(Transcript continued from the Episode 130 show notes and audio podcast)

One of the businesses that has always been interesting to me is actual ecommerce where you sell a physical product. A lot of the reason I’ve never done that is because most of the times when you think about that you think about having a stack of widgets in your back bedroom and when people place the order you ship them a widget. I talked to you a little bit last week about how I actually had a business like that briefly that didn’t go very well, it didn’t scale at all, so I abandoned that.

One of the things about 100k Factory that make it interesting are that you don’t touch the products. I thought I would describe the business model to you in a little more detail. Not because I want you to go buy the program. By the time you’re listening to this 100K Factory is probably closed for the last time ever, but I think the business model is fascinating.

There is this concept called drop-shipping. This happens to you if you’re a consumer buying online all the time. You order something from somewhere and the person that you order it from doesn’t actually have the product. The product is at the original manufacturer or in some wholesaler’s warehouse somewhere in the world. When you buy the product from the retailer that you bought it from, that retailer takes your money, keeps the portion of your money that is going to end up being the profit, and takes some of the money that you gave them and sends it to a drop-shipper who drop-ships the product directly to you.

In this scenario the retailer, the guy you gave the money to, never actually touched the product. This is a very interesting business model because there are huge numbers of these drop-shippers in China that are available to send these little cheap impulse-buy products overseas to the United States, or to whatever market you’re targeting, at very low cost.

Let’s take an example. I went to Texas A&M University, so let’s say that you are selling a Texas A&M drink coaster. This is a little bit of a tricky example because in actuality something like a Texas A&M drink coaster would have to be licensed because it would use the Texas A&M logo, so it’s not a likely candidate for this. But let’s set that aside anyway and say that you’re selling a Texas A&M University gadget of some kind and you found a source for Texas A&M University gadgets, say a drink coaster, for $5 apiece online that will drop-ship to your customer.

You can advertise Texas A&M University drink coasters on your website for $15. When you get an order and you take the customer’s money then you can take $5 of that $15 and send that $5 to your drop-shipper and say, “Please send a coaster to my customer,” and that transaction is completed.

This is  a very interesting business model because in 100K Factory the way they teach you to get the traffic is from Facebook. That’s one of the things that I’m very interested in is learning more about Facebook advertising. That’s one of the reasons I’ve decided to follow along with this course.

I’m an organic search guy, we talk a lot about search engine optimization. I’ve done some Facebook advertising and I’ve done some Google Adwords advertising, and what I usually joke is I’m an expert at paid advertising, if you want to know how to spend a dollar to make $0.90 then I’m your guy. So I am interested in Facebook advertising because I plan to use Facebook advertising in my business in the future to grow Late Night Internet Marketing through the advertising of this affiliate marketing course that I’m working on. So I’ll be working on that.

This Week in Internet Marketing News: Amazon Affiliate Commission Changes

We’re a little bit late on this, but I wanted to talk to you a little bit about the changes in the Amazon commission structure. In the past one of the criticisms of Amazon and their commission structure has been you can’t make as much money with the Amazon commission as you can selling information products or something like that where you get a commission of sometimes as much as 50%. That can be absolutely true.

The tricky thing or the cool thing about Amazon is once you send traffic to Amazon and they’re cookied with your affiliate link you get a commission for anything they buy within 24 hours. So if you send traffic over to Amazon for a book and they end up buying a refrigerator within 24 hours, instead of just getting the commission for the book, or even if you don’t get the commission for the book, if they buy a refrigerator while they’re cookied with your affiliate link you get the commission for the refrigerator. That’s pretty cool.

The other reason that we recommend Amazon for starting out affiliate marketers is because it’s super easy to get started. There’s one place to apply and there’s every product under the sun available there at Amazon that you can possibly want to sell. There’s also collateral available, they have affiliate resources and ads and so forth that you can use to be a successful Amazon affiliate.

In the past they had offered a tiered commission structure that depended on what you sold. For the most part it depended on the number of items that you sold and the percentage of commission, with a few exceptions, depended on how many items you sold, and the more items you sold the more money you made.

Now they’ve gone to what they call the fixed standard program fee rate. Their commissions don’t change depending on how much you sell and they’ve removed what they used to call the variable standard program fee rate. That means if you sell 3,000 things your commission doesn’t change compared to if you had sold just a few things.

For Amazon super affiliates, like TheWirecutter.com this probably a huge blow, because in many cases they have removed the high commission rates that you get if you’re selling thousands and thousands of items a month on Amazon and they’ve reduced commission rates for certain technology items particularly. If you’re selling video games or video game consoles, now your commission is 1%.

Take for example The Wirecutter. If you’re not familiar with that site it’s probably the most profitable affiliate website on the internet. Wirecutter is a famous affiliate website that has come along in the last several years that reviews products, mostly technology products, and tells you which ones are the best ones to buy.

They certainly are recommending things like game consoles, PCs, televisions, and other kinds of electronics where the commissions have been cut down to just a few percent. Where they were making maybe as much as 8% on televisions, for example, they’re now going to making 2%. I’m sure that has cost them a small fortune, that would be my guess. That’s unfortunate.

