If you recommend a restaurant to a friend, and that friend visits the restaurant because of your recommendation, the restaurant’s revenue will have increased because of your referral. This is ‘word of mouth’ marketing. But you, as the referrer, do not see any of the cash benefit that the restaurant does.
Imagine that the restaurant gave you 10% of the bill for every person you referred. They would be paying you a finder’s fee for new customers. There are a number of businesses that market in this way offline. Brokers for insurance products are an example, but these referrals can be hard to track. Online, they are very easy to track. This system of reward, where compensation is based on referral, is called affiliate marketing, and this term is used to describe this type of marketing in an online environment.
Affiliate marketing occurs where a third-party advertises products or services on behalf of a merchant in return for an agreed commission for a sale or lead. Because of this, affiliates are sometimes viewed as an extended sales force for a website.
In this post , you will learn:
- Which crucial elements go into a successful affiliate programme.
- How to set up and run your own affiliate marketing programme.
- Which tools and resources you will need to sell products through affiliates.
The building blocks of affiliate marketing
The core of affiliate marketing is a simple process:
- An affiliate refers potential customers to a merchant’s website or other offsite destination (such as a Facebook tab).
- Some of those customers perform a desired action.
- The merchant rewards the affiliate for each desired action that results from the affiliate’s referral.
However, there are many different ways in which an affiliate might market a merchant’s offering; there are many different actions that can be rewarded; and, most importantly, there needs to be some way to keep track of the whole process.
Figure: How Affiliate Marketing Works
Action and reward
Affiliate marketing can be used to promote any type of website – there just needs to be an agreed-upon action resulting in an affiliate earning commission. Different types of merchants will have different required actions. The actions and the type of commission can be summed up as:
- Cost per Action (CPA) – a fixed commission for a particular action.
- Cost per Lead (CPL) – a fixed commission for a lead (that is, a potential sale).
- Revenue share (also CPS or Cost per Sale) – an agreed-on percentage of the purchase amount.
- Cost per Click (CPC) – a fixed amount for each clickthrough to the website (although this forms a very small part of the affiliate marketing mix).
Let’s look at an example of each of the first three actions above:
Here, the action could be anything from downloading a white paper or software to signing up to a newsletter.
Merchants who offer CPL commissions are usually those who need to convert a lead into a sale offline. This means they will generally need to complete the transaction over the phone with the customer, or that the process is quite complicated. Typically, insurance companies and banking institutions offer this type of commission. Membership sites that offer a free trial period, such as online DVD rental, can also use this commission structure.
You may be wondering why merchants are willing to pay for a lead, instead of only for completed transactions. Affiliates prefer this model, as they are not in control of the offline conversion process. It is the merchant’s job to be able to complete the transaction. Some merchants may be wary that the leads will not be of a high enough quality. This is why they will usually have conversion targets with which the leads generated need to comply as a quality control.
Revenue sharing is the ideal commission structure as both the merchant and the affiliate are rewarded for performance – the more sales, the more revenue generated for the merchant, and the more commission for the affiliate. Websites where a sale can be performed instantly are ideal for revenue sharing. Online retailers and instant online travel agents are perfect examples of merchants who offer a revenue share commission. The affiliate earns a percentage of the sale.Merchants tend to structure their commission offering so that affiliates who perform better earn a higher commission.
For example, a merchant may offer the following tiers of commission:
- 1–10 sales: 10% commission
- 11–25 sales: 11% commission
- 26–50 sales: 12% commission
- 51 or more sales: 15% commission
We have seen that there are different types of actions that can result in commission being awarded, and that these usually suit the website that is being promoted. This means that any industry that is online can most likely be promoted through affiliate marketing.
Affiliates have many options open to them to promote merchants’ websites. But before we get to that, we need to take a look at tracking – the thread that holds it all together.
The key to affiliate marketing is being able to track the whole process from potential customers being sent to a website through to a completed action, so that the merchant is able to award the correct affiliate with the correct commission.
