Many times over the years, I’ve been approached by webmasters contemplating the establishment of their own affiliate program, and while intended marketing strategies, niche categories, site types and business models vary greatly, there’s a pair of questions that virtually every one of them has on their list, in one form or another:“How the hell do affiliate programs make money, especially the ones that pay $30 – $40 per-signup, including on trials?”

The natural follow-up question, inevitably, is: “They all shave, don’t they?”

While there has been, no doubt, plenty of shaving in the history of this industry, I’ve also seen first-hand that it’s not only possible to turn a profit on an aggressive pay-per-signup model, it’s possible to turn a truly handsome profit using such a model – and yes, to do so without shaving, cheating, or otherwise taking advantage of your hardworking affiliates.

This new series of articles will address some of the ways in which successful existing affiliate programs have gone about transforming from relatively humble startups to industry-leading revenue machines. To be sure, there have been players great and small who got where they are now by both hook and crook, but I can speak to the honest success of at least a few, having had a behind-the-scenes, all-access view of their data and books.

I don’t presume to have anything like all the answers – and if I did I wouldn’t be inclined to give them away – but what I can do is give you examples of successful and productive strategies that I’ve seen employed over the years dating back to 1997, when I got my first look at the inner workings of an active affiliate program. When and where possible, I’ll give specific examples, although some details will be off-limits due to the fact that most of my relationships with affiliate programs over the years have included confidentiality and/or non-disclosure agreements where their essential data are concerned.

Part 1 of this series starts where one contemplating establishing his/her own affiliate program should: with the basics.

Questions and Assumptions

Whenever I consult with a new client who intends to launch a program of his/her own, I always begin by asking a series of questions, and with getting the client to address a glut of assumptions and practical challenges which they will inevitably face along the way. Some find that by the time they’ve addressed the fundamental questions, they’re no longer interested in starting an affiliate program – which is an entirely valid response, by the way, particularly if you are not someone with a high tolerance for risk in your business model.

Among the first things to realize is that there is no one “right way” to go about structuring and operating an affiliate program. There are many different ways to generate revenue, and the real question is less “How?” than it is “Which?”; meaning that generating revenue from your traffic and customers can be accomplished in a number of different ways, and doing it “right” depends on what sort of relationship you want to have with your customers, what sort of products you want to put on the market, and how aggressive you want to be with your affiliate payout structure, among many other factors.

Ambition and Its Implications

Another crucial question is one rooted in your ambition; what’s the goal for your program? Are you shooting for the moon, and looking to become an industry powerhouse, grossing say $40+ million per year, or are you simply looking to establish a solid income for yourself, in which case a substantially smaller revenue target will get the job done? The importance of these questions should not be underestimated; one goal necessarily requires a greater degree of startup capital in this day and age, as well as a higher risk of failure, naturally.

I’ll examine the ramifications of an affiliate program’s goals in more depth in future parts of this series; for now, boil it down to a single axiom – the higher the mountain, the more challenging the climb.

Risk Factors – And We’re Not Talking Financial

Unless you’ve been living under a stone for the last 5 years, you know that the adult entertainment industry has been subject to increasing governmental scrutiny of late. One area which you simply cannot afford to ignore, or exist in denial of, is that of legal risk.

I know a lot of webmasters, and even a few affiliate program owners, who have never had more than a casual conversation with an attorney about their business. Put briefly, that’s just nuts, folks. I know attorney fees can add up quick, but if you jump into business as a pay site owner and you haven’t at least consulted with a competent attorney with relevant experience about – just to choose one example – 2257 regulations regarding record-keeping and labeling, you are living mighty dangerously, my friend.

If you go the route of particularly hardcore or extreme content, you are also kicking up your risk factor. Considering distributing “rape fantasy” videos? Be prepared to get to know your lawyer – and possibly a few prosecutors – very well, indeed. Thinking more along the lines of solo nudes? You may not be 100% in the clear, but you can definitely breathe easier than Rob Zicari and his wife are breathing right now…

There are tons of other risks outside of legal ones, naturally, and the first one that comes to mind for most people is the risk of failure on the financial front. I’ll take up that risk mostly as a function of other decisions and issues tackled; I can’t emphasize this enough though – one should not ignore the legal risks just because they appear to be more remote and less exigent than the financial ones.

In short, before you consider hanging a cyber-shingle announcing the launch of “WidgetBucks,” you better have those legal ducks in a row. Choose to stick your head in the sand, and you may find it rather difficult to breathe down there.

Content: Not Simply a Product, but an Element of Strategy

The next question is one that most prospective affiliate programs have already answered by the time I’ve met with them: what type of content/site do you plan to offer? Even if they haven’t any idea what type of payout model they will employ, how aggressive their payout will be, or even settled on a host, most everyone I’ve spoken with has been clear about the content they intend to distribute, be it niche-specific or more general.

The content question has bound up within it several “sub-questions” – things like whether you intend to shoot/contract for exclusive content, use licensed content, some mixture of the two, will the content be gay or straight (gay content generally running a higher price tag), etc.

Hence, the content question is not simply an issue to be decided based on what kind of content you think will be desirable to surfers, your choices should also be based on practical considerations; a site that features daily updates of 100% exclusive, high-quality content is likely to do well with its membership retention, but providing such an offering for your members would be very costly, and probably prohibitively so for most startups.

You and Your Affiliates – For Better and For Worse

What kind of relationship do you want to have with your affiliates? This question may sound touchy-feely, but it’s crucial, regardless. Any program has to strike a balance between keeping its affiliates happy and doing what is in the best interest of the affiliate program – because the two are not always going to line up, precisely.

Many affiliates are all about the free promotional content their sponsors provide; if you don’t have very liberal terms of use for promo content, or (god forbid!!) don’t offer free content for them to use, some affiliates will not give your program the time of day. On the other hand, if you let your affiliates go hog wild with all your content, you may see your best stuff spread far and wide in the free site sector before you can say “limited, non-exclusive, non-transferable right to distribute!”

Affiliates, obviously, are the lifeblood of an affiliate program, and you must take care of your webmasters. Treat them with respect, fairness and an above-board approach and you will reap the benefits of their talent for driving traffic and sales. Treat them like annoyances or afterthoughts, and pretty soon your program will be the afterthought.

That said….

Affiliates can also bring major trouble your way; ask any of the companies that have been slapped around by the FTC for their affiliates violating CAN-SPAM in recent months. The best advice I can give with respect to avoiding affiliate trouble is to establish a strong set of terms and conditions and a clear acceptable use policy for your affiliates to follow – and then ENFORCE those policies, fairly, evenly and consistently. The rules only matter to the extent that they are enforced, and – perhaps more importantly – only protect your program to the extent they are enforced.

Program Structure and Methodology

At some point, the question of your affiliate program structure, including the manner and rate of payout, must be addressed, obviously. The questions already listed should be well-settled before you ever reach the point of deciding on a payout structure, however, and I’m of the school of thought that you ought to run fairly extensive testing on a pool of traffic you can acquire at a fixed cost before you ever sign up Affiliate 1.

Before you can even approach a decision on a payout level, you need to have a realistic sense of the average value of your site members.

That’s it for Part 1 of this new series; next time, we’ll examine the various sources of traffic available to an adult affiliate program, and some of the ways in which successful programs have gone about optimizing their return on such traffic.