For the first time in years, online advertisers are beginning to talk about a shortage of inventory, and not just in search and highly targeted environments. With the rise of heavy optimization in ad networks, even inventory that has historically been seen as remnant has now become coveted and monetizable.

Through the ups and downs of the media market, affiliate and performance marketing has solidified its model and found its niche. Today we share with you part one of a conversation with Peter Figueredo,Co-Founder and CEO of NETexponent, an agency that specializes in affiliate and performance marketing programs, to see how the media market swings have changed the way online marketers need to approach their pay-for-performance efforts.

avant|marketer: The ad network model has risen from the ashes and seems to have benefited from heavy optimization in increasing the productivity of inventory. At some point, don't the ad network model and the affiliate program come into conflict over demand for partner sites?

Peter Figueredo: This has been an interesting issue for us, and it differs for each of our clients. Ad networks amass relationships with many websites and therefore can drive significant volume when looked at as one publisher. This volume may lead advertisers to pay more than a normal affiliate. However, what most people miss is that advertisers are competing with ad networks to a certain degree. Through the affiliate program, advertisers are also trying to build direct relationships with many websites. This is one example of conflict that can arise from mismanaged affiliate programs.

Let me tell you why this can become problematic. Base affiliates could be getting a commission of $20 for a sale and an ad network could be getting $40 because they drive more volume. Eventually the ad network will begin to poach affiliates - knowingly or unknowingly - by offering a higher commission than the advertiser can directly. This then means that the advertiser pays $20 more per order for the same orders it was getting before and it loses the one-to-one relationship. A technique we use to avoid this is to cap what ad networks can pay out to their sites unless they get special permission.

avant|marketer: You have positioned NETexponent more as a remote sales force than a pure ad and media company. To what degree do the ups and downs of the online media market impact your ability to drive cost-effective sales for clients? Can an affiliate network remain an effective hedge against rising prices in the media market?

Peter Figueredo: First, let me explain that we differentiate "affiliates" from what we call "media partners". We make the distinction based on volume potential and relationship with our media team. Affiliates drive significant volume in the aggregate and our relationship with them is fairly automated. Media partners drive significant volume individually and have complex one-to-one relationships with our team. Affiliates help drive costs down because they tend to be more efficient and relatively unaffected by ad industry ebbs and flows. Media partner inventory is more expensive but volume makes it worthwhile. These sites generally feel the pressure of raising prices and are faced with reduced inventory when the market pendulum swings in favor of budget increases.

avant|marketer: So how do you keep a top-tier partner happy in these circumstances?

Peter Figueredo: As with many other things, it's going to come down to money - straight dollars and cents. If your deals are netting these sites good income, that's the key. If you don't put in the effort and decide your low-cost channel will be a low-effort channel for you, and you don't do your part to make your offers work, those sites will jump ship the first time a better opportunity comes around.

Advertisers must be proactive in optimization of every aspect of their affiliate and performance marketing initiatives. Ask questions such as: Can we co-brand creative? Can we improve our landing pages? Can we do custom promotions? Do we create the feeling among the sites that sense of partnership we are committed to having work? This can be tough in an environment where most advertisers have become lazy and expect affiliates and media partners to self-optimize.

What this effort also does, when the ad media market turns for those media partnerships that are making money with you, is prepare you to work with new deal terms should your partner sites want to take advantage of [favorable] changes in the marketplace. There are really two types of sites out there are those that are designed from the ground up to function as CPA sites, and then there are those that are not, and may find it works for them to migrate to CPC or even CPM. The CPA sites are likely to stick with what works and stick with you, though maybe at different rates, throughout the ups and downs. With the other sites, advertisers who are savvy should know enough about the metrics to make it work. If this is one of their media-type partners, they should know what the ups and downs of the site are over time, and should be able to make the deal work at least as a CPC.

avant|marketer: So as the ad cycle comes and goes, what kinds of online sales models seem best adapted to a dedicated performance marketing program? What kinds of businesses need to be considering a full-time partner like yourself in the online sales process?

Peter Figueredo: I would suggest that anyone who does, or would consider, outsourcing their online media planning and buying, would likely also benefit from outsourcing their affiliate program. 

It all comes down to staffing and revenue. What do you think the affiliate program can drive for you, and what kind of resources do you think you can put against it? A company like NETexponent and our team-based approach is perfect for those who want maximize all the vehicles available [for generating] a successful performance program but don't want to have to put together a 10 person staff in doing so. Maybe affiliate just sits outside their area of expertise and they want to focus on their core.

In my opinion, it's always going to be customer-acquisition focused marketing...marketers who need efficient orders and high volume. It takes a lot of work to generate the volume, it takes even more work to monitor the efficiency and quality of the orders.

avant|marketer: So over time, what percentage of online sales can a marketer invested in these programs expect to generate?

Peter Figueredo: That depends. I mean, if you are a really active marketer using other online vehicles like search, as well as heavily using standard online media planning and buying, you could still expect an optimized affiliate program - anything that is pay for performance - to generate 35-40% of your sales at the top end. For marketers not doing any other media buying, affiliates can be 100% of what they generate.