361: How to Use Affiliate Programs to Fuel Growth
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In today’s episode of The Startup Chat, Steli and Hiten talk about affiliate programs and how to use it for your business when you want to acquire more customers.
Affiliate programs can be an effective way to get new customers and scale your startup. For it to be successful, it is important to know how to create a program that helps your customers and advocates do your marketing for you.
In this episode, Steli and Hiten talk about what an affiliate program is, why they don’t work for some startups, why some programs have failed in the past and much more.
Time Stamped Show Notes:
00:00 About today’s topic.
00:46 What are affiliate programs?
01:09 Why it’s a channel that works really well.
01:20 A key metric that you can use to determine if this is for you.
01:53 A mistake startups who want to use this channel make.
02:12 An interesting thing about affiliate programs.
03:52 Two reasons why affiliate programs work.
04:04 What a referral program is.
05:03 The reason affiliate programs don’t work.
05:59 Another reason why affiliate programs don’t work.
07:35 Examples of affiliate programs gone wrong
3 Key Points:
- If my product already has a high word of mouth, it’s more likely an affiliate program will work for you.
- When you sell to b2b companies, just offering them some amount of money might not work as well.
- You having an affiliate program doesn’t really scale your business if a bunch of these factors are not in place.
Steli Efti: Hey, everybody, this is Steli Efti.
Hiten Shah: And this is Hiten Shah. And today on The Startup Chat, we’re going to talk about affiliate programs, and how to use it for your business when you want to acquire more customers. I’m going to shoot this first, real quick, and then we’ll get into it, Steli, ’cause this is one of those more rapid-fire ones, because it’s just a topic and we haven’t talked about it, but it’s a super-important one, because it’s affiliate partners, referrals, there’s this whole category of, somebody is bringing me leads and/or sales for my business and I’m giving them some kind of commission. That’s essentially what an affiliate is. Right?
Steli Efti: Right. Right.
Hiten Shah: I love the idea of having affiliates, or even partners that are bringing you customers for a commission. I think it’s one of the key channels that, especially in B to B and SaaS, that works really well. It also works really well in e-commerce, and for me it has everything to do with one key metric, if this is going to work for you. And it’s going to sound crazy, but it’s pretty standard, but the key metric that I actually go for is, if my product already has high word-of-mouth, it is more likely that an affiliate program, or a referral in partnerships are going to work really well.
Steli Efti: Yeah, that makes so much sense it hurts. But I’m still sure that a lot of people-
Hiten Shah: Yeah, exactly, because not every product has that.
Steli Efti: Yeah, and I’m sure a lot of the startups that are considering or have chosen … Let’s invest in affiliate programs or referral programs to fuel our growth, have never stepped back to ask this very simple question, “Hmm. Do we get any word of mouth right now? Are our customers or people who know about us talking about us at all?” It seems like a very fundamental first step to answer before you go, “Let’s pay them money, or give them incentives to do it.” But-
Hiten Shah: Exactly.
Steli Efti: … But I’m still, I would be surprised if a lot of people thought about that first. So one thing, one interesting thing about affiliate programs is that, or referral programs, is that I do think, my sense is that within the startup community, there’s kind of a belief that this can work really, really well for end consumer products, right, kind of recommend-a-friend, this type of thing, but in B to B, in SMB or even worse, in Enterprise, when you sell to more corporate, serious customers, just offering them some amount of money or a gift card or this or that might not work as well. And so … There are some exceptions that I can think of, Dropbox being a really big and popular one that was kind of … Was kind of a pr- … End-consumers used it, but professionals and businesses also used it, but I remember their affiliate, their referral program of, if you share it on Twitter you get another X amount of free space, and if you post it on LinkedIn you get free space, and if you invite ten people you get more free space. That model really worked brilliantly, and I actually know the guy that did that for Dropbox. But not every product has that unique value proposition or feature set where that would make sense. But I’m curious, would you, do you agree, and have you seen this being true, or not true, that B to B, SMB startups have less success with their affiliate programs or referral programs than end consumer startups? And if so, does an affiliate program or a referral program, does it always have to be money, like a gift card, or you get fifty bucks if you refer a friend, or if you get a click or something, or have you seen other models that work well?
