Affiliate Marketing 101

Wikipedia defines affiliate marketing as “an Internet-based marketing practice in which a business rewards one or more affiliates for each visitor or customer brought about by the affiliate’s marketing efforts.” Basically, this means that an affiliate is rewarded when he or she directs a customer to a merchant’s site, and that customer purchases a product. In other words, you as the affiliate, get paid a commission when someone buys a product or service that you direct them to through a special link. Now, that is somewhat of a simplification, and it only covers one compensation model. What you’re compensated for is only half the equation, however. How you direct customers to a merchant’s site is important as well. The methods you use to do this may be dictated by the product, service or even compensation model.

Are you confused yet? Let us go into more detail on how affiliate marketing works. The basic transaction in affiliate marketing goes like this:

  1. A company (sometimes called “advertiser,” “retailer” or “vendor”) with a product or service to sell makes an  agreement with you, and other website owners, to become their “affiliates.”
  2. You, as the affiliate (sometimes called “publisher”), places a link that the marketer has assigned to you on a website (not necessarily your own), allowing visitors to hyperlink to their website.
  3. You get paid for this on the basis of click-throughs, sales or other actions.

Networks of servers and complex software keep track of the whole transaction. Because of all the technological systems involved, affiliate marketing programs can be set up to display ads only to a very targeted audience. Impressions can be delivered on the basis of not only which website a person is visiting but on much more granular details, such as the keywords they are using to search online. Companies as diverse as Amazon, National Geographic and American Express have found that affiliate marketing is a powerful and cost-effective way to find new leads and turn them into customers.

This kind of advertising is sometimes referred to as “pay for performance” or also “revenue sharing.” The reason for that is, unlike traditional advertising where companies themselves primarily pay raise awareness of their product or service, affiliate marketing commissions are generally based on how well the affiliate’s promotion methods work. Commissions are commonly set on the basis of cost-per-sale, cost-per-action, cost-per-lead or even cost-per-click.

To support the affiliate marketing process a number of infrastructure companies, such as Commission Junction , Clickbank and Pepperjam, serve both the marketers and their affiliates. Individual affiliates are drawn to these networks because they’re easy to join and it helps them market products and services that can interest a wide variety of potential customers. Companies find it convenient to use these networks to handle the signing and support of affiliates. This support can include anything from tracking referrals from and paying out weekly or monthly commissions for every single affiliate, to answering affiliates’ technical support questions on the intricacies of Internet-based affiliate marketing, right down to how to place an advertising banner on a website.

Affiliate marketing can be handled in-house as well. Dedicated software exists that allow a company sign up and manage a large number of affiliate marketers without an external affiliate manager. This frees companies from the standardized compensation programs offered by the networks, allowing them to write their own contract and create their own rules about how the affiliate marketing program will work. It also lets them save on commissions, since there’s no middle-man between them and their affiliates. Often, companies that run their affiliate program in-house will offer larger commissions and tend to be more accommodating with their affiliates.

Now that we’ve discussed how exactly affiliate marketing works, let’s explore the different compensation models commonly employed today.

Earlier, we mentioned 4 different compensation models: cost-per-sale (CPS), cost-per-action (CPA), cost-per-lead (CPL) and cost-per-click (CPC). CPC is an old model that was commonly used in the 1990’s, but has been largely retired because of issues with tracking and click fraud. However, through the work of Google and Overture (now Yahoo), it has remained as an advertising channel now commonly referred to as pay-per-click (PPC). As an affiliate you may use PPC as a promotion method, but since it is not an affiliate compensation model any longer, we will not discuss it here. CPA and CPL are very similar, and for that purpose we will describe them together as a single compensation method. CPS is the most common method which companies compensate their affiliates, so we will discuss that first.

Cost-per-sale (CPS) is the easiest compensation model to understand. A company pays the affiliate a percentage of the order amount (sale) that occurred when the affiliate referred a customer (usually via a link) to the company’s website. Online retailers, such as Amazon or Newegg, typically use this model. When working with this model, you as the affiliate should weigh the commission percentage with the average sale or item amount. For example, retailers like Amazon typically pay a low commission percentage, around 5%. However, as the largest online retailer, Amazon does offer a very wide range of products, so the low percentage of the sale can be offset by you promoting only high-ticket items. In contrast, products sold through Clickbank, a retailer of digital and informational products, typically offers large commissions (up to 75%) on products sold through them. Products here tend to vary greatly in price, but with such large commission margins, a product that sells for as little as $5 could be worth your while to promote, provided that you can generate a large volume of sales.

Cost-per-action (CPA) and cost-per-lead (CPL) is when a company pays you a flat commission if a referred visitor performs a specific action on their site. This action could be anything from filling out a form, joining a mailing list or creating an account on their website. These compensation methods are often popular with credit card companies, insurance providers, loan and mortgage providers, movie and game rental services, music and movie clubs, etc…the list can continue almost indefinitely. This compensation method is very attractive for affiliates largely because these programs convert well; the action that referred leads perform is often free or costs a very small amount. Some companies have given this method a bad reputation because of their unethical business practices. They would offer a “free” trial of a product in exchange of shipping and handling charges, and after a short period (sometimes a little as 7 days) would automatically bill the customer and send them more of the product. They would not mention this practice on the sales page, or would hide it in confusing legalese in the terms and conditions of the offer. Because of the few companies that operated in this fashion, many pay-per-click advertising networks such as Google’s AdWords, will not approve ads for “free” offers. CPA and CPL remains a valid compensation model popular with many companies, and extremely lucrative for affiliates.

Now that you understand what affiliate marketing is and the most common compensation models, you’re now ready to learn how to direct leads, or potential customers, to click on your assigned affiliate links.

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