Anyone watching TV these days can’t help but notice the proliferation of advertisements for price comparison sites. What is less widely understood is what is driving this sudden growth, and how this is changing the customer purchase funnel (in other words, the way we select products and services to buy online).

In our previous blog post in the Curated Web series, we looked at the various types of vertical search site, how they make money and where they get their search results from. We touched briefly on affiliate marketers, mentioning the affiliate networks which they belong to and the affiliate fees which they earn. In this post we dive much more deeply into affiliate marketing, to understand why retailers are spending increasing amounts on affiliate marketing, what impact these rapidly developing vertical search sites are having on buyer behaviour online, and what these changes mean for major Web companies, especially Google. But first, we will explain a little more about what affiliate marketing actually is.

A quick primer on affiliate marketing

Affiliate marketing is the Web’s second oldest profession. In a nutshell, retailers offer “affiliates” a fee (either a flat fee or a percentage) based on the number of customers that an affiliate sends them and the amount that those customers spend. Anyone who can somehow find prospective customers and direct them to a retailer’s site can be an affiliate, and there are legions of affiliates doing exactly this – building assorted price comparison sites, product comparison sites, review sites, voucher sites and directories. For the retailer, affiliate marketing offers them a way of outsourcing some of their marketing effort. For clever affiliates who are good at finding ways to attract and direct prospective customers, it offers a potentially lucrative revenue stream.

One way in which affiliates can make money is by setting up vertical search sites for particular products or services. A good vertical search site guides the individual into making a buying choice, by:

1. Identifying the key factors that matter to that individual,
2. presenting him or her with the options available,
3. offering expert advice on the pros and cons of different options,
4. offering user opinions (via social media) from other people who’ve made that decision,
5. and then finally providing a straightforward interface so that the individual can make a buying decision and then go quickly on to make the purchase.

Two examples of sites that do this particularly well are Money Supermarket, especially for financial products (e.g. credit cards, mortgages) and Simplify Digital, for people looking to choose a TV / broadband deal. These are effective affiliate sites because they add value for prospective customers (by helping them make informed buying decisions) whilst adding value to retailers by providing them “pre-qualified” customers who’ve expressed an interest in their specific product / service. Popularity with prospective customers means that these sites attract a good volume of traffic, lowering the marketing cost they have to spend to attract users and increasing the profit they make (by effectively “selling on” the individual to a retailer for a higher fee).

How affiliate marketing is drastically altering the customer purchase funnel online

Affiliate sites, not least those with rich vertical search functionality, are having a significant impact on the way in which people make buying decisions online. The nature of this change is best summed up by a pair of “before and after” diagrams, looking at how the purchase funnel for buying (for example) home broadband has been altered by the advent of affiliate sites. The first diagram shows the cyclical set of general search querying and site browsing which consumers depended on before the advent of vertical search sites:

In the “after” diagram below, we show how a vertical search site takes over from generalised search to provide the end-to-end purchase funnel for customers:

From the diagrams above, two things are clear:

1. A good vertical search site simplifies life for the online shopper
2. A good vertical search site diminishes the amount of time that shopper spends doing generalised search, and indeed the importance of those search results

The future growth outlook for vertical search sites is extremely positive

The affiliate market continues to grow – retailers are allocating bigger portions of their marketing budgets to affiliate marketing, as it represents a very low risk way of growing sales (because they only have to pay when they make sales). At the same time, more and more affiliates are being attracted into the space by the growing number of people who are researching buying decisions online and / or going on to make those purchases online.

Vertical search sites are especially common in product categories where the value of a prospective customer is high – for example, mortgages, pay-TV, mobile phones; in these cases, retailers can afford to offer high acquisition fees to affiliates, which in turn attracts more affiliates to the space. But as competition heats up among affiliates for the high-value sales, we can expect to see more affiliates launching vertical search sites to cover the “long tail” of niche or low-value product categories, especially as the costs of setting up vertical search sites diminish.

So what next for general search?

To date, generalised search as offered by Google and others has been an extremely valuable service, because it offers advertisers (retailers) a way to reach prospective consumers looking for their specific products. Google’s AdWords service, where advertisers bid to reach users searching for particular terms, has long been that company’s cash cow.

With the growth in vertical search, however, advertisers are being offered the opportunity to buy prospective customers in places other than on Google search results. Furthermore, they may be able to better qualify those prospective customers, because a good vertical search site “walks” the customer through the buying decision funnel, and only passes them onto the retailer once they’ve made a decision, providing a potentially higher value source of website visitors than AdWords. On top of this, some of these vertical search sites are now disintermediating Google, appealing directly to shoppers via TV advertisements and other above-the-line promotions.

So whilst the growth in vertical search may be good for both consumers and retailers, it could well spell trouble for Google – and we will explore this further in the next post in this series.