Hiten Shah: Well, I mean, at the end of the day affiliate programs work for two reasons. One, because there is somebody out there that has an audience that wants to refer your product to their audience. That’s an affiliate program, right? A referral program is more like your own customers bringing in more customers by referring each other. And so I think there’s a nuance between the two. Because typically affiliate programs are designed around somebody making money. Actual money, not credits, or not anything like that, but money, while Dropbox’s referral program is all about people getting credit, or getting extra … Specifically getting extra storage, so give 250 megabytes, get 250 megabytes. So for everyone you invite you get extra 250 megabytes. And that’s really what worked for them, in fact they’ve de-emphasized that whole program now, compared to how popular they made it back in the day. It was a double referral program, which means that both sides are getting an incentive for signing up, or inviting, or whatever. And I think it really helped grow the business to where it is today. It would be nowhere near where it is today without that. And that incentive wasn’t a money incentive, really. It was a storage incentive. It was when storage was a currency. These days storage isn’t as big of a currency, I mean we have a terabyte on our hard drives. Back then we had, you know, gigabytes on our hard drives, it was like 20 gigabyte hard drives, when they started, and I think that made a big difference. And then, in terms of affiliate programs, again, I’ll repeat this, the reason affiliate programs don’t work is because nobody, they’re … You can’t figure out who should promote it, you can’t incentivize them, and when they, when people come to your site and they sign up, they don’t stay. Or they don’t pay. So you having an affiliate program doesn’t really scale your business if a bunch of these factors are not working. So you need a great onboarding experience, you need a great path to monetization of your own user, so that the affiliate is happy when they get paid out, when your customer pays, and it happens in a reasonable amount of time. Another factor is, a lot of times you’ll do math on your end, and look at your funnel, and figure out what your customer acquisition cost is, and then be able to give an affiliate for every signup a certain amount of money. So then they’re no worried about the customer paying, right, they’re just worried about getting you the signup. And if you have your metrics in place, and you have your numbers in mind, and all that, you can come up with a good number that an affiliate would get. The thing is, then, that’s really important, knowing what your own customer acquisition cost is, there are hypothetical costs, if you are doing paid acquisition, and being able to figure out what you’re willing to pay for a new signup. This way you can give affiliates money for every signup instead of having to wait, in B to B, until your customer pays you, ’cause oftentimes that can be 14 days, 30 days or even longer. So I think that’s a key reason these programs fail. Another reason they fail is, you can’t find affiliates. There aren’t, there isn’t a natural audience out there, and a lot of them, that is really … a lot of them or a few of them with a lot of, a big audience themselves, that want to promote services like yours.
Steli Efti: Beautiful. Yeah, that makes a lot of sense. And I remember even talking to Anthony, one of my co-phoners at Close, who used to work at eBay a long time ago, and they had all kinds of problems with affiliates that would hack the system and create either … Create these fake automated accounts that would click on something and sign up for something to get their money but there were no real humans behind it, or it was like just a, whatever you call it, crowdsourcing farm somewhere in the world, that would, like, real humans being paid a penny to do it, and then they would get thirty cents from eBay for that human action, and there was a constant fight between eBay’s affiliate program and people trying to take advantage of it, right, to make money. And so, there’s a … If you don’t think it through, if you don’t understand who your customer base is, who your users are, what the incentives are that are aligned for both sides, it can seem like an easy thing, why don’t we just pay people to be our extended sales force and go out there and promote our product and get us a lot of new customers? That seems like a super-appealing idea, but if you don’t think it through carefully and if you don’t make sure that the fundamentals are there for your business, it could be a thing that doesn’t do anything or a thing that might do harm. You’d be surprised how many people out there, and we talked about this in a prior episode, that, even for a small startup if what you offer is like some kind of a crazy, attractive affiliate program that doesn’t have a lot of safeguards in place, some scammer will find you. And then they will put it on some scammer forum, and all of a sudden a shit-ton of these people will attack your system. It is surprising, but it does happen a lot. So you have to think this through very carefully. But if it works it can be a great driver for growth.
Hiten Shah: I agree.
Steli Efti: Awesome. That’s it from us for this episode. We’ll hear you very soon.
Hiten Shah: See ya.