Cost Per Action, CPA Affiliate Networks and Your Affiliate Marketing Efforts

©2009 Doug Champigny. All Rights Reserved Worldwide.

CPA networks, or affiliate marketing operations based on a Cost-Per-Action model, have been around for years, even though they’re seldom discussed in the Internet Marketing arena, and just slightly more often in the affiliate marketing realm. Cost per action, also sometimes called cost per acquisition, is like most other affiliate marketing programs in that you make money from actions taken by targeted traffic your refer to the merchant’s site – but that’s where the similarity usually ends.

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In regular affiliate programs, the money you earn is a percentage of each sale you make. With CPA offers, usually you’re earning your affiliate commissions based not on sales but on other actions the merchant wants to effect. It can be downloading a free report, asking for a free sample, having free information mailed out to you, getting access to a private members’ area of a website, etc.

As you can see from the above examples, cost-per-action or cost-per-acquisition is usually modeled so that you’re getting paid for free actions taken by the traffic you refer. So if you’re firmly planted in the affiliate marketing mindset, alarm bells are probably going off in your head right now… After all, what kind of shady operation is promising to pay you commissions when you haven’t made any sales? As if they had the money to just give away like that… Yeah, right!

If that’s what you’re thinking, here’s a real surprise for you: almost without exception, these cost per action arrangements are set up by, or on behalf of, some of the biggest offline companies in the world, including insurance companies, travel companies, offshoots of international banking consortiums, etc. These very large, very dependable corporations use cost per acquisition models to get leads from targeted prospects, leads they obviously hope to convert to ongoing clients. Their lead acquisition programs are tested, tweaked, and tested again, and are some of the most closely monitored results of any online activities anywhere.

It’s very important to remember that marketing is much more mature and professional in the offline world than in most of the online world. Look at the highly-varied background of today’s Internet marketers and affiliate marketers – surprisingly few have a solid marketing background or any formal marketing education at the post-secondary level. While many are earning 6, 7 or 8 figures a year online, most couldn’t even secure a junior-level position in corporate marketing departments – especially not on an international scale.

As a result, online marketers look at what they make on each sale and offer a piece of that to their affiliates. Affiliate marketers look at the product, the conversion rate of the salespage, and the percentage offered as affiliate commissions. Everything is based on the current sale in most cases. The closest most come to a CPA model is offering 100% commissions, meaning that really they’re giving away the sale to get the lead. But again, even 100% commissions are based solely on the current sale.

High-level offline marketing, however, is based on the lifetime value of each customer and factors in the ratio of leads to sales, the average retention rate and longevity of client contracts, and the total dollars earned from the ‘average’ customer or client. While this involves a lot of research and number-crunching Internet marketers are loath to even attempt, it allows lead acquisition programs to blow online marketers out of the water in terms of payouts.

Let me give you an example: You have tested and tweaked your back-end system to convert more leads and keep customer retention high, and have a number of related services being offered to your clients on a regular basis to add to the lifetime value of each client. Your base service is $10 a month, the average client stays for four+ years, and average add-on sales over that four years runs to $600 – $150 a year. Once you know that your average client is providing as gross income of $1,080, you subtract the fulfillment costs for the services or products that client receives.
Since most businesses run these programs en masse, the fulfillment costs per individual are generally low.

When the net income per client has been established, attention turns to the ratio of leads to sales. Again, the offline world rules in most cases. Each lead will be sent automatic followups by e-mail and/or by direct mail offline. Assuming the lifetime value is high enough to warrant it, those not responding to the mailouts will then drop onto the company’s telemarketing leads list, and a live salesperson will call to close the sale. Many businesses will then discard the lead if no sale has resulted, but more advanced marketing departments don’t stop there. They’ll keep the prospect on a pre-written autoresponder course providing them with related information and further encourage them to become a client, and some will go a step further by offering them some related gift to keep them interested.

Assuming all of this has been factored in, there will probably be about $350 – $500 profit left in the average lifetime value of a customer. If they’re closing 4 out of ten leads, that then breaks down to a profit of $140 – $200 per lead received. By knowing that, they can decide to pay out $50 – $75 per lead and still have hefty profits from receiving thousands of targeted leads. While traditional affiliate marketing would pay out more over the four-year lifespan, at 30% commission of $3 per month it would take over two years to receive the same $75, and CPA marketers know most effective online marketers would rather take $75 today rather than $144 it takes 4 years to fully collect.

Newer affiliates, not used to the cost per action arena, see it as getting paid $75 to refer people to a $10 per month sale, and try to sign up in droves, often spurred on by e-books about CPA programs that tout the high earning possible from a pay-per-lead program. They don’t realize that corporations are very protective both of their brand’s image and of the quality of leads they receive – remember that the conversion ratio is one of the main factors in determining what they pay per lead. This results in as many as 90% of all applications to CPA networks being rejected, dashing the affiliate’s hopes for big CPA earnings.

In truth, without an existing track record in CPA, or very professionally-designed websites heavy in marketing psychology, most marketers will never get into the CPA networks and have a chance at earning money with cost per action opportunities. New CPA networks are coming online though that raise the bar for average marketers, providing both cost per acquisition offers and pre-designed websites shown to drive the right quality of traffic to the merchants’ sites and opt-in forms. These should finally open the cost per action field up to a great many more online marketers, finally making it a viable way for affiliate marketing businesses to make money online using the CPA model.

If increasing your cashflow from your affiliate marketing and internet marketing activities is of interest to you and you’d like to explore these new CPA networks further, here’s more information on making money with cost-per-action marketing and CPA networks.

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