments Two To Four Months
I came across a very interesting study by Benjamin G. Edelman last night titled, “Optimal Deterrence when Judgment-Proof Agents Are Paid In Arrears—With an Application to Online Advertising Fraud.” There is also a useful Q&A synopsis that can be found via Harvard Business’s Working Knowledge, titled, “Reducing Risk with Online Advertising” which outlines the main pointers.
Edelman argues that by delaying payment by two to four months advertisers could eliminate more than 70% of fraud without decreasing profits. The research was based on findings from a major advertising affiliate network. Which affiliate network that is one can only speculate? In Edelman’s report he did state that in 2007 the network had 4,357 affiliates so your guess is as good as mine, but I would by no means consider that a “major” affiliate network.
Edelman’s abstract reads “I develop a screening model with delayed payments and probabilistic delayed observation of agents’ types. I derive conditions in which a principal can set its payment delay to deter bad-type agents and to attract solely or primarily good-type agents. Through the savings from excluding bad agents, the principal can increase its profits while offering increased payments to good agents. I apply the model to online advertising markets widely perceived to be a hotbed for fraud. I estimate that a leading affiliate network could have invoked an optimal payment delay to eliminate 71% of fraud without decreasing profit”. This is significant, the reduction of fraud by 70% without a reduction in revenue will get an online marketer’s attention, and it got mine!
Coming from the affiliate network space while working as a Sales Director for AzoogleAds I know payment terms were very important to many publishers. Based on current standards for payment terms, I don’t see may publishers willing to wait two to four months to be paid. On top of this, if any particular affiliate network or advertiser tried to make an affiliate wait such a long time to be paid, they would just go to another affiliate network or competitor to run the same or similar offers. There is a huge lack or loyalty in this space; it’s all about the money for many.
I personally think Edelman is onto something with his findings and believe they hold merit, however I do not believe they are realistic based on the highly competitive nature of the industry. If an affiliate network decided to impose such extended payment terms, they would be out of business in a very short time because a competitor would offer quicker or maintain current standard terms well less than two months, let alone four. The incentive to pay publishers a bonus is great, but publishers likewise have issues with affiliate networks also. Why should affiliates have to put up front the cash for two or four months just to make the affiliate network(s) and advertisers money?
The only way this would work is if all advertisers universally said they were not going to pay for two or four months. Online marketing being as competitive as it is, rules this out. Furthermore, what is to say that some advertisers won’t say their leads or sales are fraudulent after a month or two, who will hold advertisers accountable under Edelman’s recommendations? All advertisers convert their traffic that affiliates send differently, many better than others. Like all business, advertisers too go through tough times and what’s to say when they are facing tough times that they would not claim the leads are fraudulent?
It has to be a two-way street with what is in the best interests for advertisers and publishers. Edelman’s recommendations given the current affiliate climate are simply not realistic. As an advertiser I of course support the conversation and discussion of reducing risk with online advertising, but I know the onus is on me to ensure that I am taking proactive steps to ensure the traffic that I am receiving and paying for is of high quality. Withholding payment would not be an affective or sustainable means to reduce risk.
Edelman points out a few examples relating to advertisers and how they have failed to take simple pro-active measures. “Advertisers have omitted many of the kinds of protections that you would ordinarily expect when dealing with little-known suppliers; for example, easy tasks like determining whether the supplier is a bona fide business entity, or cross-checking the supplier’s street address with its phone number and tax ID number. These very obvious and easy things haven’t been done in many instances because they were believed to be superfluous. If fraud is impossible, then why should we waste our time looking?” Further to the advertisers responsibility to be pro-active Edelman goes on to state, “yet in practice many online advertisers don’t have these kinds of tools even when they are spending hundreds of thousands or even millions of dollars on potentially fraud-ridden advertising.” Clearly many advertisers are behind when it comes to dealing with fraudulent traffic. Even those advertisers that do catch-up need very much to stay abreast of fraud. Online marketing fraud is continuously evolving; there is not one stop solution.
To make matters worse, it’s often times not in the affiliate networks best interests to curtain fraudulent traffic anymore than what they need to. To be direct about it, there are affiliate networks out there that will only remove publishers that need to be removed. The monetary incentives have often times outweighed the benefits of removing affiliates. It should be stated that this is often not the case and increasingly affiliate networks are being more pro-active when dealing with fraudulent publishers. Having worked for AzoogleAds, I can vouch for the quality of traffic. AzoogleAds very pro-actively took a stance to eliminate any fraudulent traffic and has been an industry leader in maintaining that stance.
The problem though is of course not just the affiliate networks, but often times the employees such as affiliate managers and sales managers. There are many affiliate managers and sales managers out there that turn a blind eye to fraud, often times making money from the fraud as they are paid on commission. Edelman provides a great example, “For example, an affiliate program manager might be paid a modest salary plus 10 percent of year- over- year growth in the size of the affiliate program. But consider the incentives of someone paid in that way. If there is fraud in the affiliate program and the staff person recognizes it and ejects it that means the program is smaller and her bonus gets smaller. In fact, her bonus might be disproportionately smaller because it’s based on growth, so if you took out the 10 percent of fraud in the program, there goes this year’s growth and the Christmas bonus. So in many companies the incentive to get to the bottom of this quickly and successfully is tempered by the incentive of staff to do what is in their personal interest.” To deter fraud affiliate networks need to structure compensation in alternate manners that don’t incentive their employees to turn a blind eye or to potentially make money from this fraudulent traffic. How that can be done is a whole other topic!