On the other hand, there are other categories like luxury beauty, furniture, and home improvement where now the fixed commission is 8%. It doesn’t matter whether you sell one, two, or three items or a billion items, your commission is going to be 8% on everything that you sell.

For the beginning Amazon affiliate that is in these areas, this is really good news. It means that when you’re first starting out and you’re only selling a few items a week or a few items a month, you just got an instant raise if you’re in these categories.

New Amazon commission structure

The table above shows the new commission rates. [see Amazon’s policies]

There are a couple of questions that have come out of this.

One is do I still recommend Amazon as a place to start if you’re an affiliate marketer. Yes, I do, absolutely. Amazon is still the easiest place to start, it’s a great way to learn affiliate marketing.

I now would probably recommend that you stay away from things that have incredibly low commissions, but I’ve always recommended that. We’ve always said that you should promote things that are high in price that give you a decent commission.

I think what that means is that some niches that you might have been interested in and considered before, if you’re going to use Amazon, they’re no longer economically commercially viable. There have always been niches that aren’t commercially viable. Basket weaving is probably not a commercially viable niche. Worm farm equipment is probably not an economically viable niche.

Now I would say, particularly if you’re using Amazon, a site that reviews televisions is probably not a commercially viable niche. I think that hasn’t changed the fact that Amazon is still great. In fact, for some niches it’s actually a better choice now than it was before. I encourage you, if you’re considering affiliate marketing, to continue to look at Amazon as a place to start for your affiliate marketing.

The second question here is why did Amazon do this? Why in the world would they want to change this commission structure in this way and anger affiliates? By the way, for affiliates that were in this tier with more than 3,100 products a month tier that are taking it on the chin, my understanding is that Amazon phoned those people directly, which is kind of interesting.

Why do that? The answer is always because this will help Amazon make more money. There’s just no question about it. Don’t be confused. Amazon’s job is to make money. Amazon is not in the business of creating great affiliate programs. They’re in the business of making money, so that’s the reason that they’re doing this.

The obvious next question is how will this help them make money. What I would imagine is that it probably does two things for them. On things like televisions, I imagine since that is a commodities business the margins are already super low. Because of the competition with BestBuy and other places where people can actually go see a TV and buy it, the competition between BestBuy and Amazon or other places online is super fierce.

It’s probably just the fact that their margins on televisions and other things where they cut the affiliate commission is already super low to begin with and they can’t afford to lose money on these items. TVs are expensive to ship, so most of the people who are getting TVs shipped are probably getting them shipped with Amazon Prime, so they’re probably losing money all over the place with commodity large items that have low margins like televisions, so they need to cut the affiliate commission to compensate for that. That totally makes sense to me.

It also probably makes sense that where they’ve raised commissions there are two things going on there. One is they have the room to raise them, so they’re trying to compensate for what it is that they’re doing. Two, it may be true that they’re trying to drive behavior. If those are the highest margin items that they have and they want a high margin business, which is something if you’re in accounting one of the things you worry about is the profit margin of your business and your operating fall through and things that impact cash flow.

You want to sell as many high margin products as possible, that’s part of the efficiency of your business when you look at that P&L. I would imagine that they’ve prioritized these items that make their business look better on paper. Why do that? It makes the share price go up. That makes shareholders happy. When you throw off more cash you can pay more dividends on your stock. There are lots of reasons that you want to run a high margin business.

If I have a choice between a business that spends $1.00 to make $1.10 and a business that spends $1.00 to make $1.50, I’m going to want to invest in the business that can make $1.50 with a $1.00 because that is a more efficient business and eventually is going to pay more dividends in the stock in most cases.

There are lots of complicated details around this and I’m not giving you stock advice, but I am telling you that one of the reasons that you set a commission structure that is this complex is because you’re trying to drive behavior. Otherwise, you’d just set a commission structure at what you could afford, one-size-fits-all and don’t worry about it and you would just say, “Our commissions are going down to 4%,” and be done with it. In this case they’ve split out these categories and I guarantee you it’s because they’re trying to drive particular behaviors that will make their business operate in the way that they would like it to operate. So that’s interesting.

The other side effects and other question that comes up with this is if you’ve been hit by this, what do you do? I think one of the things that you do is go look and see if there are other affiliate programs that you can use in place of Amazon if you’ve been hit particularly hard.

For example, let’s say you’re in the TV situation and you were selling lots of TVs. What do you do? The first thing you do is you go to other big box retailers and see what their commissions are on those same TVs, or whatever it is that you were selling, and see if it’s possible for you to get a better deal. Some places that you might check are BestBuy, Walmart, Target, those kinds of places that have big box affiliate programs where that might be an option. Overstock.com, places like that. See if you can get back to your original commission levels.

Additionally, there are other places that, in the case of TVs, are a little bit less likely to have affiliate programs, like Commission Junction or Share-a-Sale where you might find some retailer in there who happens to be selling TVs who is offering a higher commission than 2%. I don’t know because I haven’t looked, but I don’t think it’s going to be that hard for you to find a commission that is higher than 2%.

