HostingCon: Affiliate Referrals, Click Fraud Drive Up Marketing Costs

Web hosting providers are paying more to attract new customers, as affiliate referral fees and Google AdWords campaigns become more expensive, according to panelists at this week's HostingCon 2006 conference. Click fraud is also a growing problem for search marketing campaigns using google, they said.

"The cost of acquiring a customer is skyrocketing," said Lou Honick, CEO of HostMySite.com. "If you're going through traditional channels, it's getting more and more expensive to acquire a customer."

Affiliate programs, which pay a fee for customer referrals from third-party web sites, are a key sales channel for many shared hosting providers. In recent months a growing number of hosting companies have begun paying $100 or more per referral for customers who typically pay $5 to $15 per month. There are at least six hosts offering between $100 and $120 per referral at Commission Junction, which manages a network of affiliate programs. That rate represents a significant increase, according to Matt Heaton, CEO of BlueHost, who said his company generates most of its leads through affiliate programs.

"At the time we started using them, we really struggled to pay $75 for a customer," said Heaton. "I think that's a really low price today. There are people who will pay 2 to 2.5 years revenue for a customer. If you want to pay less, you have to convert better. You have to evaluate what a customer is worth to you." Heaton said he generally tries to keep his affiliate referral fees equivalent to 16 to 18 months of revenue for a customer.

The upward trend in affiliate fees is tied to the growth of hosting "top 10" sites that guide web searchers to hosting providers. Chad Randall, the director of sales for hosting directory TopHosts.com, said the practices of top 10 sites encourage competition for the best payout. "Many of these sites have become Commission Junction affiliate farms," said Randall. "If you get on Commission Junction and offer a $200 referral fee, you're suddenly number one on 50 web sites."

Pay-per-click (PPC) ads on Google AdWords are another prominent customer acquisition tool for hosting providers. While affiliate programs only incur a cost when a sale is made, AdWords trigger payment whenever an ad is clicked on, whether or not a sale follows. In recent weeks, advertisers have become increasingly concerned about click fraud, in which competitors or scammers click on a particular AdWords ad to drive up the advertiser's costs. The Affiliate Marketing Blog recently wrote about a forum on which participants openly discussed click fraud strategies.

The reality of click fraud doesn;t come as a surprise to hosting companies that are regular users of AdWords. "The keyword cost has gone up 30 percent, and our customer acquisition cost has gone up 60 percent. The difference has to be click fraud," said Heaton, who estimated that 20 percent of his AdWords clicks could be fraudulent. "If the click fraud continues, in short order the cost of customer acquisition will become unsustainable."

While the cost of affiliate referrals and AdWords are rising, the higher expense is often worth it for quality customers. "You're not just paying for that customer, but for everyone they refer," said Derek Vaughan, chief marketing officer of TechPad Agency, which publishes a network of hosting-related web sites.

Cultivating customer "word of mouth" referrals is one way to lower the cost of finding new customers, according to Honick. "You need to turn your current customers into a marketing machine," said Honick. "You have to look to the people who are loyal to your company and make them walking, talking billboards for your business."