Long story short, online marketing is still a relatively new industry with very low barriers of entry. It would be irresponsible for advertisers to blame affiliate networks or vice versa for fraud incurred. Both parties must pro-actively do their parts to ensure quality and control. In the end, extended payment terms will deter fraud, but will also deter and eliminate all or most distribution. It is ultimately up to the advertiser to ensure the money that is spent is done so in a wise fashion. Advertisers must pro-actively know their traffic. For affiliate networks, they equally need to pro-actively reach out to many of their advertisers to educate and actively arm them with the tools to create sustainable long-term relationships. As an industry both advertiser and distributor (affiliate and or affiliate network) need to start thinking long term.
Bad idea, at least in affiliate marketing, different story for contextual ads maybe.
In affiliate marketing is the risk already shifted from the advertiser side to the publishers. Publishers (affiliates) also have costs and it would increase their business risk significantly, if they would have to front money for two to four months in the hope that the advertiser will pay them eventually.
It also creates problems for the affiliates to determine their actual ROI in a timely manner. An earnings report is only doing the trick partially, if earnings can be deducted until the date when actual payments are being initiated by the advertiser.
I talked a bit more about those things at a blog post at Search Engine Journal last year
http://www.searchenginejournal.com/google-adwords-and-paid-search-cpa-vs-existing-cpc-model/5499/
Carsten,
I agree it’s not a realistic way to handle the fraud. In many cases advertisers can curtain all of this through pro-active measures, but the vast majority still do not.
Your totally right, no affiliate will front the money for two months…that just wont happen.
I read your post and you have some great points.
Thanks for you comments.
Hi, we just came across this article and found it interesting. CPA WatchDog was founded to erradicate affiliate fraud. A few thoughts:
Affiliate fraud is costing advertisers upwards of $1B annually. Fortunately, affiliate programs can be a great source of new clients and therefore the cost of fraud just averaged into the Cost Per Client Acquisition. Are there people working to stop the fraud – the answer is yes. But unfortunately they aren’t working with tools that are advanced enough to stop today’s sophisticated fraudulent affiliate.
CPA WatchDog and the CCFA (Cyber Crimes Field Agency) were created to help clean up the fraud in the affiliate marketing space, giving the industry greater credibility as a marketing outlet for large and small companies alike. We think that the absence of fraud will increase the amount of money spent on affiliate marketing, increase payouts to affiliates, and decrease the cost per client acquisition to the advertiser. This increased efficiency will help everyone in the industry – affiliates, advertisers, and networks. Bottom line – less fraud, more for everyone else (affiliates, advertisers, and networks).
The top Affiliate Networks have been known to stop basic fraud and original fraud tactics; however the majority of the affiliate fraud occurring today can be attributed to sophisticated, low profile affiliates that spread out only a small amount of fraudulent transactions to each advertiser and on each network, across numerous advertisers and networks. These affiliates are left to continue defrauding advertisers with at low personal risk and are ultimately written off as a cost of doing business. The Advertiser Fraud Protection program tips advertisers off to fraudulent behavior ahead of time.
CPA WatchDog™ is the first and only third-party affiliate fraud protection company that identifies, tracks, and allows for the prosecution of commission-based affiliate fraud. The purpose and mission of the company is to take the risk of affiliate fraud out of the affiliate marketing industry, making the playing field safer for advertisers and networks. CPA WatchDog™ offers fraud prevention solutions to three different groups to include advertisers, networks, and affiliates (publishers).
CPA WatchDog’s™ Advertiser Fraud Protection product [www.cpawatchdog.com/advertisers], showcases CPA Watch dog’s proprietary fraud profiling/tracking technology and monitoring system, allows advertisers consistently maximize ROI by reducing fraud. This service allows advertisers to efficiently identify fraudulent affiliates quickly and easily.
Affiliate Network Fraud Protection [www.cpawatchdog.com/networks] is CPA WatchDog’s fraud monitoring service that protects the advertiser and boosts credibility of member affiliate networks. This service reassures advertisers that they are receiving valid transactions from their affiliate network and allows the highest quality affiliate networks a way to distinguish themselves from the rest of the pack.
VERIFIED AFFILIATE™ [www.cpawatchdog.com/affiliates], is CPA WatchDog’s newest Affiliate Verification Program, it allows affiliates to verify their identity and establish a professional history that can be viewed by affiliate networks and affiliate managers. This also allows affiliates the opportunity to distinguish themselves from less credible affiliates and earn higher payouts due to the instant trust a CPA WatchDog™ Verified Affiliate™ status garners with top affiliate managers.
CPA WatchDog’s incentivized, three-tier verification program is the first such comprehensive solution to address the issues of affiliate fraud, and includes all three players (the advertiser, the network, and the affiliate) in an integrated solution. CPA WatchDog™ is now accepting applications from new advertisers and networks interested in eliminating the spectra of fraud from affiliate marketing. For more information, contact CPA WatchDog™ 1-800-272-0052 or visit http://www.cpawatchdog.com.
Thanks,
CPA WatchDog™ Web Team