Sharing a Lobster
An online seafood merchant boosts sales by giving other Web sites a piece of its action.
By Ron Stodghill, FSB senior editor

(FSB Magazine) -- Snail mail may be slightly out of fashion, but lobster mail is doing just fine, it turns out. Just ask Dan "The Lobster Man" Zawacki, the self-proclaimed wacky visionary behind Lobster Gram, a Chicago-based retailer. When his 25 employees aren't decorating the company's office and its two warehouses with new lobster paraphernalia - the place is a veritable shrine to crustacea, crowded with big inflated lobsters, posters and desk ornaments - they are busy gift-wrapping tons of Maine and Canada lobsters each year and shipping them across the U.S.

Last year Lobster Gram's revenue rose 38 percent, to $7.8 million, and the company, which is profitable, expects it to rise another 30 percent this year. "I try to make selling lobster as fun as possible," Zawacki says, "but this is really serious business."

ROI_man_with_lobster.03.jpg
Shell game: Lobster Gram founder Dan Zawacki holds a 15-pound Maine lobster.
Network Effects
How much does affiliate marketing cost?
Experts say you should expect to pay $1,000 to $4,000 in setup fees, plus a commission of 0.5 percent to 20 percent of gross receipts, depending on your industry.
How many affiliate sites are there?
Around one million as of September 2006, but 20 percent, at most, generate significant business.
Can affiliate marketing damage my brand?
Yes, because many affiliates use spyware and other controversial means to push the marketer's message. Ask the affiliate network to spell out its spyware/adware policy before you sign up.
How do I know if a particular affiliate network is right for me?
Don't believe the hype. Instead, ask marketing professionals who are not your competitors for a candid evaluation.
SOURCES: Molander & Associates (molanderassoc.com); Shawn Collins Consulting (shawncollinsconsulting.com)

Zawacki attributes the bulk of Lobster Gram's recent revenue growth to an online promotional strategy known as affiliate marketing. This is how it works: Zawacki pays an affiliate management firm to deliver customers by placing links to his site on other sites. Those partner sites, called affiliates, generally pocket a 10 percent commission on the sales they generate by sending customers to Lobster Gram's Web site (livelob.com). The affiliate management firm takes another 3 percent on top of that commission.

The notion of one company's paying another to generate sales leads is hardly new. But with its ability to rack up millions of transactions at light speed, the Internet has spawned dozens of online affiliate marketing services. Industry leaders include AffiliateLink (affiliatelink.com), Commission Junction (cj.com) and LinkShare (linkshare.com).

Viral marketing

After years of relying on radio ads and catalog mailings to generate hundreds of telephone orders each week, Zawacki, 44, says that traditional media are no longer enough.

"There's a whole group of people out there who don't want to talk to anybody," says the CEO, an immovable native Chicagoan who owns one lobster warehouse on the city's North Side and another in Biddeford, Maine. "They just want to sit at their computers in their pajamas and order lobster. The affiliates help bring those people to me."

Lobster Gram advertises its products on some 2,000 affiliate sites, including upromise.com, couponbella.com and edealtracker.com. The sites generate about 6 percent of online sales and 5 percent of total revenue. Lobster Gram is the most heavily trafficked live-lobster site on the Internet, according to traffic-monitoring service Alexa.com.

"It's giving me some branding and some reach," says Zawacki, who views his main rivals as much larger gift companies, such as Hickory Farms and Omaha Steaks, rather than lobster specialty retailers such as thelobsternet.com and theperfectlobster.com.

The cost of running an affiliate program, says Zawacki, is quite reasonable. In January 2002, Lobster Gram ponied up a one-time fee of $1,800 to affiliate marketer Commission Junction, plus the 13 percent affiliate commission. Last year Lobster Gram paid about $50,700 in total commissions on affiliate sales of $390,000.

Zawacki recently hired a full-time affiliate-marketing specialist, Jim Lillig, 42, to police Lobster Gram's brand image on the Web. Lillig also monitors affiliate sites to make sure they are not hijacking commissions by using Lobster Gram's trademarked search terms to snag customers who would otherwise have gone directly to Lobster Gram's site. Most important, he strives to build stronger ties by developing promotional programs with the few partners, such as upromise.com, that drive most of Lobster Gram's affiliate sales. "Out of 100 affiliates, only five will make a sale," he says.

Benefits outweigh costs

One drawback of affiliate marketing: eroded margins. The company estimates that it makes a 3 percent profit on its affiliate-driven Web sales, compared with 5 percent on sales from radio ads and catalogs.

Why the difference? Some online customers click to an affiliate's site after hearing a Lobster Gram radio ad or browsing its catalog. When that happens, Zawacki ends up paying a commission on top of his traditional marketing costs to generate a single online order. "There are times when I could be competing against myself," he says.

Still, Lillig believes that the long-term benefits more than compensate for any erosion in the company's margins because of affiliate marketing. By the time a buyer comes to its Web site, he explains, he usually has already done his homework and has decided that Lobster Gram is the best value. That means he's more likely to become a loyal and profitable customer than someone who comes by way of a radio ad or catalog. "Affiliate marketing," says Lillig, "is mostly a fine way to reduce my customer-acquisition costs by attracting more repeat customers."

Even though the company's margins from its online affiliate sales are thinner than those from its traditional sales channels, the return is handsome. After salaries, fees, monthly payments to Commission Junction and various other marketing costs, Lillig estimates the firm's annual ROI on its affiliate marketing program at 112 percent to 115 percent.

Zawacki remains excited about the potential of affiliate marketing. "I have come to think of the Internet as its own kind of shelf space," he says. "My affiliates are helping add to my shelf space." And, he hopes, to more and more of those coveted clicks that lead to bountiful lobster sales.

Have you tried an affiliate marketing service for your business? Was it successful? Do you think the potential for new customers is worth the added expense? Tell us what you think.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.