The Internet has changed the way we do business as much as it’s changed so many other things about our culture. What began with a military computer networking scheme that developed into ARPANET, which connected a number of universities around the United States, has turned to a necessity for both individuals and businesses across the globe. This has led to a revolution in how business is conducted. In fact, few, if any, business functions today are not in some way informed by the Internet and that is especially true in the realm of sales and marketing. When you think about online marketing, what comes to mind? Search engine optimization or e-mail marketing are probably at the top of the list, but there is something else in the marketing arsenal that you may be overlooking: Affiliate marketing.
How Affiliate Marketing Works
At its most elementary level, affiliate marketing is a fairly simple and straightforward affair in which one business partners with another, placing an ad link on the second company’s website and paying that company for every sale that a visitor sent over from that affiliate site makes on the seller’s site.
It is a solid, reciprocal relationship. The affiliate drives customers to the seller and the seller pays the affiliate for the traffic. This type of business arrangement, where the seller pays a commission for sales leads, is referred to as revenue sharing, and has been around in one form or another for as long as large scale sales efforts have existed. It entered the world of ecommerce the same way that so many other innovations have, through the adult entertainment industry. However, while it may have begun with a company called Cybererotica, by 1994 the concept had spread into the Internet mainstream with a music company called CDNow and its BuyWeb Program.
It began, as all such ideas, as the solution to a business need. Geffen Records wanted to market its music directly to consumers over the Internet but didn’t want to actually do the job itself. CDNow developed a program that would directly link an artist’s page on CDNow’s site to the artist’s music page on the Geffen website. It didn’t take long to catch on with other Internet-based companies.
Amazon launched its own pay-per-action affiliate program in 1996. If a visitor to the affiliate followed the link to Amazon and bought a book, then that affiliate received a commission. Amazon may not have been the first on the wagon with this idea, but they were certainly the best. Their program became the model for affiliate programs everywhere and in 2000 they were awarded a patent (6,029,141) on all of the most important parts that go into an affiliate program.
The rise of Web 2.0, with the improved communications it allows, as well as blogging and the development of interactive online communities and social networking sites have changed the way affiliate marketing is conducted and have made it much harder for the criminal (or merely the unscrupulous) to make money. Today, affiliate marketing has grown into a massive industry with many new and novel types of affiliate arrangements.
Managing an Affiliate Program
Taking an affiliate program from concept to completion requires knowledge of the audience you are trying to reach, a proper budget and, most of all, the right choice of program (or programs) and compensation package to fit your needs.
Know your Audience
Any first year marketing student will tell you that you have to know your audience before you reach them. If you are selling a product that will appeal to a mass market, such as music or electronics, then you want a broad presence that will be seen by many people. If, on the other hand, you sell medical supplies or some other niche item, you will want to target your advertising more carefully, concentrating on the people most likely to be interested in your products and services.
Setting a Budget
Affiliate advertising is, usually, a pay-per-action (also known as a cost-per-action or CPA) affair. In other words, something that you and your affiliate have made an agreement about happens, such as an ad link being clicked and a sale being made, and you owe that affiliate money. This is different from pay-per-click (also known as a cost-per-click or CPC) arrangements where payment is made for each click on the ad. That means, whether or not you convert that click into a sale, the affiliate gets paid. This is in stark contrast to display ads where you pay once and the more customers respond the cheaper the ad (in terms of cost per customer). Because of this, it is important to be able to set an advertising budget-especially for pay-per-click arrangements-large enough to pay for the number of expected clicks or actions, regardless of the number of sales that result.
Types of Affiliate Programs
While there are no real industry-wide standards for categorizing affiliate marketing sites, the following is a basic list of the types of sites that are used by affiliate marketers:
- Click-per-action networks are affiliates that expose their advertisers to their own network of affiliates (also known as top-tier affiliates)
- Search affiliates that use pay-per-click search engines to promote advertiser offers
- Co-registration affiliates that include offers from other companies during the registration process for their own website
- Blogs and RSS feeds
- Email list affiliates
- Comparison shopping and directory sites
- Loyalty sites that provide some kind of reward system for purchases
- Coupon and rebate sites
- Content, niche and product review sites
- Personal websites
Getting Paid: How compensation works
You are paid by your customers, your affiliates are paid by you, but how? There are a number of different compensation schemes and either you or your affiliate will have a preference for one or another. In some cases the issue is negotiable, in others it is not. The various compensation schemes are:
- Revenue sharing, also called “cost-per-sale” (CPS) is the compensation method of choice today, accounting for 80% of all affiliate programs today.
- Cost-per-action (CPA) is the second most prevalent scheme in use today, accounting for another 19% of affiliate programs.
- Other methods such as cost-per-click (CPC), where the advertiser pays for each click, and cost-per-mille (CPM), where the advertiser pays for every 1000 ad views, come in at 1% of affiliate programs. The use of these methods declined over the years for a variety of reasons that included the necessity to pay even though the ad failed to produce sales and, in the case of cost-per-click, fraud. These methods are, however, still used extensively in display advertisement and paid search programs.
CPS and CPA schemes have higher expectations before a commission check is issued to the affiliate. In fact, as the names imply, the customer has to buy something. Only then will the affiliate receive payment. In this arrangement the advertiser and the affiliate share the risk of the venture. It is from this model that affiliate marketing gets its other name, “performance marketing.” To make it under these rules, the affiliate must send only the best leads since it is only after a sale is made that the advertiser will reward the affiliate.
While the vast majority of affiliate programs are simple, one-tier affairs, it can go beyond that. Such programs fall under the heading of multi-tier marketing: An advertiser makes an agreement with an affiliate. This is the “top-tier” affiliate. That affiliate then attracts other affiliates and the deal moves down to them. Our top-tier affiliate is paid at the agreed upon rate and gets a commission on everything that the “second-tier” affiliates bring in. Any referral program that develops beyond these initial two levels is considered a multilevel marketing or network marketing scheme. Given the terrible reputation these businesses have, it is wise to simply avoid them completely.
It is not difficult to find affiliates. In fact, almost any website could be recruited as an affiliate. Bear in mind that high traffic websites will likely prefer CPM or CPC deals because these have a lower risk than CPA or revenue sharing. Some places to look while recruiting include:
- Affiliate networks that already have a number of advertisers. These networks normally have a large number of potential affiliates for your company.
- Sites that are relevant for the same audience that the advertiser is trying to reach. As long as the potential affiliate’s site is not in direct competition with the advertiser, it can work.
- Vendors or existing customers could be recruited as long as doing so doesn’t pose any legal or regulatory issues.
- Affiliate program directories
Pros and Cons
The cost-per-sale model makes affiliate advertising very popular since you only pay for results. The biggest con regarding this method of marketing is history itself. Spam, adware, spamdexing, trademark bidding, pay-per-click fraud and a number of other issues have given this kind of marketing a bad name over the years. These troubles, however, are becoming less and less prevalent due to advances in technology and better methodologies for dealing with them. This, coupled with the way one only needs to pay for results, leaves affiliate marketing as a strong way to reach the audience you are looking for.