But now that investors have stopped rewarding dotcoms with endless pocket change, Internet companies are getting pickier about how they spend their ad dollars. Online, that means banner ads are suffering in favour of so-called pay-for-performance models that let online retailers pay only for ads that result in a sale.

Enter "affiliate marketing," an online marketing strategy that allows e-commerce companies to place links on hundreds or thousands of related sites. Rather than pay for these links up-front, the merchant provides either a flat fee or a commission (usually 10 per cent or less) to the affiliate sites for every purchase that results from the links.

For example, a site devoted to skiing contains links to retailers that sell ski equipment. If a Web surfer clicks on the link and buys merchandise from the retailer, the retailer pays the content provider a commission on the sale.

"From the advertiser's standpoint, it is Nirvana," says Jim Nail, a senior analyst at market research firm Forrester Research Inc. in Cambridge, Massachusetts. "You get the exposure, but you don't pay a dime for it unless you make a sale."

Retailers like Amazon.com Inc. and CDnow Inc. have been using affiliate marketing strategies for a few years, but the concept is just beginning to gain momentum in Europe.

But providers of affiliate marketing services hope that European online advertisers will latch onto the programmes even faster than their US counterparts did. "The European guys missed the whole first wave of advertising online and are saying they don't want to make the same mistakes as the Americans did," says Gordon Hoffstein, president and chief executive of Be Free Inc., a Marlborough, Massachusetts-based online marketing concern that manages affiliate marketing programmes.

Hoffstein says that Be Free recently opened up a small, five-person office in the UK and is planning to expand to France and Germany within the year.But Europe presents specific challenges to companies setting up networks of affiliate marketers. "In the US, one retailer deals with 250 million people.

But in Europe, someone like bol.com has six or seven different offices that deal with the same number of people," says Hoffstein. "It makes building an affiliate network more challenging."

Additionally, an affiliate programme isn't effective unless it contains a large number of sites. A merchant needs thousands of affiliates in order to attract enough consumers to make the strategy effective. The rule of thumb is that 20 per cent of affiliates account for 80 per cent of transactions-and like the famous half of a company's advertising that works, it is difficult to know which affiliates will draw those transactions.

But analysts predict that partnerships between Websites in the form of affiliate programmes will play an increasingly important role in the online marketing landscape, posing a threat to online Web banner ads. According to a recent study by Forrester that surveyed 50 US online retailers, 13 per cent of the companies' revenues came from affiliate programs. By 2003, Forrester says that percentage is likely to rise to 20 per cent. On an average, each retailer had roughly 10,000 affiliates.

Even online ad sellers concede that companies are applying greater scrutiny when it comes to spending online marketing dollars. "The combination of tighter marketing budgets and an increased expectation for accountability have forced companies to think hard about how they invest in advertising," says Antti Eranne, strategic development director for digital media group 24/7 Media Inc. in Amsterdam.

The effectiveness of the affiliate programmes, because they automatically link like-minded sites together, is greater than the effectiveness of traditional banner ads. According to Nielsen Net Ratings, for every 1,000 banner ads that appear online, only three draw mouse clicks from Web surfers. On the other hand, affiliate sites get roughly 10 times the click-through rates of banner ads, meaning that for every 100 affiliate ads, three result in an interested customer.

Hoffstein admits that affiliate marketing will never totally replace online banners on the Web. "There's no way affiliate marketing can make up an entire marketing programme; there are a whole variety of ways to tackle this," he says. "What we do know is that people can't afford to spend $10 million [10.5 million euros] on one television spot, and while people are looking for more cost-efficient ways to advertise, affiliates are a smart way of trading space."

-- The Wall Street Journal