Measuring and Managing Online Affiliate Fraud

Affiliate programs vary dramatically in their incidence of fraud: in some merchants’ affiliate programs, rogue affiliates fill the ranks of high-earners.  Yet other similarly-sized merchants have little or no fraud.  Why the difference?

In Information and Incentives in Online Affiliate Marketing, Ben Edelman and I examine the impact of varying merchant management decisions.  Some merchants hire specialist outside advisors (“outsourced program managers” or OPM’s) to set and enforce program rules.  Others ask affiliate network staff to make these decisions.  Still others handle these tasks internally.

A merchant’s choice of management structure has significant implications for both the information available to decision-makers and the incentives that motivate those decision-makers.  Outside advisors tend to have better information: An OPM sees problems and trends across its many clients.  A network is even better positioned – enjoying direct access to log files, custom reports, and problems reported by any merchant in the network.  That said, outside advisors usually suffer clear incentive problems: most notably, networks are usually paid in proportion to a merchant’s affiliate channel spending, so networks have a significant incentive to encourage merchants to accept even undesirable affiliates.  In contrast, merchants’ own staff typically have incentives more closely aligned with the merchant’s genuine objectives.  For example, many in-house affiliate managers have stock, options, or bonus that depend on company profitability.  And working in a company builds intrinsic motivation and loyalty.  In short, there are some reasons to think outsourced specialists will yield superior results, but other reasons to favor in-house staff.

To separate these effects, we used crawlers to examine affiliate fraud at what we believe to be an unprecedented scope.  We automated more than 2 million page-loads on a variety of computers and virtual computers, examining the relative susceptibility of all CJ, LinkShare, and Google Affiliate Network merchants (as of spring 2012) to adware, cookie-stuffing, typosquatting, and loyalty apps.

We found outside advisors best able to find the “clear fraud” of adware and cookie-stuffing that are plainly prohibited by network rules.  But in-house staff do better at avoiding “grey area” practices such as typosquatting – schemes less plainly prohibited by network rules, yet still contrary to merchants’ interests.  On balance, there are good reasons to favor each approach – but a merchant choosing outsourced management should be sure to insist on borderline decisions always taken with the merchant’s interests at heart; and a merchant managing its programs in-house should be careful to avoid known cheaters a savvy specialist would more often exclude.

Incidental to our analysis of management structure, we also collected significant data about the scope of affiliate fraud more generally.  Some differences are stark: For example, Table 4 of the article reports Google Affiliate Network merchants suffering, on average, less than half as much adware and cookie-stuffing as LinkShare merchants.  Edelman has been critical of Google on many issues, but when it comes to affiliate quality, GAN was impressive.  GAN’s focus on affiliate quality comes through clearly in our large-sample data.

Our full analysis is under review by an academic journal.

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