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Affiliate Marketing Explained
- History of Affiliate Marketing
- Development of Affiliate Marketing
- Web 2.0
- Affiliate Compenation Plans
Affiliate Marketing is a method of promoting internet businesses (merchants/advertisers) in which an affiliate (publisher) is compensated for visitors, subscriber, customer, and/or sale provided through his/her own promotional efforts.
Affiliate marketing is also the name of the industry where a number of different types of companies and individuals are performing this form of internet marketing, including affiliate networks, affiliate management companies and in-house affiliate managers, specialized 3rd party vendors and various types of affiliates/publishers who utilize a number of different methods to advertise the products and services of their merchant/advertiser partners.
Affiliate marketing overlaps with other internet marketing methods to some degree, because affiliates are using the same methods as most of the merchants themselves do. Those methods include organic search engine optimization, paid search engine marketing, email marketing and to some degree display advertising.
Affiliate marketing - using one site to drive traffic to another - is the stepchild of online marketing. While search engines, e-mail and RSS capture much of the attention of online retailers, affiliate marketing, despite lineage that goes back almost to the beginning of online retailing, carries a much lower profile. Yet affiliates continue to play a fundamental role in e-retailers' marketing strategies.
History of Affiliate Marketing
How it All Started
The concept of revenue sharing, paying commission for referred business, predates affiliate marketing and the internet. The translation of the revenue share principles to mainstream electronic commerce on the internet happened almost four years after the World Wide Web was born in November 1994 when CDNow launched its BuyWeb program.
With its BuyWeb program, CDNow was the first non-adult site to introduce the concept of an affiliate or associate program with its idea of click-through purchasing through independent, online storefronts.
CDNow.com had the idea that music-oriented web sites could review or list albums on their pages that their visitors might be interested in purchasing and offer a link that would take the visitor directly to CDNow to purchase them. The idea for this remote purchasing originally arose because of conversations with a music publisher called Geffen Records in the fall of 1994. The management at Geffen Records wanted to sell its artists’ CDs directly from its site but did not want to do it itself. Geffen Records asked CDNow if it could design a program where CDNow would do the fulfillment.
Geffen Records realized that CDNow could link directly from the artist on its Web site to Geffen’s web site, bypassing the CDNow home page and going directly to an artist’s music page.
Affiliate marketing was used on the internet by the adult industry before CDNow launched their BuyWeb program. The consensus of marketers and adult industry insiders is that Cybererotica was either the first or among the early innovators in affiliate marketing with a cost-per-click program.
Amazon.com launched its associate program in July 1996. Amazon associates would place banner or text links on their site for individual books or link directly to the Amazon’s home page.
When visitors clicked from the associate’s site through to Amazon.com and purchased a book, the associate received a commission. Amazon.com was not the first merchant to offer an affiliate program, but its program was the first to became widely known and served as a model for subsequent programs.
In February 2000, Amazon.com announced that it had been granted a patent (6,029,141) on all the essential components of an affiliate program. The patent application was submitted in June 1997, which was before most affiliate programs but not before PC Flowers & Gifts.com (October 1994), AutoWeb.com (October 1995), Kbkids.com/BrainPlay.com (January 1996), EPage(April 1996), and a handful of others.
Historic Development of Affiliate Marketing
Affiliate marketing has grown quickly since its inception. The e-commerce website, viewed as a marketing toy in the early days of the web, became an integrated part of the overall business plan and in some cases grew to a bigger business than the existing offline business. According to one report, total sales generated through affiliate networks in 2006 was £2.16 billion in the UK alone. The estimates were £1.35 billion in sales in 2005. MarketingSherpa's research team estimated that, in 2006, affiliates worldwide earned $6.5 billion in bounty and commissions from a variety of sources in retail, personal finance, gaming and gambling, travel, telecom, education, publishing and forms of lead generation other than contextual ad networks such as Google AdSense.
Currently the most active sectors for affiliate marketing are the adult, gambling and retail sectors. The three sectors expected to experience the greatest growth are the mobile phone, finance and travel sectors. Hot on the heels of these are the entertainment (particularly gaming) and internet-related services (particularly broadband) sectors. Also several of the affiliate solution providers expect to see increased interest from B2B marketers and advertisers in using affiliate marketing as part of their mix. Of course, this will continue to change over time.
And Now Web 2.0
The rise of blogging, interactive online communities and other new technologies, web sites and services based on the concepts that are now called Web 2.0 have impacted the affiliate marketing world as well. The new media allowed merchants to get closer to their affiliates and improved communication between each other. New developments have made it harder for unscrupulous affiliates to make money. Emerging black sheep are detected and made known to the affiliate marketing community with much greater speed and efficiency.
