What Is Affiliate Marketing?

What Is Affiliate Marketing?

by Andy Hagans

Affiliate marketing has become a massive online industry over the past several years, emerging as both an effective way for marketers to sell their products and services and for publishers to monetize their audiences. Despite the popularity of affiliate marketing, many publishers still aren’t aware of exactly what affiliate marketing is or how it works. In some cases, these publishers are gatekeepers to an audience that could be very effectively monetized through affiliate marketing, meaning that they’re passing up an attractive revenue stream.

What It Is (And What It Isn’t)

At its heart, affiliate marketing is an online version of a sales structure that has been happening offline for decades. In its simplest form, it involves three primary components:

• A merchant, or someone with a product or service to sell
• An affiliate, or individual with the willingness and ability to sell that product to a particular audience
• A product or service

For each product the affiliate sells, they receive a portion of the proceeds from the merchant. It’s effectively an outsourced sales team. At its core, affiliate marketing is just that simple.

Offline Example

When I was a child, my school would have fundraisers that involved us going door-to-door to sell magazine subscriptions (magazines were glossy, soft-cover publications that would be mailed to a subscriber’s house on a weekly or monthly basis). I didn’t realize it at the time, but I was right in the middle of an affiliate marketing scheme. The magazine companies had products they wanted to sell. Schools had the ability to sell these products. And for every subscription sold, the magazine companies gave a slice of the proceeds to the school. (In this example, there’s actually a secondary later of affiliate marketing; the schools effectively outsource the actual selling to the students, in exchange for prizes that come with meeting certain sales figures.)

Online, affiliate marketing works generally the same way–except that the door-to-door sales approach is replaced by strategies more suited to a digital marketplace. In most instances, the affiliate marketing process works as follows:

1. Visitor to a publisher’s website clicks an “affiliate link” that takes them to a third party landing page
2. Visitor makes a purchase
3. Affiliate (publisher) gets a commission based on the value of the products and services purchased at the partner’s site

In other words, affiliate marketing is a kind of cost-per-action (CPA) advertising. The publisher makes nothing for highlighting a partner’s product on their site, and they make nothing for getting a visitor to click through to that site. The commission is only earned when a sale is completed.

Affiliate marketing is facilitated by “affiliate links” that allow merchants to track where their customers originate. In other words, it’s possible (and actually very simple) to know which revenue came from a specific affiliate and to compensate that affiliate accordingly.

Affiliate Marketing Economics

For publishers, the affiliate marketing revenue equation looks something like this (we’ve boldedthe factors that are most within your control in optimization efforts):

Visitors x Click Rate (on Affiliate Links) = Referred Visitors

Referred Visitors x Conversion Rate x Average Purchase Price = Referral Revenue

Referral Revenue x Commission % = Affiliate Marketing Revenue

The success of an affiliate marketing strategy depends on how many referrals you’re able to send to merchant sites and how well these referrals convert (hence the bolding of these factors above). The more relevant and appealing the offers you highlight on your site, the higher both your click and conversion rates will likely be. If you’re running a travel blog, you probably don’t want to be featuring affiliate offers for baby products; replacing them with affiliate links to cruise packages would probably result in a higher referral rate.

Appeal of Affiliate Marketing (to Advertisers)

Advertisers love affiliate marketing because it involves minimal risk. If a sufficient margin is built in as compensation for the affiliate, it becomes impossible to lose money. That’s because affiliates are generally only paid when a sale is completed (i.e., a lead is converted). Advertisers (or “merchants”) pay nothing for leads that don’t convert.

Compare this to a CPM-based advertising campaign, where an advertiser pays a fixed amount to get a fixed number of ad impressions. (E.g., they may pay $10,000 to have 1 million ads shown on a publisher site, or a $10 CPM.) That campaign may be unsuccessful however if the ad impressions don’t convert into clicks and/or eventual sales.

Under most affiliate marketing arrangements, advertisers only pay for converted leads. There is basically no way they can lose money or get a negative ROI with this marketing method. Each new sale generated may have a thin margin after the affiliate payment is made, but it’s possible to structure in such a way that eliminates the possibility of a loss.

Some merchants will pay for actions that do not involve the transfer of money (i.e., something besides a sale of a product or service). For example, many merchants pay affiliates for referred visitors that ultimately sign up for a newsletter or other free product.

Appeal of Affiliate Marketing (to Publishers)

Affiliate marketing is very appealing to some publishers as well, because it can allow them to make considerably more money than they would under an alternative monetization strategy. Though the specifics of payout arrangements can vary a bit, in general affiliate payments will be significantly larger than the revenue generated from a click under a CPC pricing arrangement (or the effective CPC under a CPM arrangement). For high margin products such as e-books, for which there are no material costs, affiliate margins can be as 50% of the total purchase price. So it’s not unheard of for affiliates to generate $100 or much more from each referral.

To explain this a bit further, let’s consider a real life example. Below is a screenshot from AffiliateTip.com, a popular blog run by affiliate marketing guru Shawn Collins. In his right sidebar, he has a number of affiliate links for products such as HootSuite, Dropbox, and Bluehost:

Alternatively, there could be a traditional 160×600 display ad unit here. From a network, that ad unit might earn the published an effective CPM of $3 or $4. If the optimal affiliate marketing links are used instead, the payout can be much higher.

Let’s assume that the aggregate click rate on this affiliate link section is 1%, that 20% of referred visitors convert, and that the average commission is $10. For every 1,000 visitors:

• 10 click through to an affiliate link
• 2 end up purchasing something from a merchant
• $20 in revenue for the publisher is generated

The end result in this hypothetical is $20 in revenue–significantly more than the $3 or $4 that could be earned from traditional display advertising.

Of course, the revenue per visitor is highly dependent on the click and conversion rates. But the hypothetical above should illustrate that if you’re able to find quality, relevant affiliate offers, affiliate marketing can be a very attractive monetization opportunity.

Affiliate Marketing In Action

Affiliate marketers can use a number of strategies to sell to their audience, with different approaches making the most sense for different niches and product lineups. These strategies include:

• Coupons
• Product Reviews
• Product Rankings
• Product Aggregation / Price Comparison

Below are some real life examples of affiliate marketing strategies in action:

• Review: 31 Days to Build a Better Blog. Note the affiliate links to the landing page where this e-book can be purchased. For every referred purchased, this publisher makes 40% of the total purchase price.
• TV Review Site. This site compiles prices for products at various Web retailers, including an affiliate link to all of them. If a visitor to this site ultimately clicks through and makes a purchase, a commission is earned.
• Only Cookware. This is one of several sites run by Amazon “super affiliates” Paula and Wanda. Their reviews feature affiliate links for visitors to purchase the products on Amazon, which nets them a commission in the neighborhood of 8.5%.

Many publishers would be surprised at the depth of the affiliate marketing industry; it’s a lot more than e-books and amazon affiliates. Commission Junction, one of the largest affiliate networks, has an impressive list of advertiser verticals:

Bottom Line

Affiliate marketing is a fairly simple concept that can be implemented in a countless number of ways online. Though it’s not as familiar or easy to set up as display advertising strategies that dominate many publisher monetization strategies, there is the potential for a big payoff if a bit of work is done upfront.