The Economics of 0% Commissions, Brand Bidding And The Long Tail

I'm sorry Kieron, but I'm going to do a post on the implications of brand bidding and in particular closed groups (again). Look away now if you don't want to see the results!

It struck me this morning that many merchants are paying 0% commissions on Wii consoles because they don't make sufficient margin and they already have significant levels of demand that they don't feel the need to effectively pay for the sales.

So let's look at the first part (not sufficient margins). The view of economists is that the price of a good or service will rise until supply meets demand. We have seen this with the Wii Console. A the outset the prices were basically £179.99. You would get a few mavericks that would cut the cost. But effectively there was no need for merchants to do this as they'd sell at that rate.

No the supply of the Wii's is even more limited and hence the price has risen. Game now sell it at £204.99 (increase of £25); Sendit £179.89 (no change); Amazon New Used from £325 (increase £146); PC World £1000 (increase of £820.01); GameSeek £179.99 (no increase);

Without an increase in the wholesale cost of the consoles, surely Game will be making at least £30 - £35 per sale when they do get them?

But this isn't the main point of this post. What I wanted to raise was that the issue surrounding the interaction of demand and supply with commission rates in the console sector is analogous with that of impact of merchants allowing brand name bidding, in closed groups or otherwise.

Taking the notion of "we're getting those sales anyway, why should we pay for them", can that not only apply to brand bidding?

For big brands that have got their own SEO right then surely why the hell do you need to pay £xx,xxx's or even £xxx,xxx a month when you don't have to?

Here's a list of some the sites that have been (are) bidding on the Sky brand in the recent past:

Sky.com/SaveSky.com
sky.digital-tv.co.uk
Sky.selectdigitaltv.co.uk
sky.4-digital.co.uk
Sky.TV-offer.co.uk (1163 keywords.txt - not necessarily an accurate list)
sky.4-digital.co.uk

If the logic is that sky is bidding on 2350 keywords (which it looks like they are) and they don't think they're missing out on some so they want to open it up to others to reach the long tail of their brand, why limit it to five other affiliates. Who's to say they have the monopoly on SEM intellect?

These affiliates use Hitwise, other public tools and proprietary software to develop and manage their keyword list and bids. Why can't it be done in house? I know Traffic Broker has spent over 1000 hours developing their software, but what advantages are there for the merchant?

Can you see where I'm going with this? If you take the information that Pete of AF gave that in some cases as much as 75% of content affiliate cookies are being over-written by brand name bidding affiliates then it takes you that bit closer to the thoughts I'd like you to at least entertain.

So far:

Merchants don't want to pay for traffic they'll already otherwise get;
Brand name bidding can be an advantage if the internal intellect isn't there;

What I'm now going to say is ...

If there are a huge army of affiliates creating content and doing research about your company, the products you offer and the industry you work in; would it be in your best, long-term, interests to allow 75% of their hard work to be stolen because you don't want to manage your SEM campaign to its fullest extent internally?

My view is thus: If you want to conduct a brand-name-bidding strategy then don't use the affiliate channel. Don't overwrite affiliate cookies and reward all the hard work that content affiliates put in eulogising your company and products.

It's unfortunate that content affiliates inform and educate your customers one step before the brand name bidders step in with their own cookies having simply bid on your brand (+ generics) when the consumer was ALREADY GOING TO BUY FROM YOU!

So I'd implore every merchant that currently allows brand name bidding to work out the exact average cost per sale it incurs and how much a month brand name bidding costs you in commissions and network over-ride.

From this you'll be able to establish if you want to prevent people bidding on your brand, if you want to do it internally or if you'd want an agency to do that doesn't overwrite the cookies of the affiliates that informed and encouraged that customer to buy from you!

But what has this got to do with the long tail? Well 1% of your affiliates may be generating 30%-40% of your sales - but what a bout the other 99% of your affiliates that may be collectively driving 60%-70% but in the odd sale here and there. How would you feel if they all started to say "don't buy from Sky (just for argument sake) they're crap, they take your money, give you rubbish service and are expensive" - how would that effect sales?