Principal Compensation Plans
80% of affiliate programs today use revenue sharing or cost per sale (CPS) as compensation method, 19% use cost per action (CPA) and the remaining 1% are other methods, such as cost per click (CPC) or cost per mille (CPM).
Diminished Compensation Plans
The use of pay per click (PPC/CPC) and pay per impression (CPM/CPT) in traditional affiliate marketing is far less than 1% today and negligible.
Cost per mille (thousand) (CPM/CPT) requires the publisher only to load the advertising on his website and show it to his visitors in order to get paid a commission, while PPC requires one additional step in the conversion process to generate revenue for the publisher. Visitors must not only made aware of the ad, but also pursue them to click on it and visit the advertiser's website.
Cost per click (CPC/PPC) used to be more common in the early days of affiliate marketing, but diminished over time due to click fraud issues that are very similar to the click fraud issues modern search engines are facing today. Contextual advertising, such as Google AdSense are not considered in this statistic. It is not specified yet, if contextual advertising can be considered affiliate marketing or not.
Compensation Plans for other Internet Marketing Channels
Pay per click is the predominant compensation model for pay per click search engines and their contextual advertising platforms, while pay per impression is the predominant compensation model for display advertising. CPM is used as a compensation method by Google for their AdSense/AdWords feature "Advertise on this website", but this is an exception in search engine marketing.
While search engines only recently started experimenting with the compensation structures of traditional affiliate marketing, such as pay per action/CPA,[12] they have used similar models in display advertising, offering CPA as early as 1998.[13] By the end of 2006, the market share of the CPA/performance pricing model (47%) caught up with the CPM pricing model (48%) and will become the dominant pricing model for display advertising, if the trend of the last 9 years continues in 2007.
CPM/CPC versus CPA/CPS (performance-based marketing)
In the case of CPM or CPC, the publisher does not care if the visitor is the type of audience that the advertiser tries to attract and is able to convert, because the publisher already earned his commission at this point. This leaves the greater, and, in case of CPM, the full risk and loss (if the visitor can not be converted) to the advertiser.
CPA and CPS require that referred visitors do more than visiting the advertiser's website in order for the affiliate to get paid commission. The advertiser must convert that visitor first. It is in the best interest for the affiliate to send the best targeted traffic to the advertiser as possible to increase the chance of a conversion. The risk and loss is shared between the affiliate and the advertiser.
For this reason affiliate marketing is also called "performance marketing", in reference to how employees that work in sales are typically being compensated. Employees in sales are usually getting paid sales commission for every sale they close and sometimes a performance incentives for exceeding targeted baselines.[16] Affiliates are not employed by the advertiser whose products or services they promote, but the compensation models applied to affiliate marketing are very similar to the ones used for people in the advertisers' internal sales department.
The phrase, "Affiliates are an extended sales force for your business", which is often used to explain affiliate marketing, is not 100% accurate. The main difference between the two is that affiliate marketers cannot, or not much influence a possible prospect in the conversion process, once the prospect was sent away to the advertiser's website. The sales team of the advertiser on the other hand does have the control and influence, up to the point where the prospect signs the contract or completes the purchase.
Multi-tier Programs
Some advertisers offer multi-tier programs that distribute commission into a hierarchical referral network of sign-ups and sub-partners. In practical terms: publisher "A" signs up to the program with an advertiser and gets rewarded for the agreed activity conducted by a referred visitor. If publisher "A" attracts other publishers ("B", "C", etc.) to sign up for the same program using her sign-up code all future activities by the joining publishers "B" and "C" will result in additional, lower commission for publisher "A".
Snowballing, this system rewards a chain of hierarchical publishers who may or may not know of each others' existence, yet generate income for the higher level signup. This sort of structure has been successfully implemented by a company called Quixtar.com, a division of Alticor, the parent company of Amway. Quixtar has implemented a network marketing structure to implement its marketing program for major corporations such as Barnes & Noble, Office Depot, Sony Music and hundreds more.
Two-tier programs exist in the minority of affiliate programs; most are simply one-tier. Referral programs beyond 2-tier are multi-level marketing (MLM) or network marketing.
Even though Quixtar compensation plan is network marketing & wouldn't be considered 'affiliate marketing', the big company partners are considered and call themselves affiliates. Therefore, you may argue that the Quixtar company is the affiliate marketer for its partner corporation.
If you are an affiliate marketer, or are looking to get started in affiliate marketing there are numerous products on this site designed to assist you. If you need help locating a software or guide for your specific need, you may contact me for assistance.
The Affiliate Masters Course is a free affiliate marketing guide that is quite informative..