Specialised affiliate tracking software is used to track affiliate campaigns, and this is usually supplied and supported by an affiliate network. Often, the merchant and the affiliate will also use their own tracking software to make sure that there are no major discrepancies.
Affiliates send traffic to merchants through links or URLs, and the tracking software allows each affiliate to have a unique identifier in the URL. These links set a cookie on the customer’s computer, which allows the software to track the sale.
For example, here is the URL of a product on a retailer’s website:
Here is the URL for the same product, but with affiliate tracking:
You can see some of the information being recorded. It has been shown in bold in the URL:
- The affiliate network – Affiliate Future
- The ID of the affiliate (238)
- The ID of the merchant (214)
- The ID of the programme (3897) (a merchant may have more than one programme on a network)
- The media used (0)
- The destination of the click
Can you spot the original URL in the one with the tracking? When the customer completes the required action on the merchant’s website, the cookie will allow the tracking software to collect the information needed to award the commission. For example, if a customer were to use an affiliate link to purchase a gift from a merchant (using the same URL as before), the following information would be collected:
- Referring URL and affiliate
- Total sale amount for commission
- Date and time of sale
- Unique order number of sale
All this information will allow the merchant to confirm that the sale is valid, as well as the amount of commission that is due, without ever releasing any of the customer’s personal information.
Affiliate tracking software collects information even if no action is completed. This is vital to the affiliates and to the merchants to see where they can optimise their campaign.
Information collected includes:
All this information helps to build up data in order to strengthen the campaign.
Figure 2. Example of the data collected to measure an affiliate marketing campaign.
Affiliates will use this information to determine the success of their marketing efforts. Remember that affiliates invest money in marketing various merchants, and they are rewarded only on commission. An affiliate will use the above information to determine whether or not to promote a merchant, and how much they should invest in promoting a particular merchant.
Merchants can use the information on their campaign to determine how best to optimise. For example, if a particular type of banner seems to be doing better than others, they could use that to improve other banners that they offer.
How long does a cookie last?
There are a lot of different expiry periods for cookies. Cookies are not just used for affiliate marketing. They are also used to store information so that a website ‘remembers’ who you are next time you visit it. The domain owner gets to determine how long a cookie should last. This is called the cookie period.
When it comes to affiliate marketing, it is up to the merchant to decide what the cookie period should be. The affiliate is awarded commission only if the desired action takes place within the cookie period. Some merchants make the cookie last for the session only (that is, if the user leaves the website, comes back the same day, and then makes the purchases, no commission is rewarded). The standard cookie period for affiliate marketing is 30 days, although higher-value items with longer purchase considerations, such as package holidays abroad, can last as long as 90 days.
There are merchants who offer what is called an affiliate lock-in. Here, the first affiliate to refer the customer earns commission for the lifetime of the customer: every purchase that the customer makes will earn the affiliate commission. Affiliates tend to prefer a longer cookie period; it increases the likelihood of being awarded commission.
Successful tracking is fundamental to any digital marketing campaign, and especially so to affiliate marketing. As affiliates are paid only for performance, if anything goes wrong in the tracking process, it is the affiliates who suffer. The merchant will still get the desired sales, but the affiliates won’t be rewarded. It is therefore good to bear in mind some of the problems that can be faced with tracking.
Multiple referrals, one sale – who gets the bounty?
With so many affiliates, it is not uncommon for a potential customer to visit a merchant’s website through the links of many different affiliates before finally making a purchase. Who do you think should receive the commission?
For example: A user sees a banner on a website he visits promoting a weekend in Paris, booked with Eurostar. The user clicks on that banner and checks out the deals on the Eurostar website. A cookie is set, as the first website is an affiliate of Eurostar.
He doesn’t book right away, but after chatting to his girlfriend, they decide to book the trip. He goes to Google, searches for ‘Eurostar weekend in Paris’, and clicks on one of the PPC adverts. This has also been placed by an affiliate, but a different one.
This time he books the trip. But which affiliate should be rewarded the commission?
