Not too long ago, I had the pleasure of leading a cooking class at St. Martin de Porres in New Haven Connecticut. We had a blast! For the past 10 years I’ve fished for Lobsters off the Connecticut Coast as a hobby, and I took the catch of the day down to the boys at St. Martin de Porres.

These Lobsters were pulled from the waters off Guilford, Connecticut. Long Island Sound suffered a massive lobster die-off over a decade ago, and stocks have recovered nicely in some local fisheries. For $60 per year, the state allows you to tend as many as ten lobster traps.

To say the boys were happy to add some seafood to their lunch menu would be an understatement! They loved checking out the creatures – One of the boys wanted to take one home as a pet. He was eating lobster 20 minutes later with no regrets.

I also brought along an old lobster trap with me. They got to see how the lobster enters the trap and gets caught which was really neat.

St. Martin de Porres Academy is a faith-based nativity middle school that provides tuition free, extended day education for underserved girls and boys from low-income families in the New Haven area.

The lobsters we cooked were steamed – in my opinion the best way to cook lobsters. Boiling can produce a waterlogged & overcooked lobster. I’ve been cooking lobsters for a long time and if there’s one piece of advice I’d give, it’s to cook them for less than you’ve been taught. It’s amazing how the flavors come out if the lobster is cooked for even a minute or two less than you’d expect.

In case anyone’s interested, here is the Keyen Farrell go-to steamed lobster recipe:

1. Fill the pot with two to three inches of water.
2. Add 1/4-1/3 cup of salt per gallon of water.
3. Insert a steaming rack into the pot if you have one. If not, you can use a bed of smooth stones.
4. Bring the water to a boil.
5. Add the lobsters to the pot, cover, and begin timing
6. Place the lid on the pot and return the water to a boil.
7. Plan on 10 minutes for the first pound of lobster, and two additional minutes for every additional 1/4 pound. A 1 1/4 pound lobster will take 12 minutes, a 1 1/2 pound lobster should get 14 minutes, and a 2 pound lobster will need around 18 minutes.

It still surprises me how many incentive marketing & cash back websites maintain minimum payout thresholds. In a space where trust is paramount, payout thresholds destroy credibility. If users must accrue $10 or $20 in rewards before seeing those earnings, many will invariably hit the eject button. Site owners mostly use payment thresholds as a means of withholding payouts from low-earners under the guise of covering transaction costs. The transaction cost argument no longer holds water given the efficiencies of bulk e-payments. PayPal mass payments cost a mere 2%. If you choose to go the snail mail route and cut paper checks, your costs will be astronomically higher. I, Keyen Farrell say, “Don’t do it!” Unless you are operating at enormous scale (think Ebates,  NetFlip circa 2002), or have unusually lucrative offers, the price of cutting checks is simply too high. Keeping your transactions purely electronic will save you time and avoid needless headaches for you and your users. You can even designate a single bank account into which commission revenue flows and from which incentive payouts are drawn.

If you follow the Zero-Threshold Rule, your visitors will be inclined to complete more, not less offers on your site. You may find that users complete one or two offers to test it out. Yet once you hold up your part of the bargain, they will almost always return. The Zero-Threshold Rule builds trust with your users and should not be ignored as a selling point. You can further leverage the rule by working it into your site’s messaging. It’s astounding how many incentive websites have not only minimum payout thresholds, but bundle offers together, forcing users to complete several offers at one time. Bundling offers is the antithesis of the Zero-Threshold Rule and not only destroys your user base but compromises the quality of transactions. Sustained incentive marketing rests upon happy users and happy merchants. The last thing you want is low-quality, chargeback-prone transactions caused by bundled offers. If your site contains a varied selection of offers, and users are given the flexibility to complete which offers and how many, everyone comes out on top.

One of the toughest questions facing an incentive website or any e-commerce website for that matter, is the question of price. In the case of the former, price refers to the size of the cash reward (rebate) offered to users. The goal is to size the rebate such that it maximizes net income. If the goal is to maximize ROI, this sweet spot is critical. And if the goal isn’t to maximize ROI, there are probably greater things to worry about.  :)  Most incentive marketers will size their cash rebates based on trial and error, but there’s a far more precise way to determine the optimal rebate. The following is a walk through of how to solve for the optimal incentive rebate.  Using some high school algebra and calculus. I applied this technique to determine optimal rebates for the network of incentive websites I created in 2003. This technique allowed Topaz Financial to drive more than 100,000 completed advertiser actions at margins that would not have otherwise been possible. If the math looks daunting, there are many tutorials for solving these equations. A search for ’solving systems of equations’ and ‘differential equations’ should turn up helpful resources.

To illustrate how it works, let’s create a hypothetical situation. We’ll assume that your incentive website offers a cash rebate for each completed action, in this case, the purchase of a pair of shoes. Further, let’s assume the merchant pays you a $25 commission for each completed sale. We want to determine the size of the cash rebate that maximizes total profit. Your first inclination might be to offer visitors a large share of your commission to entice a greater number of users to complete the purchase (action). Yet paying out a large share of the commission could cause the reduction in net income that outweighs the increase in volume of actions. On the one hand you want to offer a rebate that entices a large number of visitors to complete the offer. On the other hand you want to offer a rebate small enough to keep your net commission high. Likewise, there is a positive relationship between the size of the rebate and volume of actions completed. To make the math simpler we will assume that this positive relationship is linear. In other words, we will assume that a given change in the rebate will always induce the same increase in purchases. Admittedly at extremely high or low rebates this assumption may not hold, but for our purposes it is a fair assumption.

To start, we need to collect a few data points. You’ll need to experiment to see how users react to a few different rebates. The benefit of the linear assumption is that we only test 2 prices in order to calculate the slope of our line.

