Online marketing basics: affiliate marketing

Affiliate marketing is considered a classic discipline in online marketing. The foundation for this now worldwide marketing model can supposedly be attributed to an internationally renowned trading platform: Amazon. The idea was to advertise products on thematically similar websites and then pay the website operator a little commission if this led to a new customer. Within the last 20 years, this simple model has developed into a powerful marketing tool that should be considered an essential part of any online marketing plan.

What is affiliate marketing?

Affiliate marketing is a performance-based marketing model by definition. Payment for it works on a simple commission basis, in which two partners come together: the merchant and the affiliate.

  • The merchant (also known as the advertiser or the dealer) wants to advertise products or services on an external website. For this, the merchant readies advertising media like banners and offers a level of commission, dependent on the billing model (see below).
  • An affiliate (publisher or website operator) offers available advertising space (and in doing so, the reach of their website) to the merchant. Affiliates are essentially middlemen between merchants and potential customers. This service can be offered either by embedding banner ads on the affiliate website, or including affiliate links in editorial entries.

Affiliate networks, or affiliate service providers (ASP), help connect potential affiliates and merchants. The affiliate software enables technical implementation and conversion tracking, which is first possible after calculating the commission. Through affiliate links or banners, the merchant can plainly see if a customer has reached the website through an affiliate partner. Each time the defined target is reached (e.g. if a sale is made in the online shop) then the merchant pays the affiliate the corresponding commission.

The most common exchange in affiliate marketing happens via the website of the affiliate. But affiliate programs can also be integrated into e-mail marketing campaigns (newsletters, mailings) or used via social media networks.

Commission models

As previously discussed, there are various methods of compensation for the affiliate. The following models are the most commonly used forms of reimbursement in affiliate marketing:

Pay-per-sale

Pay-per-sale or pay-per-order is the most widely used compensation model in affiliate marketing. The exchange is completed after a customer successfully places an order with the merchant. Commission must then be paid accordingly if the customer reached the merchant’s website via an affiliate link or an embedded banner before placing the order. There’s usually either a fixed fee or a percentage fee, depending on the product or service offered, but a mixture of the two is also common. There’s typically also a commission if customers visit a merchant’s site via affiliate marketing and then return to buy the product later, too. This is made possible thanks to cookies that preserve the product link for between 30 and 60 days after. 

Pay-per-click

This method calculates the number of clicks on the ad – though the use of this model is becoming increasingly rare. In the early stages of affiliate marketing, the pay-per-click compensation model was widespread and frequently used, above all because of how simple it was to implement. But research proved that, in most instances, the ROI (return on investment) for the merchant remained quite low. At the same time, there’s a risk of manipulation by the affiliate. Prices in pay-per-click commission tend to be very low.

Pay-per-click-out

In pay-per-click-out, visitors who click to visit a merchant’s website must make at least one additional click (click-out). This is designed to help mitigate the disadvantages of the simple pay-per-click model. Once the potential customer has made a second move on the merchant’s website, a commission is paid.

Pay-per-lead

In the pay-per-lead commission model, contact must be established with a customer before payment is made (i.e. when a customer fills out a contact form or requests further information). Pay-per-lead is typically employed for products that rely on a lot of consultancy, like insurance. This is because a customer will usually take some time to consider the contract, often even going into a store to sign an agreement; making pay-per-sale less relevant. The merchant pays a commission to the affiliate for every contact made to a customer, known as a lead.

Pay-per-sign-up

Pay-per-sign-up is a form of the pay-per-lead model. The affiliate claims compensation whenever a user registers on the website of the merchant.

Pay-per-install

Pay-per-install is a derivative of the pay-per-sale model. The (initial) user software installation triggers a commission. This is usually used for browser toolbars or free demo versions.

Pay-per-link

Pay-per-link is commonplace in what are known as advertorials or sponsored posts. For example, if a blogger includes a link to a merchant’s product in one of their posts, a one-time commission is paid.

Lifetime commission

In what’s known as a lifetime commission, an affiliate receives a steady imbursement after the first action of a customer. This compensation continues for a ‘lifetime’, which in this instance refers to the length of time that the newly acquired customer remains loyal to the merchant’s company. This method of compensation is commonly used by merchants who offer subscriptions (e.g. dating sites). The affiliate is paid a commission once the subscription is taken out and after every renewal.

Airtime commission

The principle of airtime commission is specific to the telecommunications field and is used by companies like mobile phone contract providers. Using this method, the affiliate receives a commission for every minute of paid phone calls made by the referred customer (over a predetermined time period).

Affiliate marketing for merchants: advertising without risks

There’s one particular advantage that makes affiliate marketing so appealing for merchants: it means no prior advertising costs. The results-based commission means that the affiliate is only paid once clicks are delivered, sales are made, or subscriptions are placed. The bottom line is that affiliate marketing is usually (depending on the billing model) a very affordable way of canvassing to help increase overall awareness of a brand. Through research and precise analysis, merchants can locate suitable affiliate partners, or even affiliate networks, to help them target an exact market group and eliminate wasted advertising (e.g. a cosmetics merchant could use a beauty blog as an affiliate partner). Through tracking each individual link and the use of cookies, it’s possible to measure and clearly see success, providing good opportunities for optimization.

But if no suitable affiliate network can be found, then the lack of infrastructure is a disadvantage. This would mean a company would need to put time and money into development, incurring additional marketing costs as a matter of course.

Affiliate marketing for affiliates: no financial security

For the affiliate, e.g. a blogger, affiliate links and banners should be seen as an additional source of income. Because the ad content is prepared and sent by the merchant, implementing affiliate marketing on a blog or website is relatively straightforward. There’s also a wide selection of different partner programs, giving every publisher an opportunity to enter into affiliate marketing – whether they’re a small, niche website or a large discount and voucher portal. The downside of affiliate links is that it’s very difficult to make a calculated prediction on revenue – meaning that financial forecasting is tough to achieve.

As an affiliate, you’re also always dependent on the merchant. The quality of the linked offer plays a very big role, particularly in pay-per-sale deals: if the reader is disappointed by the content of the link or the banner ad, they may cease to visit the blog. Another drawback is the lack of transparency in the commission settlement. It’s almost impossible for affiliates to inspect the merchant’s figures.