Usually the most recent referral is awarded the commission, although there are some merchants who also offer compensation to other affiliates involved in the sales process. In the example above, the affiliate who placed the PPC advert would get the commission for this sale.
Consumers sometimes delete cookies from their computer. If this happens, then the sale will never be attributed to the affiliate. This practice does not seem to have a drastic effect on numbers, however, and so most affiliates will calculate this into their return on investment (ROI).
Merchants will often use some kind of tracking so that they can better optimise their own marketing efforts, or a merchant may make some kind of technical change to their website. It is crucial that any of these changes are tested first with the tracking software, to make sure that they do not create any conflict.
It is generally accepted practice that even if a merchant’s marketing effort is responsible for the final sale, the affiliate still gets the commission if it is within the affiliate’s cookie period.
Placing an order by another method
If the customer completes the action, but does not do so online, the affiliate will not receive commission. So, if a customer visits an online retailer through an affiliate link, but places an order over the phone, the affiliate will miss out on commission.
How do affiliates promote merchants?
Affiliates are digital marketers who are paid on a performance basis. Every type of marketing strategy will be found in the affiliate world, and affiliates can often be seen at the forefront of breaking technology and applying it to marketing strategies.
The basic aim of an affiliate is to send targeted traffic (that means customers who are very likely to perform the desired action) to a particular merchant’s website.
Affiliates may promote as many merchants in as many industries with as many tactics as they want, but they usually specialise. Most of the tactics will be the same as those that the merchant employs, but will reach a different part of the Internet population. Effective tracking takes care of any overlap, and will help merchants to adjust their spending for the most effective ROI.
The main types of affiliates can be broken up as:
- Personal websites. Affiliate marketing came to the fore as a way for personal websites to make money, although this now forms a small part of the affiliate marketing mix.
- Content and niche sites. These are websites created specifically around a topic, and any products promoted will carry affiliate tracking. For example, an affiliate may create a site dedicated to digital cameras, with tips and downloads to help you get the most out of your camera. It could review a number of different cameras, and offer links to purchase those cameras online. All of those links will be affiliate links. Seasonality is also a key time for content sites. Websites can be created specifically for Christmas, Mother’s Day, and many more key retail seasons.
- Email lists. Some affiliates run large opt-in email lists, and they market particular merchant offers through their email newsletters. Some renegade affiliates use spam email to promote merchant offers, but as affiliate marketing has matured, there are usually terms and conditions to prevent this in reputable industries.
- Loyalty sites (points, cash back or charitable donations). As affiliates earn a percentage of a sale, some affiliates ‘split’ this with the customer and create cash back or points-based shopping sites. There are also some that donate a percentage of the commission to a charity.
- Coupon and promotions sites. Some affiliates use unique coupons and offers to get users to click on their links; this benefits the affiliate, who earns a commission, and the buyer, who gets a promo or discount.
- Search advertising. Some of the most successful affiliate marketers are those who promote various merchants through paid search engine marketing. As these affiliates seek to find the highest earnings for the lowest CPC, this is also referred to as search arbitrage.
Mini case study: COUPONS
Coupon-focused affiliate marketing is very common in the digital marketing space. However, this can be perceived as cheap and untrustworthy. COUPONS is one website that offers this form of service.
The website is designed with several coupons on offer. Users can ‘clip’ the coupon, share it, like it, print it, and even tweet it. This website has been optimised with a strong Call to Action that entices users to take action. The coupons are informative and the calculator in the top right hand corner of the website updates how much the user is saving.
What makes this affiliate marketing programme unique is that the users can print the coupons. This form of affiliate marketing provides users and merchants with both online and offline experience. Therefore, merchants earn returns not only when a coupon is clicked on, but also when they are printed.
This is an example of a website that truly has the user experience in mind, and makes online coupon shopping fun!
Affiliate networks have many affiliates and merchants signed up to them, so they are an ideal source for recruiting affiliates if you are a merchant, or for finding merchants to promote if you are an affiliate. To the merchants, they provide a one-payment solution as the merchant will be invoiced for all the commission collectively owed, which is then dispersed to the affiliates.
