[patio11]

Affiliates typically work on a CPA basis: cost per action. eBay is a little trickier, but it boils down to that. They get paid based on conversions, not based on traffic.

Most people who sell via affiliates have what is called a backend. (BCC does not.). It means, loosely speaking, any way for the company to increase LTV [edit: life time value, total economic value extracted from customer over the entirety of your relationship with them] after the initial sale, which is typically when the affiliate gets compensated. eBay LTVs are dominated by he backend: I bought my first box of Warhammer figures for $20 and earned eBay a buck back in 2000. Over the last ten years, I have been worth north of $2000 to eBay.

It is very difficult to know with certainty that the LTV of the kid buying the Warhammer figures is going to hit four figures because in a few short years he is going to move to Japan then drop off your radar for a few years then sell a hundred thousand dollars of bingo card software using his Paypal account.

So you need to guesstimate LTV for customers, within 30 or 60 or so days of acquisition, to pay your affiliates. If you underpay, they send you less traffic and you lose. You probably pay your affiliates more than the instant revenue. If eBay figured my LTV was $1 and paid the affiliate 50 cents, they would have sent me to another site instead. If Netflix paid only the first month's revenue, they'd lose signups to other sites.

If you overpay, you hemmorage money.

So you get really, really sophisticated about measuring and predicting LTV. You understand your business better than any affiliate can hope to. And when the numbers predict red ink? You drop them like a bad habit.

[charlief]

Can eBay pay the affiliates based on the realized LTV? i.e. eBay pays 50 cents when you're worth $20, and as you increase your value they keep on paying the affiliates. After all these years, you're worth north of $2000 to eBay, and eBay has paid out a total of $50 to affiliates along the way.

I can see what the practicality might be like, but it seems much simpler and fair than estimating LTV and cutting off affiliates if you were incorrect.

[patio11]

That is not technologically or organizationally impossible, but there are many reasons to prefer paying based on estimated rather than realized LTV. One reason is that many affiliates incur non-zero traffic acquisition costs immediately, or close to immediately, because they use AdWords or similar methods. (Or, alternatively, because their SEO enjoys being paid money on a regular basis. I certainly like getting my salary from the bingo business regardless of whether the business sells a lot or a little in a given month!)

eBay currently extends them money far in advance of eBay receiving it, with the understanding that if there is an upside eBay will get most of it. If eBay pays them only after eBay gets money, that will cause many of them to go cashflow negative, and since they are not billion dollar publicly listed companies with easy access to capital at low rates, that leads to the firm either failing or exiting the eBay relationship. Neither of these outcomes benefit eBay.

There are numerous other risks this exposes affiliates to -- eBay retroactively changes the rules, eBay becomes unable to pay out the money, eBay has extrinsic changes in their business which lower payments after affiliates have incurred upfront costs sending them traffic, etc. All of these risks make eBay a less attractive partner to do business with.

You can't always have everything you want. There is a tradeoff here: eBay will pay you substantial amounts of money, up front, absorbing most of the financing and execution risks. However, in return for this, you agree to having your business relationship governed by what will appear to be black magic.

[jamesteow]

What is LTV?

[philfreo]

life-time value (of a user)