CHANGING REVENUE MODELS


How affiliates and operators must work together for the future.


AS THE BANKING crisis of recent vears has shown, not everything that seems outwardly profitable is necessarily sustainable in the long run. Following me demise of a variety of prominent poker operators earlier this year and the subsequent increase in general regulation, the online gaming industry stands at a crossroads. Operators and affiliates must realise that in order to remain profitable, it wfll be necessary to adapt. In a sense, the mode of operation that both affiliates and operators have grown accustomed to is destined to become a thing of the past, and been ennnes must work together with the future in mind to succeed.

The success and sustainability of the iGaming landscape is based primarily upon the relationship between operator and affiliate. Practically, this relationship is one of mutual dependence. Affiliates help operator earn money by promoting their sites. In turn, operators pay affiliates for successful marketing efforts. This relationship dynamic is what makes affiliate marketing so useful, since both parties are better off through their interaction and help each other earn revenue.

Cooperation

The long-term sustainability of the symbiotic relationship between affiliate and operator depends on cooperation - something that cannot occur with each party working in self-interest. Rather, operators and affiliates must realise that they are united as an entity. All possible pursuits should be undertaken so that the whole becomes greater than the sum of its parts. If affiliates simply try to increase their gains, they may benefit in the short-term, but operators will then suffer, and the general relationship will be impossible to maintain. Equally, if operators attempt to decrease their affiliate marketing expenditures, affiliates will lose both revenue and, consequently, any motivation in being affiliates. Without their affiliates, operators will lose the benefit of a strong acquisition and retention channel that can help grow their business as well as increase the value of their brand.

Regulation

With increased regulation, and the promise of even more regulation to come, operational costs are climbing and reducing the margins for operators. By offering their affiliates lucrative revenue share packages (which can sometimes be in the range of 50 percent), operators can find themselves living beyond their means, particularly if they are operating in markets where player life time values (LTV) are lower.

Lucrative revenue share deals are particularly unsustainable if operators must continually share revenues without a constantly increasing player base. If this becomes the case, operator revenues will consistently decrease, as will their ability to pay affiliates. Most importantly, this affects the relationship between operator and affiliate, which is the most important characteristic of a strong and successful affiliate program.

Regulation includes high tax payments to authorities. In addition to the taxes, operators must also factor other operating costs such as licensing, legal costs to ensure operation within legislative guidelines, payment processing, marketing and advertising, staff, as well as all affiliate related costs. Realistically, this can lead to operators paying out up to $7 to $8 out of every $10 they earn. As such, having a revenue share system that factors key costs, has a continuous injection of new players and transactional volume and has a good ratio of retaining customers to compensate low margin with volume, becomes imperative for survival and success. Developing such a system is easiest via operator and affiliate cooperation, which itself should be based on understanding and desire for mutual success.

Sustainability

As mature affiliate programs have a slower rate of acquiring new affiliates, their reliance on a sustainable win-win model is crucial, lest they find themselves in a situation where they are paying out higher revenue share to their existing affiliates for activity from past referrals while not making up the margin with new acquisitions. This, coupled with the costs for retaining players, can put more pressure on an operator's business if there is an imbalance in the compensation model as well as the acquisition and retention strategies.

Furthermore, with tighter margins, there is more competition between operators; this has led to a change in the landscape, with common practices such as lifetime guarantee of revenue share now coming under threat. Similarly, with cost per acquisition (CPA) schemes, their sustainability also lies in the continual referral of new quality customers, since it is a one-time payment. A CPA scheme has its advantages with a key appeal to affiliates being its provision of income each month ver advertising costs, provided their referred players fulfil the requirements set out in the CPA structure. This also has advantages to operators in that it allows affiliates to dedicate their efforts and revenue towards further acquisition.

Conversely, operators have traditionally shied away from CPA schemes due to their risky nature and paying for traffic that may not meet desired quality. It has also been unpopular with affiliates, who are in the business for the long haul and have invested their resources in building traffic volumes and referrals in return for continued revenue and a long-term business.

In addition, affiliates on CPA models do not tend to have the same level of commitment to relationships with operators as those on revenue share models do. This is due to the fact that the affiliate tends to play the role of a traffic supplier and less of a partner that analyses retention and life time player values.

So, what is the solution?

Short-term rev sharing? CPA structures? Fixed fees?

Just like affiliates and operators know from advertising experience, there is never a best single approach; it is always more prudent to custom-tailor efforts. Likewise, it is important for operators and affiliates to work together to craft personalised commission structures towards a mutual goal of profitability for the affiliate and operator as a single entity. This approach could involve revenue share, CPA, fixed fee, or hybrids of them both, so long as it fundamentally involves the interest of maintaining long-term profitability for both affiliates and operators.
 
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