Affiliate Marketing: An Introduction

Have you ever wandered how you can deliver even greater efficiencies from your online marketing efforts? Look out for the new kid in the crowded online marketing block: Affiliate marketing. Instead of advertisers paying for online ad space via a Cost-per-Click (CPC) and Cost-per-Impression (CPM) model, (for more information on these models see our previous article on this here), advertisers can now opt to pay via a Cost-Per-Action (CPA) model, where they only pay when a sale is made.

A merchant scenario:

So what are the benefits of a business selling product via an affiliate program? Let’s say you are selling a subscription based online space for families to keep backups of their digital photos. You charge $10/month for this service. Now with this kind of service, you need as many ongoing subscribers as possible as the incremental cost of servicing them is negligible. Let’s assume that your internal cost of acquiring a customer is $100. Now you are looking to set up an affiliate program to encourage your business partners to send as many customers your site as possible. In this case, you decide to give your partners $50 for every paying customer you send your way. Thus you are now expanding your “sales team” organically and reducing your customer acquisition costs while improving your return on investment.

A website publisher scenario:

What about website operators? What is in it for them? Well, as an example, you run a website that reviews the latest and greatest in video games. Your target readership enjoys reading your reviews and you make money via advertising through a traditional cost per click or cost per impression model. To expand your revenue potential, you sign on to Amazon’s affiliate program and link your game review of Mario’s Galaxy sold on Amazon’s site. Every time your readers click on the link and purchase the game, you earn a commission (usually 4%). Whilst these amounts are small, they are scalable and can act as an ongoing passive income for your website.

How does it work?

In the past, managing your affiliate partners was a labor intensive exercise. Now with improvements in web technology many of the tasks (such as tracking sales, codes, payments etc.) are now done automatically.

When you sign up as an affiliate partner with a merchant, you will be given a special id and a unique URL link that you can place on your website. Be sure that you read their terms and conditions – some do not allow these links to be used on email campaigns or from paid links from search engines.

Once you have placed the link on your website, when a visitor clicks on your unique URL link, a tracking cookie is placed on their computer and if they purchase from the merchant, your account is credited. Most affiliate programs have a minimum threshold before they pay you. Some of these thresholds can exceed $100, so be wary that depending on the popularity of your site you may not see any revenue under the CPA model for a few months at least.

Ethics etc.

As with all financial relationships between business partners, compliance with ethical protocols plays an important role. If you are a website publisher, do you disclose your financial relationship with your affiliate partners? It is really up to you to decide how much you want to disclose. In the website publisher scenario above, the operator could have a page of disclosures listing the affiliate partners, especially since you are writing an unbiased editorial piece. Generally speaking, consumers and users of your website will find out that you have a revenue based relationship sooner or later, so it is important that you have a clear and accurate disclosure policy, supported by plain English statements on your website. Also note that when you sign up for an affiliate program, most have a clause stating that you cannot use the service or the engagement as a source for spamming (as defined by the CAN SPAM act).

The Future

Web based affiliate programs will likely continue to grow in 2008. The CPA model is very compelling for merchant in many industry sectors, as the cost of managing such a program is falling (due to improvements in technology) and improves their return on advertising investment. Implementing ethical business protocols and procedures will also play a dominant role with bloggers and website publishers trying to find the balance between being independent and hooking into extra lines of revenue. In either case, the best policy is to be up front and honest with your website visitors.

Examples of Affiliate Programs

Below are examples of 4 affiliate programs.

Disclaimer

The author is a an affiliate partner of IXwebhosting.com and Basecamp.

Sharcmedia.com is an affiliate partner of eBay and Amazon.