Let’s say for example that you are in a situation where you are selling a particular model of Samsung television. Let’s say that because you followed the search engine optimization advice on this podcast that you are dominating the search for a particular model of Samsung LED television. You’re selling 50 or 60 televisions a month and this is really hitting you in the bottom line.

I think you really could consider investigating drop-shipping those televisions. If you can become an authorized Samsung retailer and hook up with a distributor, you might actually be able to ship those TVs at a huge margin.

Now, it’s going to be a little harder with something like Samsung because they have some pretty strict rules about who their authorized retailers can be. But I would definitely think that would be something that would be worth at least investigating depending on what is going on with you and your Samsung television business. That’s the kind of thing that you can do to recover.

Another thing that we’re seeing as a result of this is if you’re in the business of flipping and selling Amazon websites, the value of those websites is changing. At least for the moment, it’s generally not in the positive direction. If you’re right now in the middle of trying to sell a website that you built with Amazon, your valuation is going to go down as a result of this change that Amazon made. That’s unfortunate, it’s bad timing.

That’s part of internet business is that things are constantly changing. The truth of the matter is, in the long run, when you sell a website like this online you’re going to be selling it for multiple of earnings anyway. It might make sense depending on your particular situation, if you’re not happy with the offers that you’re getting for this site that you’re trying to sell to wait and then build your earnings up to a level that will get you the sale price you want and sell it later, depending on what is going on with your particular situation.

There’s a lesson here and it’s one of the reasons that I like affiliate marketing so much. One of the reasons that when we teach affiliate marketing we say use PrettyLink, because if something happens to your affiliate relationship with some supplier then you can change suppliers. Without having to edit 40,000 pages on your website where you’re selling a particular model of Samsung TVs, you can just go in and change the PrettyLink for that Samsung television. That makes it really easy to maintain your website.

Change in this business is constant. One of the things that is so exciting and fantastic about the internet is that it is evolving at a very fast rate. At the beginning of this episode I talked about 100K Factory and how I’m exploring that. That is based on the rise of Facebook and particularly the Facebook advertising model, which is crazy powerful. Facebook knows everything about its users and that allows you to target them very efficiently. That is what makes that kind of model of 100K Factory work.

That’s a new thing. Facebook hardly even existed a decade ago, so the internet has changed from what it was a decade ago. And it will change again. You have to change with it. This is one of those examples where if changes in the Amazon commission structure have affected your business then you have to consider some sort of change.

That might mean changing your affiliate relationship to use someone else. That might mean moving to drop-shipping. That might mean existing that market. That might mean changing from affiliate commissions to ads in some cases, if you find that you can make more money with Adsense than you can with selling televisions now. There are all kinds of things.

If you have traffic, the bottom line is you can almost always find something to do to monetize that traffic. Yesterday it was affiliate links to Amazon. Tomorrow it might be affiliate links to a different supplier that is paying you a little higher commission.

From a mindset perspective, I think one of the most important things here is to understand that change is inevitable. The only thing that is constant in the universe is change. After you get over the shock of your income being impacted, the right thing to do is to understand what you can do to mitigate the impact to you and what opportunities does this present. I think in this case maybe it presents you an opportunity to relook at your Samsung TV business and find a more efficient way to convert that traffic into sales. Look at it that way.

It’s those people that are able to accept change and roll with it that will be successful in the long run. Not just in internet business, but in life in general. These things are going to come at you and I think it’s okay. Yes, sometimes it stings. You have to be one of those people that gets back up, gets after it, and finds a solution and moves on to the next thing if you want to be successful on the internet.

Wrapping Things Up….

One more thing before I get out of here. I did want to mention to you that Ray Edwards is killing it over at his launch for Copywriting Academy.

If you are in the market for learning how to be a better copywriter, this is the course for you. It is the best course on the internet. I’ve been through it. Ray is amazing. You know all of that. But, forget all of that. Forget about spending money. You have to go over there and check out the free training that he is offering in the lead up to this launch.

Ray is one of those guys who feels like he should be doing the right thing all of the time. Funny thing, I try to surround myself with people who feel like they should do the right thing. With Ray one of the things he feels like is the right thing to do is to deliver massive value, even during launches. Yes, he wants to sell copies of Copywriting Academy. Yes, he will sell, maybe millions of dollars of Copywriting Academy. I don’t know. That’s a fantastic course and people will be incredibly successful that use it. In order to get there Ray is a do the right thing kind of guy and he wants to attract people in the right way, and in his mind, clearly from his actions, you can see that the right way to attract people is to deliver unconditionally massive value leading up to the launch. That’s what he’s doing.

I want you to get over there and opt-in at LateNightIM.com/cwa. That’s a goofy abbreviation for Copywriting Academy. Yes, I know copywriting is one word, but the acronym that I’m using is CWA. I think you will like the videos. They’re super great. There is nothing to buy until the very end, so don’t worry about that. Just go over there and take advantage of the opportunity to make your copywriting better at no cost to you.

Until next time.

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