Imagine $100 bills being dropped from a helicopter and a mad rush of people scrambling to pick up as much money as they could. A young woman is stuffing as much as she can down her shirt, another kid is just simply jumping up and catching the bills as they fall from the sky and in the background is an older gentleman pulling a vacuum cleaner out of the back of his Lexus LS. What would you do to gather as much money as you could? What are the other people doing?
The affiliate marketing space is just as fiercely competitive-- and frenzied. Harvard Business School professor Michael Porter’s 5 forces model brings some order to the chaos. Regardless of whether you are the owner of your business or simply a sales person pushing your company’s products, take time to really think about the forces that affect your piece of the business.
Porter identifies five primary and dominating competitive forces: Rivalry among existing competitors, Threat of substitute products or services, Bargaining power of buyers, Bargaining power of suppliers, and Barriers to entry.
Porter’s 5 Forces Model
Rivalry among existing competitors
Rivalry refers to the competitive interplay between companies within the same industry. Factors such as strategy, differentiation, industry concentration, switching costs, branding all have effect on the degree of competitive rivalry. Affiliate networks for example now find themselves in the predicament of competing on razor slim or even zero margin when brokering widely distributed offers such as Blockbuster and Columbia House. As the brokering business becomes more and more commoditized, these companies are progressing toward developing their own unique products, aggressively arbitraging leads on the backend.
Threat of substitute products or services
Availability of products or services which buyers can select as acceptable substitution affects the health, growth, and sustainability of industries. Factors impacting substitution include switching time and costs, acceptability, suitability of the substitutes, and price/performance/value trade-offs. The switching costs for a publisher to choose one CPA offer from another are minimal—if you are an advertiser, keep close tabs on promotions that are similar to yours and make sure that your bounty is competitive. If the CPA is the only differentiator between your offer and a competitor’s, think about what additional value you could add, such as a greater selection of creative or superior service.
Bargaining power of buyers
Buyer power refers to bargaining leverage that can be used by purchasers to control cost and therefore profitability of the industry. Some of the factors here include product/service differentiation, brand image and identity, price sensitivity, and competitive intelligence. Advertisers, give your publishers a great reason not to create their own offers. Keep producing fresh promotions, offer great payouts without getting squeezed on margin, and keep the opportunity cost for publishers in the court of promoting your offers as opposed to backward integrating into your business.
Bargaining power of suppliers
Supplier power refers to those factors which affect the supply chain aspects of an industry. In addition to the other 4 forces, elements which impact supplier power include supplier concentration price/cost considerations, switching and substitution options, and integration value. Lower tier publishers tend to be more fragmented and have less bargaining power with advertisers because of both volume potential as well as not “being in the loop” on market rates. On the other hand, advertisers distributing more standard, commodity type products have less leverage when dealing with savvy publishers.
Barriers to entry
Existing industry players will often use strategy and other competitive factors to dissuade other companies from entering their market. The power of these so called barriers refer to the deterrents of new or existing companies entering such markets. Factors affecting these entry decisions include cost/pricing, regulatory issues, competitive responses, success and financing requirements, and economics of scope and scale.
Barriers low if:
-Common technology exists
-Little brand recognition
-Easy access to distribution channels
-Low scale threshold
Barriers high if:
-Patented or proprietary technology or knowledge exists
-Difficulty in brand switching
-Distribution channels more restricted or exclusive deals exist
-High scale threshold
It’s all about the Benjamin’s
Utilize the 5 forces model as a framework for understanding the underlying structure of the industry or business segment you focus on. Proactively think about the forces that affect the short, intermediate and long-term effects of the affiliate space's size, strength, vitality, and profitability. This time around the money is really there, it is up to you to determine your winning strategy.
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