What is affiliate marketing and how does it work?

What is affiliate marketing and how does it work?

Affiliate marketing is performance-based, whereby affiliates promote a merchant’s product or service and earn a commission for each visit, signup, or sale they send to the merchant.

It allows affiliates (sometimes called publishers) to earn money without maintaining product inventories, investing in services, or supporting customer relationships. It also allows merchants (also often called advertisers) to promote their products and services without allocating significant marketing resources.

The market situation

This solution is not new. The first merchants to turn to affiliates to promote their products were CDNOW in 1994 and Amazon in 1996. CDNOW, which was acquired by Amazon in 2002, shut down its affiliate program in 2012, but Amazon’s program remains an attractive opportunity for many sellers online.

There are currently miles of merchants ready to pay a commission to get more:

  • Sales of products or services
  • directs
  • Subscribers to your clubs or electronic newsletters
  • incoming calls

Participants in affiliate marketing

The main parties involved in affiliate marketing are the two already mentioned above: the merchant and its affiliate. However, neither of them could make a profit without a third party, namely the client (or consumer). A quarter comes into play quite frequently and mediates the relationship between merchants and affiliates: the affiliate network. There is also an affiliate manager who plays an integral role, and that would be the fifth part. To better understand the role of each of these five parts, let’s review them below:

The trader

Merchants are those who create or bring a product or service to the market. They might be a wholesaler or retailer, a manufacturer like H&M, a web host like Bluehost, or a software developer, to give just a few examples. Whether they create the products themselves or purchase them from their suppliers, the merchant owns the respective products and services. They handle transactions and related logistics (payments, packaging, shipping, etc.), as well as customer service. In affiliate marketing, they are the “employer” or the party that is willing to share their earnings with the affiliate that will help them sell more.

They decide what type of actions they are going to compensate for and how much. They do this through their affiliate program. The latter serves as the basis for the commercial agreement between the merchant and its affiliate. It supports vital elements like tracking, reporting, payments, and much more.

The Affiliate

Often referred to as an associate, the affiliate is the one who markets the merchant’s products or services. They choose which products and services to promote and what methods and techniques they use to attract potential customers and convince them to buy. Depending on the tools and strategies used, there are several types of affiliates. The most popular types include content, coupons, data feeds, display, loyalty, social media, and video affiliates. For a merchant, it is preferable to work with affiliates that fall into several of these categories at the same time. This means affiliates will use various marketing methods and channels to reach target customers and generate leads and sales.

Affiliates also have a lot to gain by combining various marketing techniques and strategies. It will be easier for them to convince merchants to accept them in their affiliate program and they will be able to reach a larger audience, generate more sales and earn more money.

The client

The customer (or consumer) is the one who completes the sale, the one who generates profit for both the merchant and his affiliate. They are targeted by both merchants and especially affiliates. To reach and convert them, the latter may use product or service reviews, ratings, how-to tutorials, unboxing and other videos, display ads, social media posts, mobile app placements, paid search (if allowed by the merchant) and many other marketing techniques.

It is important to note that purchasing through an affiliate link does not incur additional costs for the customer, as merchants’ retail prices already include affiliate marketing costs. On the contrary, some affiliates actually allow the consumer to save money by sharing their earnings with them. Common examples here are coupon and loyalty affiliates (especially cash back).

The Affiliate Network

They are the intermediary between the merchant and the affiliate, the party that brings the merchants and the affiliates together and provides both parties with the technology to boost their relationships. For merchants, an affiliate link means an opportunity to list their products and services where affiliates can view them and apply to become affiliates. For affiliates, the same network becomes a huge database of brands, products and services from which they can choose the ones to promote to earn money.

The Affiliate Manager

Like any serious marketing campaign, the merchant’s affiliate program must be managed. The affiliate manager is the person who is tasked with overseeing and developing the merchant’s affiliate marketing program. Affiliate program management can also be outsourced to an agency.

Affiliate Marketing Payment Models

  • Pay Per Sale or Cost Per Sale (abbreviated as PPS or CPS)
  • Pay per lead / Cost per lead (PPL / CPL)
  • Pay per call / Cost per call
  • Pay Per Click / Cost Per Click (PPC / CPC)
  • Pay per view / Cost per view (PPV / CPV)
  • Pay Per Install / Cost Per Install (PPI / CPI)

The last three payment models have been associated with unwanted activity, even fraudulent, which is why they are rarely used these days. Pay-per-call models are most effective for sales of highly regarded and/or high value products or services. The most popular and effective payment models these days are PPS and PPL, or paying affiliates for the sales or leads they mention.

Some merchants only agree to pay commissions on completed sales. However, many merchants also understand the value of leads and agree to reward them accordingly. Many merchants actually combine the two payment models, rewarding both sales and leads. It goes without saying that lead commissions are smaller than sales commissions.

In summary

Whether you are a merchant or an affiliate, affiliate marketing is a viable entry ticket to join the trend of making money online. Of course, true (and lasting) achievement doesn’t happen overnight, and it’s never possible without learning, hard work, and perseverance.