Online Marketing Lesson 47: Introduction to Affiliate Marketing

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Affiliate marketing is a practice where a merchant is willing to let other people (called affiliates) promote its products or services, and for each lead or sale delivered, the merchant will pay a commission. Affiliate marketing has gained a huge popularity on the Internet, but the concept is much older, probably as old as commerce itself.

Have you ever noticed that taxi drivers in big cities always have a preferred hotel where they take tourists, and that they make sure to personally escort the tourists up to the front desk? This happens because the hotels “reward” taxi drivers who send clients to them. In other words, the taxi drivers work as affiliates for the hotels.

The practice gained popularity on the Internet because, contrary to what happens offline, it is possible to track accurately how many leads or sales each affiliate is sending, making the whole process more reliable and efficient.

Why Affiliate Marketing Works

Affiliate marketing has grown exponentially over the last years because it has advantages to both the merchants and the affiliates. Below we are going to talk about each side individually.

The Merchant Side

1. No Risk

The main advantage of having an affiliate program is the fact that the merchant can’t lose money with it. If a certain company spends money on a certain advertising campaign, there is always the risk that such campaign won’t work and won’t bring any sales, producing a negative ROI. With affiliate marketing this is not possible, as the company will only spend money on actual sales.

2. A Way to Complement Marketing

By using an affiliate program merchants can expand their marketing efforts and allow interested people to participate. Affiliates might have a larger reach, and they might also use creative ways to promote the products and services, meaning that the merchant will end up with a larger and more effective exposure in the market.

3. A Way to Outsource Marketing

Some companies like the affiliate marketing model so much that they rely on it exclusively for their marketing strategy. Obviously they need to pay significant commissions for this model to work, but in exchange they get to focus 100% of their time and energies into improving their products and satisfying their customers.

The Affiliate Side

1. No Product Required

Selling something is the most profitable business model. The problem is that conceptualizing and building a product or service is not trivial, and most people can’t or don’t want to do it. Affiliate marketing solves this problem by allowing you to sell the products and services of other companies. If done correctly, therefore, affiliate marketing can be just as profitable.

2. Flexibility

A big advantage of affiliate marketing is the fact that you won’t remain attached to a certain product, service or market. You can sell shoes today, web hosting tomorrow and luxury watches the next day. This flexibility allows affiliates to experiment with a wide range of markets, promotional strategies and merchants, with the objective of finding the most profitable deals.

3. No Customers

Once the affiliate delivers the sale, he will collect his commission and his job is done. In other words, he won’t need to worry about order fulfillment, customer support and similar activities which are time consuming, boring, and possibly expensive.

How Affiliate Marketing Works

Affiliate marketing has four main forms on the Internet, and below we are going to explain how each of them works.

CPS

CPS stands for Cost-Per-Sale, and it is the most common form of affiliate marketing. The merchant will pay commissions to its affiliates only when they deliver an actual sale. It is estimated that over 70% of all affiliate marketing programs work as CPS. The reason for this popularity is the fact that this model eliminates the risk of paying commissions for leads or clicks that won’t convert into clients and therefore won’t generate sales.

CPA

CPA stands for Cost-Per-Action, and it is a form of affiliate marketing where the merchant will pay a commission to the affiliate if he sends a lead who will take a certain action. This action can be the download of a brochure, the sign-up for the email newsletter of the merchant, the completion of a survey and so on. This model can be very profitable for affiliates because the leads won’t need to spend money or use their credit cards. Obviously this adds a risk to the merchants, and that is why CPA is used on only 20% of the affiliate programs around the Web.

CPC and CPM

In the early days of affiliate marketing some merchants would pay commissions to their affiliates based on the number of clicks that they would send to the merchant website (called CPC or Cost-Per-Click), or based on the number of impressions that the merchant ads would receive (called CPM or Cost-Per-Mille). Those models proved to be inefficient for merchants. Moreover, most online advertising programs work under a CPC or CPM basis, so merchants could always turn to those if they wanted to promote their products and services. Those factors combined practically killed the CPC and CPM affiliate marketing models, and today it is very rare to find affiliate programs using them.

Multi-tier

Under a multi-tier affiliate program, affiliates will earn commissions not only on the sales that they generate, but also on the sales of the affiliates that they refer to the program. Let’s suppose that merchant XYZ has a two-tier affiliate program where affiliates can earn 50% on direct sales and 25% on the sales of referred affiliates. If affiliate A refers affiliates B, C and D to the program, he would receive a commission of 50% on every sale that he generates, and a commission of 25% on every sale that affiliates B, C and D generate.

