Affiliate marketing is used widely to promote Web sites, and affiliates are rewarded for every visitor, subscriber, or customer provided through their efforts. Because of this, affiliates are sometimes viewed as an extended sales force for a Web site. Affiliates are paid for performance, so affiliate marketing is also referred to as performance marketing.

The core of affiliate marketing is a simple process:

  • An affiliate refers potential customers to a merchant’s Web site.
  • Some of those customers perform a desired action.
  • The merchant rewards the affiliate for each desired action resulting from the affiliate’s referral.

However, there are many different ways an affiliate might market a merchant’s offering, there are many different types of action that can be rewarded, and, most importantly, there needs to be some way of keeping track of the whole process.

4.1 Action and reward

Affiliate marketing can be used to promote any type of Web site—there just needs to be an agreed-upon action that will result in an affiliate earning commission. Different types of merchants will have different required actions. The actions and the types of commission can be summarized in the following:

  1. Cost per action (CPA). A fixed commission for a particular action.
  2. Cost per lead (CPL). A fixed commission for a lead (i.e., a potential sale).
  3. Revenue share (also cost per sale [CPS]). An agreed-on percentage of the purchase amount is awarded.
  4. Cost per click (CPC). A very small part of the affiliate marketing mix, where the merchant pays a fixed amount for each click-through to their Web site.

4.2 Tracking: the lifeline of affiliate marketing

The key to affiliate marketing is being able to track the whole process, from potential customers being sent to a Web site to completed action, so that the merchant is able to award the correct affiliate with the correct commission. This really is the crux of affiliate marketing.

Specialized affiliate tracking software is used to track affiliate campaigns, and this is usually supplied and supported by the affiliate network. Often, the merchant and the affiliate will also use their own tracking software to make sure that there are no major discrepancies.

Affiliates send traffic to merchants through links or uniform resource locators (URLs), and the tracking software allows each affiliate to have a unique identifier in the URL. These links set a cookie on the customer’s computer, which allows the software to track the sale.

When the customer completes the required action on the merchant’s Web site, the cookie will allow the tracking software to collect the information needed to award the commission. For example, if a customer were to use an affiliate link to purchase a gift from a merchant (using the same URL as before as an example), the following information would be collected:

  • Referring URL and affiliate
  • Total sale amount for commission
  • Date and time of sale
  • Unique order number of sale

All this information will allow the merchant to confirm that the sale is valid, as well as the amount of commission that is due, without ever releasing any of the customer’s personal information.

Affiliate tracking software collects information even if no action is completed. This is vital to the affiliates and to the merchants to see where they can optimize their campaign.

Information collected includes the following:

  • Impressions
  • Clicks
  • Conversions

All this information helps to build up data in order to strengthen the campaign.

Affiliates will use this information to determine the success of their marketing efforts. Remember that affiliates invest money into marketing various merchants, and they only get rewarded on commission. An affiliate will use the above information to determine whether or not to promote a merchant and how much they should invest in promoting a particular merchant.

Merchants can use the information on their campaign to determine how best to optimize. For example, if a particular type of banner seems to do better than others, they could use that to improve other banners that they offer.

4.3 How do affiliates promote merchants?

Affiliates are online marketers who are paid on a performance basis. Every type of marketing strategy will be found in the affiliate world, and affiliates can often be seen at the forefront of breaking technology and applying it to marketing strategies.

The basic aim of an affiliate is to send targeted traffic (that means customers who are very likely to perform the desired action) to a particular merchant’s Web site. Affiliates may promote as many merchants in as many industries with as many tactics as they wish, but usually affiliates will start to specialize.

Most of the tactics will be the same as those that the merchant employs but will reach a different part of the Internet population. Effective tracking takes care of any overlap and will help a merchant to adjust their spending for a most effective return on investment (ROI). The main types of affiliates can be broken up into the following:

  • Personal Web sites
  • Content and niche sites
  • E-mail lists
  • Loyalty sites (points or cash back or charitable donations)
  • Coupon and promotions sites
  • Comparison shopping (see also PPC [pay-per-click] advertising)
  • Search affiliates (search arbitrage)

Affiliate marketing came to the fore as a way for personal Web sites to make money, though this now forms a small part of the marketing mix. Affiliate marketing does still provide some income for these Web sites. However, we will focus on those endeavors that are created purely for affiliate marketing.

Content and niche sites are Web sites created around a specific topic, and any products promoted will carry affiliate tracking. For example, an affiliate might create a site dedicated to digital cameras, with tips and downloads to help you get the most out of your camera. It could review a number of different cameras and offer links to purchase those cameras online. All those links will be affiliate links.

Seasonality is also an important consideration for content sites. Web sites can be created specifically for Christmas, Mother’s Day, and many more key retail seasons.

Some affiliates run large opt-in e-mail lists, and they market particular merchant offers through their e-mail newsletters. Some renegade affiliates use spam e-mail to promote merchant offers, but as affiliate marketing has matured, there are usually terms and conditions to prevent such promotion.

As affiliates earn a percentage of a sale, some affiliates “split” this with the customer and create cash-back or points-based shopping sites. There are also some that donate a percentage of the commission to a charity.

Some of the most successful affiliate marketers are those who promote various merchants through paid search PPC advertising on search engines. These affiliates seek to find the highest earnings per click (EPC) for the lowest cost per click (CPC), this is also referred to as search arbitrage.

4.4 Affiliate networks

As well as the affiliate and the merchant, there is generally a very important third party in the affiliate marketing mix—the affiliate network.

While some small affiliate programs and some very large affiliate programs (such as Amazon Associates) are run by the merchant, most merchants opt to use an affiliate network to provide most of the technical solutions required for an affiliate program.

Affiliate networks provide tracking solutions, reporting on programs to both affiliates and merchants, hosting of creative banners, commission payment options, and support to both affiliates and merchants. Affiliate networks have many affiliates, and many merchants, signed up to them, so they are ideal sources for recruiting affiliates if you are a merchant or for finding merchants to promote if you are an affiliate. Affiliate networks provide a one-payment solution to merchants, as the merchants will be invoiced for all the commission collectively owed, which is then dispersed to the affiliates.

Affiliate networks usually charge the affiliates nothing to join. They can charge a merchant a setup fee, which will cover the cost, making sure that the tracking solution is successfully integrated, and can charge a monthly management fee, depending on the level of support offered to the merchant. Affiliate networks usually charge the merchant a percentage of the commission earned by the affiliate (called a commission override), so that there are incentives for the networks if they perform well. As a rough guide, this is typically 30 percent of the commission rewarded to the affiliate.