Affiliate marketing is a word or words we hear so much about in this territory of online marketing, but still, there are a lot of business owners and online entrepreneurs who are not yet familiar with the impact that affiliate marketing can have on their business.
It’s also true that affiliate marketing has evoked much dispute over the years because some people seem to be all up for it while others stand right up against it.
The stance you take on the debate about affiliate marketing depends significantly
on whether you know how affiliate marketing works or not. Then again, there are also those who would like to know more about it, however, haven’t had the chance to delve into affiliate marketing, or thought it was too complicated and gave up trying in the first place.
To shed light on this powerful internet marketing tactic, I have created this article to provide more information about what affiliate marketing is and what it can help you increase your online revenues.
Understanding Affiliate Marketing
There are many ways for an online business to earn more money, and affiliate
marketing is one of the most lucrative methods.
Affiliate marketing is an online sales tactic and a business arrangement between a vendor and a third-party business by which the vendor pays commission to the business (or a third-party website whatsoever) for business leads or sales generated from its promotional efforts and direct referrals.
In other words, an affiliate would promote a product, and every time a referral
registers on the vendor’s website or buys a product, the affiliate would receive
a monetary amount as remuneration.
Affiliate marketing is a low-friction-to-market opportunity because affiliate partners don’t need to create their own products or services to earn money. However, selling anything will require a significant investment of both time and money. The truth is that without traffic, someone will struggle. This is likely the problem that many would-be affiliates face today.
However, by keeping a few principles and steps in mind, someone can dominate in the world of affiliate marketing and earn money while they sleep.
The Affiliate Marketing Relationship
To better understand how the affiliate marketing process works, you need to consider three main components: The vendor, the affiliate, and the customer
- Vendor: The vendor is usually a company or a business owner who runs the affiliate program, and is the creator of the product/service that the affiliate promotes. The vendor is you, and the product is what you sell online, subscriptions, or related services.
- Affiliate: The affiliate is the company or person who promotes products
or services of the vendor and gets a percentage of the sale made (or a dollar
amount for a lead generated). This person is often called ‘associate’, ‘partner’,
‘referrer’, ‘ambassador’ or, only, ‘promoter’.
Customer: The customer is the business prospect who is interested in
buying the vendor’s products, which are promoted by the affiliate. This is the
‘end user’ in the affiliate marketing funnel. The customer gets referred to the
vendor’s website either to find out more about their online courses or to buy
one. The consumer will not typically pay a higher price to the affiliate marketer,
as the cost of the affiliate network is already included in the retail price.
This three-party business relationship is shown in the graph below:
The three parties involved in affiliate marketing Image Source: Neil Patel
As you can see, the picture shows the three parties that are the critical components
in describing any affiliate marketing channel.When affiliate partners agree to the affiliate program terms, they are required to abide by the rules and use best practices to promote the vendor’s products.
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How Does Affiliate Marketing Work?
Αffiliate marketing allows your partners to promote your online business in several
ways. The process of how it works is described in the legal documents which
define the partnership between the vendor and the affiliate partners.
The primary way for affiliates to promote your online business is by placing a link on their website that drives web traffic to your products.
Each affiliate receives their unique link known as the ‘affiliate link’ which they
can use to promote your products. The affiliate link points to the URL of your
homepage (or other pages on your website), and it has a parameter appended
to it. The parameter (which essentially is a unique affiliate id) passes data to the
affiliate management system so that the system interprets where the traffic
came from and can attribute the right commission to the correct affiliate.
An affiliate link would look like this http://www.yourdomain.com/?aff=id.
Every time a prospect clicks on an affiliate link, they are referred to your website.
The click is tracked throughout the marketing funnel, and when the prospects complete a purchase, then you generate revenue, and a portion of it is added as commission to the account of the respective affiliate.
The vendor gets the sale, the affiliate earns a commission, and the customer receives the product they ordered. All three parties are happy. Once the affiliate program is set up, and you have affiliates signing up to sell your product, the program will entirely run on its own.
Typical Affiliate Payout Methods
Now, let’s dive into the different payout methods typically associated with affiliate
programs so you have the complete picture of how affiliate marketing works and you know what you’re competing against. It’s like when companies are competing for talent throughout the hiring process; they also need to fight to attract the best affiliates to promote their products and incentivize to keep promoting actively.
The following list contains key terms which can help you understand the different
affiliate compensation methods:
Pay per sale:
This is the case where you agree to offer a fixed rate on the sale price whenever the affiliate partner manages to sell your product. It is strictly based on purchases upon your products, and as the vendor, you have to be concerned not only about the quality and the number of people you have in your network, but also the quality of the advertisers and their available resources, e.g., website.
Pay per click:
With this arrangement, you agree to offer money to the affiliate partner whenever a site visitor comes to your website following the affiliate link of the affiliate partner. The actions measure pay per click payments visitors make on your site, including clicks, impressions, and leads.
Pay per lead:
This is between the two options above. You offer money to the affiliate partner whenever a site visitor comes to your website and provides their contact information. In this case, payment takes place when a customer requests for more information about your products or when completing the opt-in form with their email.
Paying per lead is a rather tricky payment type considering that there is the risk of fraud prevention. Dishonest affiliates might autofill the form multiple times, causing financial problems to your business. A solution would be to hire a dedicated affiliate police partner to deal with these issues.
Pay per call:
In this agreement, you offer a fixed percentage on the sale price by the number of requests that come to you by customers who show an interest in your products. The commission is measured and paid out by the number of calls that come to you from your affiliate partner. Sometimes more specific factors come into play such as call duration and location.
Although this type of marketing sounds to be an old-fashioned approach, it is becoming
more popular with the use of smartphones.
Pay per impression:
You agree to pay your affiliates based on the number of impressions ads that are served on the website and are viewed by visitors.
These are often seen in niche websites with a targeted audience and are more
For people who are outside of the online business world, these terms may sound new, but to understand affiliate marketing, you have to become familiar with them as they are part of how affiliate marketing works.