As well as the affiliate and the merchant, there is generally a very important third party in the affiliate marketing mix – the affiliate network.
While some small affiliate programmes and some very large affiliate programmes (such as Amazon Associates) are run by the merchant, most merchants opt to use an affiliate network to provide most of the technical solutions required for an affiliate programme.
Affiliate networks publish the terms of the affiliate programme, provide tracking solutions, report on programmes, host creative banners, give commission payment options, and support both affiliates and merchants.
When the affiliate logs into a network, they will see the programmes on offer and all the relevant metrics they need in order to decide whether the programme on offer is worth promoting.
Affiliate networks usually do not charge affiliates to join. They can charge a merchant a setup fee, which will cover the cost of making sure that the tracking solution is successfully integrated, and can charge a monthly management fee,
depending on the level of support offered to the merchant. Affiliate networks usually charge the merchant a percentage of the commission earned by the affiliate (called a commission override), so that there are incentives for the networks if they perform well. As a rough guide, this is typically 30% of the commission rewarded to the affiliate.
Some leading affiliate networks are:
- Commission Junction – www.cj.com
- LinkShare – www.linkshare.com
- Affiliate Window – www.affiliatewindow.com
- TradeDoubler – www.tradedoubler.com
Setting up a campaign
Affiliate marketing forms an integral part of digital marketing – how would you go about setting up and launching a new campaign? Affiliate marketing should grow your business, and grow with your business, so it’s important to plan and prepare for long-lasting success.
First, you need a clear idea of your business’s identity, goals and unique selling points. No doubt you will have competitors that affiliates already promote; you need to be able to give affiliates compelling reasons why your programme is better.
With this in mind, you need to determine the goal of your affiliate marketing. If you are a new business, you may just want to build traffic and brand awareness. Depending on what industry you are in, your goal could be new customer leads, or it could be increased retail sales. Make sure that you are clear on what you want, and that your website reflects this.
Then, you need to decide whether you are going to run your own programme, from affiliate recruitment to tracking and paying, or whether you are going to use an affiliate network. If you are using an affiliate network, you’ll need to do your homework on the best networks to join. Look at:
- Where your competitors are
- Who has the kind of affiliates you want
- What the joining fees and monthly fees are
- How much support they can offer you
- What countries the network is in
You’ll also need to decide whether you will hire an affiliate manager to run your programme, whether you will outsource your programme management, or whether you already have the resources to run the programme yourself.
You need to do a full competitor analysis, focusing on your competitors’ affiliate programmes. Look at:
- Commission tiers
- Cookie periods
- Creative offerings
- Which affiliates they work with
- Incentives offered to affiliates
Prepare the basics that you’ll need to start a programme:
- Product feed
- Banners and other creative offerings
Using your competitor research, decide on commission, commission tiers, cookie period and incentives. Test the tracking software on your site, and make sure that it does not conflict with any other tracking you are using.
Now, you should recruit affiliates. Use your competitor analysis to contact potential affiliates, promote your programme through affiliate forums, use your affiliate network contact channels to approach affiliates, and approach sites that you think fit your user demographic.
And it doesn’t all stop once you’ve launched! The key to successful affiliate marketing is ongoing communication with and marketing to your affiliates.
You need to make sure you are on top of validating sales, so that they get their commission. You need to ensure that you stay competitive with your commission offering. And you need to keep your affiliates up to date with any information that could make them send more customers your way – more revenue for you and therefore more cash for them.
As affiliates are marketing in an online environment, they will use all of the digital marketing tactics. Some affiliates even run affiliate marketing campaigns for their own websites!
But as a merchant, how does affiliate marketing fit into the overall marketing mix?
For starters, affiliate marketing can allow merchants to add elements to their digital marketing with a fixed CPA. As an example, a merchant may want to promote their products through search advertising, but may lack the expertise to run a campaign. Instead of paying an agency, the merchant can recruit search affiliates to run search advertising, and the merchant will only ever pay for performance.