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Affiliate Marketing

Affiliate Marketing: Brief Summary

Affiliate marketing is an online performance-based advertising technique, where affiliates or partners advertise the products or services of another business, in exchange for a commission. The retailer only pays commission to the publisher after a particular pre-determined action has been performed, such as a customer clicking on the advertisement, buying a product, or signing up for a membership.

Generally, a commission is paid at a set rate, which is established in advance. There are a number of different compensation models utilised within affiliate marketing, with some of the predominant examples including cost per sale, cost per click and cost per action. Nevertheless, the common feature for all of these models is that compensation is provided to the affiliate based on the performance of the advertisement.

Affiliate Marketing: Detailed Summary

Affiliate marketing is used by businesses to promote their products and services online and there are three main parties involved in the process. The retailer, or merchant, is the company that wants to advertise its products or services; the publisher, or affiliate, is the person or business that places those adverts on their website in exchange for compensation; and the customer is the person who visits the merchant via the affiliate.

In some cases, a fourth party is involved in the form of an affiliate network, with examples including Rakuten LinkShare, Affilinet and Awin. These act an intermediary between retailers and publishers and help them to find each other. Affiliate marketing often involves the use of traditional online advertising techniques, such as display advertising, email advertising, paid search engine marketing and search engine optimisation.

Affiliate networks usually offer advanced affiliate marketing tools for both advertisers and publishers, providing them with the ability to track and optimise campaigns, and monitor performance. In addition, many content management systems (CMS), such as WordPress, provide plug-ins for affiliate marketing, allowing publishers to quickly and easily pair up with merchants and start earning a commission by placing adverts or links on their website or blog.

In terms of tracking customer actions, affiliate website owners are usually allocated a unique link, which they use to send visitors to the retailer. The link can be disguised as a display advert or included in an article as a text link. When a customer clicks on an advert or link, cookies are stored on the customer’s computer or mobile, tracking the actions of that visitor. Affiliate websites vary, ranging from price comparison websites to small personal blogs.

History of Affiliate Marketing

Affiliate marketing is derived from other business concepts which pre-date the existence of the world wide web, such as revenue sharing. Indeed, the basic idea behind affiliate marketing is not too dissimilar to ideas like offering existing customers a discount for referring a friend, which have been around for decades. Nevertheless, the first online affiliate marketing programme as we know it today was designed by William J. Tobin and patented in 1994.

Other early adopters of online affiliate marketing included CDNow.com and AutoWeb.com, but the advertising strategy did not truly hit the mainstream until 1996, when Amazon launched its Associates Programme. This is sometimes erroneously referred to as the first affiliate marketing programme on the internet, and while that is not the case, it was the first to attract significant interest and was a big help in demonstrating its full potential.

From around 1998 onwards, affiliate marketing grew in both popularity and complexity, with the emergence of affiliate networks like the Clickbank Network and Commission Junction. Today, spending on affiliate marketing in the United States alone has reached around $5bn and this figure is expected to exceed $6bn by 2020, according to Rakuten. A Rakuten Affiliate Network survey also found that 80 percent of advertisers run an affiliate programme.

Compensation Models

The primary difference between affiliate marketing and similar advertising techniques, such as referral marketing, is the presence of a financial motive. While referral marketing relies upon a solid relationship built on trust, affiliate marketing is less personal and is based primarily on monetary compensation. There are a number of different compensation models or methods used, with some of the most common being:

  • Cost Per Click (CPC) – Also known as pay per click (PPC), this model is based around compensating the affiliate a set amount of money for each click on an advertisement or link. It can be of great help to a retailer when the priority is to increase the amount of traffic going to their website.
  • Cost Per Sale (CPS) – Sometimes referred to as pay per sale (PPS), this model is similar to cost per click, but requires the customer to click through onto the retailer’s website and actually complete a purchase. As a result, it is a good model to help increase the number of sales being made.
  • Cost Per Action (CPA) – Alternatively titled cost per acquisition, or pay per action, this model does not require a transaction to be completed after the customer clicks on an advert, but it does require a certain action to take place before the affiliate is compensated, such as a file download or a form submission.
  • Cost Per Mille (CPM) – Otherwise known as cost per thousand (CPT), this model refers to the amount paid per one thousand views of an advertisement. It is the easiest way for an affiliate to receive compensation, because it simply requires an advert to be displayed, without necessitating specific customer actions.

In the early days of affiliate marketing, cost per click was the most popular of these compensation methods, but its popularity has subsided due to issues surrounding click fraud, where automated online scripts were used to create artificial clicks on adverts. As a consequence, models like cost per action and cost per sale are now more popular, because they require the customer to actually complete an action which cannot be so easily automated.

Affiliate Marketing Benefits and Drawbacks

For merchants, the primary benefit of affiliate marketing is its risk-free nature. As it is an example of performance marketing, advertisers pay out in relation to the results generated, making it cost-effective. Publishers, meanwhile, are provided with the opportunity to earn money from their website or blog with relatively little effort and there is a clear incentive, because the more people they can direct to the retailer, the more money they make.

Nevertheless, there are some drawbacks as well. Click fraud and spam have been persistent problems since its conception and have contributed to negative perceptions around the entire practice. In addition, the increase in usage of ad-blocking software has had an impact on the effectiveness of some affiliate marketing campaigns, although affiliates can get around this by being creative and using content marketing in place of display ads.

Conclusion

The concept of affiliate marketing has existed since the mid-1990s and is a form of performance-based advertising, where compensation is paid to an affiliate based on the results they generate for the advertising retailer. Each affiliate is rewarded for producing desired actions for the retailer, based on a pre-agreed compensation model and this financial incentive is what separates affiliate marketing from referral marketing.

Some of the most popular compensation models include cost per click, where an affiliate is rewarded each time a visitor clicks the advert they publish, and cost per sale, where an affiliate is only rewarded if a customer clicks through and actually completes a transaction. Affiliate networks can help to facilitate partnerships, while affiliates are able to use a range of online advertising methods, including display advertising, SEO and content marketing.

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