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Web startups look for fresh revenue sources

The photo-sharing site Pinterest has experimented with new ways to make money.

As Pinterest's popularity exploded, it didn't take long for users to figure out there was something wrong with the photo-sharing site's links – or, rather, there was something different.

They still pointed to the right place in the end – an Amazon product listing for a camera, say, or an eBay auction for a dress – but only after bouncing the user past another server first. The redirection happened very quickly, almost invisibly, unbeknownst to most users. But why was it happening in the first place?

It turned out Pinterest was using a service called SkimLinks to turn plain product links into ones that made money. Every time someone bought something via one of the Pinterest-modified links, the bourgeoning social network would get a small cut. Even if nothing was purchased, the redirection allowed Pinterest to track those who were even thinking about making a purchase, giving it valuable analytics data.

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Other companies, meanwhile, have followed Pinterest's lead – scraping revenue off the back end by, say, referring users to restaurants, movies or music, and taking a cut when a purchase is made. It's a new way to make money as advertising revenue shrinks.

For many entrepreneurs, advertising is still a given – "a crutch for a lot of traffic based start-ups," says David Tedman, co-chief executive officer of Vancouver-based Invoke Media, which also has offices in New York City and Los Angeles. His company created the popular social media dashboard HootSuite, which relied on ads in its early days but abandoned them for alternate revenue streams, such as subscription pricing.

As the thinking goes, he says, "you figure out a way of driving traffic and you throw some ads up," with the expectation that the money will soon roll in, too.

But increasingly, that money isn't rolling in – even if the users are.

One problem is an oversupply of content – more ads in more places aren't creating more clicks, says Cella Irvine, CEO of Vibrant Media, a New York-based contextual advertising company that specializes in providing relevant, targeted ads.

But the bigger problem, she explains, is what's called banner blindness. "Consumers are increasingly technologically able or learning how to screen out ad messages," Ms. Irvine says. "The viewability of Internet-based advertising is a huge concern, because [advertisers] know that at least 30 to 40 per cent of ads are never seen."

This is why her company offers a pop-up ad product that's embedded in text, such as a blog. Ads appear when a user hovers over certain links, and they are hard to miss.

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But nowhere else is advertising more ineffective than on mobile devices, Mr. Tedman says. Banners and display ads simply aren't viable on such small screens, he says, and Facebook and Twitter are experimenting with highly targeted, sponsored posts instead.

And then there are those experimenting with affiliate links – links to products in online stores that earn the referrer a cut of every successful sale. Think of it as the online equivalent of a finder's fee.

Affiliate links are nothing new. Amazon and eBay have been running affiliate programs for more than a decade. But where services such as SkimLinks and its competitor VigLink differ, however, is by making it easier for businesses to leverage multiple affiliate services from the likes of Amazon, eBay, Best Buy and smaller partners all at once, with minimal effort.

All they ask is for a cut of your cut.

"We feel like people are less and less engaged with ads across the Web," says Aaron Weissman, marketing director at SkimLinks, which is based in San Francisco. "A display ad's fundamental purpose is to distract you from what you're doing. It's to drag you away."

Affiliate links, however, live not in a banner or a sidebar, but within a site or service's content area – say, a link in a blog post, a product description, or any old block of text. (Unlike some contextual ads, there are no pop-ups. It's just a link.) Some argue it's a less intrusive way of making money. But others disagree.

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"Trust is so important," says Scott Annan, the founder of Ottawa-based StartupPlays, which sells written start-up guides to entrepreneurs. "So unless it's upfront and it's obvious that you're promoting a product, it can really hurt you in the early days."

Pinterest, for example, is no longer using SkimLinks for exactly this reason. The company was not upfront about the practice until its users found out. To the average browser, Mr. Annan says, "it's unclear that you're profiting from links."

But not every user has a problem with profit. Last year, the popular blogging platform WordPress began offering some of its high traffic VIP bloggers the option of implementing SkimLinks on their sites. The revenue is evenly split between WordPress and the blogger after SkimLinks takes its cut.

Mr. Weissman wouldn't reveal exact figures, but he said the arrangement has worked well.

But some organizations have found that "affiliate links weren't generating as much revenue as more traditional ads, such as pre-roll or display ads," says Catalina Briceno, director of industry and market trends at the Canada Media Fund, which provides financial support for new digital initiatives.

A big reason is that, unlike traditional advertising, earning money from an affiliate link requires more than just a user's click – a sale must also be made. If the user, say, decides to purchase at a later date, or buy a product from another merchant, it's likely that no affiliate earnings will be earned from the sale.

The industry, however, is still evolving.

"We consider it to be an emerging trend," Ms. Briceno says.

It's possible that investors think so as well. SkimLink's primary competitor, VigLink, is backed by Google and a host of other big-name investors. SkimLinks, meanwhile, now drives $30-million in consumer sales across 27 affiliate networks worldwide according to TechCrunch.

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