The two-tier model is the most common one, because when merchants go further (i.e., with three-tier or multi-tier) there is a risk that their programs will look like pyramid schemes (which are illegal in most countries).

The Technology

It is important that you understand the technology behind affiliate programs. Basically when an affiliate signs-up for a certain affiliate program, he will be given a unique URL that he needs to use when promoting the merchant’s products or services. If the homepage of the merchant is www.merchant.com, for example, the unique URL of a random affiliate could be www.merchant.com/123.html or www.merchant.com/aff=123.

This unique URL enables the affiliate management software to track which affiliate is sending traffic to the merchant’s website. If a visitor who came through www.merchant.com/123.html URL ends up buying the product, for example, the affiliate who has that unique URL would be credited with a sale and receive his commission.

Apart from tracking the affiliate unique URLs, most affiliate programs will also set a cookie in the browser of those visitors, so that if they end up purchasing not in their first but on their second or third visit, the affiliate will still be credited with the sale. Suppose that a visitor comes to the merchant’s website via an affiliate URL. The visitor does not buy anything on his first visit, but after a couple of weeks he makes up his mind and decides to buy the product. Even if he types the URL of the merchant website directly into his browser, for example www.merchant.com, the affiliate who had sent this visitor to the merchant website two weeks ago will still be credited with the sale because the visitor will be carrying a cookie with the id of the affiliate.

How long does the cookie remain valid? This varies from program to program and from network to network. Some programs let cookies remain valid for 24 hours, while others can go as long as 120 or 365 days.

Another difference to pay attention to is the hierarchy of cookies when the customers pass through the links of two or more affiliates. Some networks let the first cookie rule, so the affiliate who first referred the customer gets credited with the sale. Other networks and programs use the last cookie rule, so that the affiliate who sent the customer right before he finalized the deal will be credited with the sale.

Direct Affiliate Programs and Networks

Some merchants opt to offer their affiliate programs directly to affiliates. This means that the merchant itself will be in charge of recruiting affiliates, tracking the leads and sales, and paying commissions. The advantage of this structure is that the affiliates can have a closer relationship with the merchant. In other words, they will be able to exchange suggestions more easily, to negotiate the terms and commissions and so on. Usually you can identify the merchants that offer a direct affiliate program by a footer link saying “Become an affiliate” or “Affiliate program.”

The second option that merchants have is to go through a network. The advantage to the merchant is that he won’t need to manage the affiliates and commissions, as the network automates the whole process. Additionally, networks carry a large pool of affiliates who might be interested in promoting the products or services of the merchant. The drawback is that, apart from paying commissions to the affiliates, the merchant will also need to give a percentage of the sales to the network.

Affiliate networks also carry some benefits for affiliates. First of all they allow the affiliates to browse through a wide range of offers and products, and it is easy to compare which offers pay more or convert better. Secondly, affiliate networks have a very advanced infrastructure and tracking system, ensuring that the affiliate will get paid timely and accurately.

In the Resources section of the members area you will find a list with a wide range of affiliate networks that you can sign-up with.

Choosing the Right Offers

Once you start signing up with affiliate marketing networks, you will certainly be overwhelmed with the amount and variety of offers. For any given niche or market segment you will probably find hundreds of different offers. The question then becomes: how do you choose the right ones?

There are two factors that you need to consider at this point. The first one is how well the offer sells. In other words, the product or service must solve a real problem or need, it must be priced efficiently, the brand of the merchant must be strong and so on.

The second factor is how well the offer is aligned with your own personal interests or knowledge base. In other words, if you know or use the product yourself, if you have an interest in that niche or market, if you already have related websites and so on.

Ideally, you want to pick offers that will both sell well and be aligned with your interests. This will ensure that your affiliate marketing efforts will be profitable, and that you will be able to work at them consistently, because you like the niche to begin with.

Action Points

  1. Decide whether you want to work with CPA programs (where the traffic volume is more important) or CPS programs (where the traffic targeting is more important).
  2. Check our list of affiliate marketing networks, and sign-up with at least one of them. Navigate the affiliate control panel to understand how it works.
  3. Browse through the offers available and pick at least one that sells well and that matches your personal interests.

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