Recently, I got a call from the president of a major content provider -- one of those services that personalizes information for "portals" such as ISPs and search engines. He was interested in developing his own revenue-sharing program to drive users to his website. It was obvious, he said, that the revenue-sharing model could dramatically lower his cost of acquisition and allow him to all but eliminate his traditional marketing and advertising budget. What he wanted to know was how to structure the deal.....

1998 has been proclaimed "The Year of E-Commerce." Amazon.com now has a $4 billion valuation ($1.7 billion MORE than Barnes & Noble), CDNow and Music Boulevard each raised tens of millions of dollars in their respective IPOs, and Yahoo! (with a $7 billion valuation) just purchased Viaweb (which hosts 1000 small e-commerce sites) for $49 million.

Much of these astronomical valuations is based on a vague concept of Internet presence: with no physical stores or inventory, many of these online retailers are essentially Marketing companies -- worth their weight in page impressions. To extend the visibility of their brand and increase online sales, many of the larger retailers have embraced a revenue-sharing model, giving away a percentage of the sale to grab all-important marketshare.

By paying individual website owners commissions for sales that they help drive, a site's cost of acquiring new customers can be reduced substantially. For these retailers, the decision to give up 5% to 20% of the sale price is a no-brainer.

Not surprisingly, a growing number of online retailers are following pioneers like Amazon.com and One and Only Internet Personals into the fray. Refer-it (http://www.refer-it.com) lists hundreds of programs that offer everything from free streaming content to hundred-dollar bounties for new accounts. It would seem that the latest mantra of e-commerce might be "It's revenue-sharing, stupid!" But finding the right formula for both the site owner (the affiliate) and the e-commerce provider (wholesaler/retailer) is less obvious.

There are two major types of revenue-sharing programs -- affiliate (also called associate) programs and bounty (also called referral) programs. Music, book and vitamin retailers tend to offer affiliate programs, telling their associates, "I'll pay you a percentage of the sale when a visitor to your site clicks through and buys one of my products." Sites like Music Boulevard, Autoweb and Darwin Keyboards, which pay website owners anywhere from a 5-15% commission, best exemplify the affiliate model.

The advantages of affiliate programs are that, in theory, a site owner can continue to earn money from the same "customer." That is, if a visitor continues to come to an affiliate's site to make his online purchases, the site owner will earn a commission on every sale. Well, maybe. And this is where it gets tricky -- who owns the customer? This is the hardest question to answer in this model. Some programs pay forever, others only for the first 90 days, others only on the FIRST purchase. And what if the visitor clicks through to the retailer's site, "window-shops" only, then returns directly to that retailer's site 10 days later and makes a purchase? Does the referring site still get the credit?

Not only must the above policy questions be answered, but the technology behind them must be developed. No small feat when you consider that Amazon.com has more than a million items for sale, and over 40,000 affiliates. Keeping track of which affiliate the customer comes from, what he buys, and when he buys it can quickly become more complicated than building the storefront itself!

Enter the bounty model -- one that has existed in the off-line world, formally and informally, since the beginning of time. Bounty program managers say, "I'll pay you a fixed price for bringing me a new customer or a 'hot lead.'" Let's pretend you own a florist shop and you partner with the local undertaker. For every grieving family he sends your way, you pay him a one-time bounty of $25. After that, presuming your crocusses didn't wilt, that family will return to you the next time there is a bereavment.

It works just as well online as it does off. WebCards (http://www.printing.com), which puts homepages on postcards, is a good (and more cheery) example in the online realm. They pay the website owner $1.00 every time a visitor to his site clicks through and fills out an online form requesting further information. It's the site owner's job to deliver the person to them; it's WebCard's job to convert the lead to a paying customer.

With a bounty program, that's all there is to it. No issues about who owns the customer (WebCards does), tracking individually priced items (it's always $1.00), or trying to lure the customer back to buy from you instead of the retailer. And from a technology standpoint there's no contest -- any small retailer or business owner can easily develop and maintain this type of program. The obvious difference for the website owner is that she needs to continue to attract NEW visitors to her site -- she can't "retail" this particular offer to the same visitor again.

I was glad to see that that web executive from the content provider was giving some serious thought to his revenue-sharing plan. With the e-commerce boom, the idea-of-the-moment is often portrayed as a quick fix, requiring little thought to magically turn silicon into gold. The fact is, revenue-sharing isn't web alchemy, it's real business. And those who set about implementing such a program should pause to consider the strategic implications. For your business, it could be the difference between IPO and R.I.P. (I know a good florist...)

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James L. Marciano is the CEO of Up-Set, a NYC new media company founded in August 1996. In addition to building online communities (or "intersets") such as TheSquare - http://www.thesquare.com, for Ivy League grads, and i-Site - http://www.i-site.org, for the blind, Up-Set has created Refer-it - http://www.refer-it.com the definitive guide to revenue-sharing programs on the Internet. Prior to founding Up-Set, Mr. Marciano was a strategy consultant for seven years; he received an AB in Social Psychology from Harvard College in 1988, and an MBA in general management from The Amos Tuck School at Dartmouth College in 1993.