Assuming the offer is currently running, you already have one set of coordinates. Let’s assume that when an offer has a rebate of $5 there are 15 completed actions. To find the second set of coordinates you’ll want to set a new rebate and measure the number of completed actions. Let’s say that when we increase the rebate to $10, there are 40 completed actions. To put it in math terms:

Let us denote pairs of shoes sold as Y and rebate as X.

The equation of Y in terms of X is a linear function of the form Y = A + B X, where A and B are constants.
This equation passes through (5,15) and (10,40)
Thus,
15 = A + 5 B Equation 1
40 = A + 10 B Equation 2

Subtracting Equation 1 from Equation 2,

40 = A + 10 B Equation 2
15 = A + 5 B Equation 1
25 = 0 + 5 B

Or B= 5 =25/5

Substituting the value of B in Equation 1,

15 = A + 25
or A = -10 =15-25

Thus, the equation is of the form
Y = 5 X – 10
where X is the reward and Y is the number of shoes sold

We have to maximize profits Z= (Commission-Rebate) x Number of shoes sold= (25-X) Y
but Y= 5X -10
Therefore,
Z=(25-X) (5X -10) = 125 X -250 – 5 X^2 + 10 X = O r Z= -5 X^2 + 135 X -250

Our task is to maximize profits or maximize Z= -5 X^2 + 135 X -250
To find the maximum value of Z we differentiate Z with respect to X and equate it to zero:

dZ / dX = – 10X +135=0
or X = 135/10= 13.5

Thus to maximize profits, the rebate should be 13.5
Profit = Z= – 5 X^2 +135 X -250 = 661.25

Since  a rebate of 13.5 would mean selling a fraction of pairs, we can offer a rebate of 13 or 14 which would give an identical profit of $660 (see table).The most challenging part of the process is holding the traffic sources and number of clicks to the offer constant while you are testing. If there are huge swings in the number of users exposed to the offer, or if the composition of traffic changes drastically, your results will be less trustworthy.

A few years ago, I authored a guide to incentive marketing titled Mastering Incentive Websites. In it, I shared my observations of the industry and detailed the steps I took to create Topaz Financial, a network of Incentive Websites that ultimately drove more than 100,000 advertiser actions. Topaz Financial was also chronicled in the spring 2006 Issue of Colby Magazine. As we head into a new decade, I want to share two pieces of advice that I hope those who currently are in or aspire to be in incentive marketing, may find useful.

Free Trials are The New Leads

Several years ago there was no shortage of advertisers eager to partner with incentive marketers on a pay-per-lead basis. As I sit here writing this in 2010, it’s readily apparent that the pay-per-lead has gone the way of the dodo. The few pay-per lead programs that remain grant payouts well below what’s required to actively promote them. Pay-per-lead offers have always been the incentive marketer’s Holy Grail since they enable conversion rates that are many times those of pay-per-sale affiliate programs. Furthermore, pay-per-lead programs offer more consistency than pay-per-sale programs since the payouts are fixed rather than a percentage of a final sale. Fixed payouts are always more attractive to users and convert at a significantly higher rate.

It should come as no surprise that in the Incentive marketing space, what matters at the end of the day is conversion rate. Each element of an Incentive Website, from the visitor funnel to the individual offers must be tuned to drive the highest conversion rate and ultimately the highest revenue per visitor.  In 2005 we experienced conversion rates as high as 20% on certain pay-per-lead offers.

As true pay-per-lead opportunities (think lead generation) have evaporated, a related model remains a viable source of conversions: free trials. Most obviously, free trials involve no immediate cash outlay from users, lifting conversion rates. Secondly, the purchase funnel is far shorter and more direct than nearly all pay-per sale funnels. Free trials are an offer type where the merchant’s goals are directly aligned with yours. The difficulty with pay-per-sale affiliate programs is that the purchase funnel is long and can be downright confusing to the user. Many pay-per-sale affiliate links will direct users to a landing page that is either irrelevant or too high in the purchase funnel. This is often an intentional merchant tactic since not all sales or actions may be required to generate affiliate payouts. You should always read the fine print in the terms of every pay-per-sale affiliate agreement. Free trials are a key strategy to keep your incentive marketing competitive this decade, and as models of digital media distribution continue to evolve, the opportunities will only grow.

Don’t Go In-House

If the volume of actions you drive becomes significant, it’s more than likely that the merchant will seek to bring your relationship in-house. Removing the affiliate network from the equation results in deep and immediate cost savings for your merchant partner – since affiliate networks charge merchants as much as 30% of each completed action, merchants will happily bump up your payout as an incentive to lure you in-house. My advice is simple: Don’t do it. While the prospect of higher payouts may seem alluring, in-house relationships can be fraught with trouble even among the most reputable merchant sets.

Affiliate networks provide a valuable service to you by acting as a powerful intermediary. If you’ve gone in-house and a merchant decides to bilk you, there’s no recourse. The merchant is only risking your relationship. In fact, if you have a blowout month in which you are owed a large commission check, an unscrupulous merchant may simply decide that the risk of losing your referrals is worth stiffing you on the check. In an affiliate network, this merchant’s actions would jeopardize their relationship with that network’s entire affiliate base. Good networks will de-activate deadbeat merchants and fight for you if you’ve been wronged. Some merchants will reverse or cancel more transactions than they should, and the network is a valuable arbiter of such disputes. You’ll likely find that your network is eager to lend their ear when you have issues. They recognize that the integrity of the network rests on a quality publisher and merchant base. You can’t have a quality network without both. And don’t forget, the network gets paid when you do! So when the phone rings from your top payer’s affiliate manager, say yes to the free schwag, but say no to going in-house!