#2 - Affiliate Arbitrage, Amazon, and the future of growth hacking in eCommerce

Hope everyone is having an incredible Q5 and able to spend some quality time with the ones you love 😄 . If you’re feeling in a giving mood, we’d love for you to hit reply and let us know what you think of the podcast and newsletter so far. ALL feedback is appreciated.

Without further ado, here’s another edition of Don’t V*LOOKUP ☄️, where we explore how top commerce operators and practitioners leverage data to make critical business decisions.

Today, we’re talking about affiliate arbitrage with Mike Mallazzo, the head of business development at Forum Brands and co-founder of Brandable, an omnichannel insights platform.

🎯 The TL;DR on what you’ll learn from this post 🎯 

1. A brief history of arbitrage in eComm and affiliate publishers

2. The power of brand collaboration and collective buying to unlock profitability with publishers directing traffic to your products on Amazon

3. What Meta’s recent Amazon Buy with Prime integration signals to marketers, and the Head of Growth’s new prerogative to nail allocation of Amazon vs. DTC marketing budget

📈 Arbitrage is how we got here, folks 📈 

A lot of DTC brands’ success in the early 2010s was predicated on cost differences between making products and advertising them (which is, loosely, what arbitrage means). Early DTC brands could easily spend less than 20% of sales to acquire a new customer on Facebook and Google.

“What people think of as the glory years for DTC businesses, was mainly due to the fact that advertising on Facebook was cheap,” Mike told us. “You had an unbelievable opportunity to very quickly come to market when Shopify came into its own with white-labeled goods, be good at Facebook and Instagram ads, and build a life-changing business that you could exit for life-changing money.”

Around the same time, affiliate publishers¹ like bestreviews.com bought cheap traffic on behalf of brands on paid search and Google ads, and directed this traffic to landing pages with curated product reviews that linked to Amazon. Any time a user clicked and purchased from this experience, bestreviews.com made a handsome commission (often 5% of the sale) from Amazon Associates, Amazon’s affiliate platform.

Several multi-million-dollar businesses were built overnight by simply taking advantage of a price difference between the cost of ads, and the earnings per click/purchase that Amazon was willing to pay out to a referral - and none of them were DTC brands.

🎵 Come together, right now… 🎵 

These tactics made millions for bestreviews.com, large retailers competing outside of Amazon, and publisher holding companies like Hearst and Meredith, but Mike says there’s also a playbook for DTC operators to capitalize on affiliate arbitrage.

“Top DTC brands would be wise to start engaging with [affiliate publishers] more directly, Mike urged. “They should incentivize these companies to find profitable niches of traffic - and it’s not at all different from what brands are trying to do with social whitelisting.”

DTC brands have a distinct advantage over retailers, who've historically taken advantage of this tactic, simply because of their economics. DTC brands can spend 25-30% of a sale as the commission rate (versus ~5% of a sale for retailers), meaning these publishers would be more incentivized to find them more high-quality traffic, and thus more conversions.

Let’s say you operate a high-gross-margin beauty brand (an ideal candidate for this tactic):

1. Find at least 2 like-minded, complementary brand partners (but the more brands, the more buying power!). Make sure you’d be comfortable sharing an offer and landing page with them. You can source data from platforms like Disco or Toki’s TokiCollabs to find brands that make sense for this type of partnership.

2. Align on an offer and story with your partners. Agree on a common angle to pitch an affiliate publisher, or, at the very least, an offer that would resonate with consumers. Are you promoting a joint sale on a scrappy-looking splash page with little to no content? Or are you thoughtfully positioning you and your brand partners on the affiliate publisher’s latest holiday gift guide?

3. Collectivize budgets. Reach out to an affiliate publisher with a top-line commission offer (i.e. 30% of a sale) and maximum ad budget for a campaign. Your collective ad budget may just be on par with retailers, but your commission rate will be what incentivizes them to acquire high-quality shoppers.

❓️ Amazon as a low-funnel growth lever ❓️ 

Mike believes that Meta’s recent announcement that it would support Buy with Prime on its social ads should cause marketers to rethink how they drive traffic to Amazon. This announcement signals that:

1. Meta knows it can no longer be a profitable channel for lower price-point categories and goods - and is calling on Amazon to help convert these shoppers more effectively.

2. Lower price-point (or even moderately pricey, single-SKU) brands ought to leverage this integration and push more low-funnel traffic to Amazon - especially as Amazon offers a Brand Referral Bonus, which gives DTC brands up to 10% of a sale back for referring traffic to the platform.

“I think you’ll start seeing more savvy growth marketers shift more top-of-funnel traffic to their DTC site, and more mid-funnel and direct response to Amazon,” he said. “I’ve yet to see a growth lead come up with a cohesive framework for how this money should be invested, but the unit economics tied driving traffic to Amazon are getting hard to ignore.”

🔎 Main takeaway 🔎 

While it may no longer be the ‘golden days’ of cheap advertising on Meta and Google, there are still pockets of arbitrage in certain channels for growth leaders to explore. Publishers - especially those that have audience alignment with your brand - will be incentivized to drive high-quality traffic to your products if offered a competitive commission compared to retailers (let’s call it 10%+ of sale). And - get this - if you direct that traffic to your Amazon listing, you may be eligible for Amazon’s Brand Referral Bonus, which could effectively wash out the commission you owe to a publisher for driving that sale to begin with.

⭐️ North star metric & key data tools ⭐️ 

As with all our guests, we wanted to know what is the ONE metric (aka North Star metric) that can be tracked to define success and the tools that can be used to lower the barriers to data-driven decisions.

Mike’s North Star Metric:

• MER (marketing efficiency ratio) or TACoS (if point of sale is Amazon)

TACoS is typically expressed as a percentage as:

(Amazon ad spend / Total Amazon revenue (organic + paid)) X 100

Key Data Tools:

• Toki - use performance data from TokiCollabs to inform a co-op arbitrage campaign

• Disco - use customer overlap data to find your co-op partners for an arbitrage campaign (disclaimer - the author is an employee of Disco, and swears that Mike brought this up on his own 😉 !)

• Brandable - measure and understand unit economics differences in Shopify vs. Amazon to make more informed decisions (disclaimer - Mike is the founder of Brandable)

For more from Mike and other Don’t V*LOOKUP guests, don’t forget to check out our YouTube channel.

P.S. If you’re still reading and want to share this with a friend, please send them here. We’ll ❤️ you forever.

_{1 Affiliate publishers can be considered high-throughput “offer sites” like bestreviews.com, CNET, Consumer Reports, or more “editorialized” publishers such as Wirecutter, Good Housekeeping, The Strategist, etc.}