We’ve talked about how search advertising and display advertising can be used by marketers to communicate offerings and drive transactions, but there’s another way to do this by involving online influencers and bloggers: affiliate marketing.
Affiliate marketing is the process by which an online merchant provides commissions on purchases made by traffic originating from affiliated websites or social media accounts. Blogs, videos, social media posts and other content that are used to review, endorse, highlight or just plain talk about products are easy to monetized with affiliate marketing.
Amazon pioneered this online business model in 1996. There were earlier affiliate programs, but Amazon created a system that made it easy for just about anyone to participate. In Amazon’s program, affiliates operate as a selling agent for Amazon’s products. As this is a form of advertising, Amazon categorizes its Associates program as a marketing expense in their investor reports.
How Do Affiliate Marketing Programs Work?
So how do affiliate programs work?
Every affiliate marketing program has three actors. The first is the consumer. This is the online shopper or, hopefully, buyer. The second is the publisher. This is the person who signs up to be the affiliate. They might run a blog, record videos, or post to social media. The third is the Advertiser or Merchant. They are trying to drive traffic to their site so they can sell their products or gather valuable leads.
Let’s look at how this might play out. A Consumer is looking to buy a new laptop. One of the first places a consumer may visit in their search for a new laptop is Google for product information, or YouTube to watch product review videos, or even social media to hear thoughts from online influencers. In this scenario, the Publisher or Affiliate runs a blog and is looking to monetize the content on their website. The Publisher would likely join and affiliate program from the third actor, the Advertiser. The advertiser is an online merchant looking to sell laptops in their online store.
So the Consumer visits the Publisher’s blog. The Advertisers runs advertising on the Publisher’s blog and after the Consumer clicks an affiliate link on the Publisher’s website leading to the Advertiser’s site and buys a new laptop, the Publisher then will collect a commission on the sale.
Now this is the exact sort of scenario you might see with a Publisher that belongs to the Amazon Associates program. Since Amazon operates their own affiliate program they can signup publishers directly. But creating and operating your own affiliate program can require a lot of resources, which is why many Advertisers decide not to create their own affiliate programs from scratch and instead work with a third party to manage the affiliate relationships and technical components.
Affiliate Marketing Brokers
These third parties are called brokers. Advertisers sign up with Brokers to have them manage their affiliate programs and Publishers sign up with Brokers to help drive profitable traffic to the Advertisers through the Broker’s network.
CJ Affiliate is an example of an affiliate broker. They cater to both the publisher and the advertiser helping to promote a variety of products.
At this point you might assume that all affiliate programs work basically the same. A Consumer has an interest in some product, encounters a Publisher’s site where the Consumer might click on a link that leads to the Advertiser’s website. While that may be true for a lot of affiliate programs, not all affiliate programs are based on a pay-per-sale model. In other words, not all programs benefit the advertiser through product sales.
Affiliate Marketing Pay Models
Let’s look at the different forms of Affiliate Pay Models.
First, is the Pay-per-Sale, which we’ve already discussed. If a consumer purchases something on the Advertiser’s site the Publisher will get a commission.
Next is Pay-per-Lead. Quite a few Affiliate programs are not based on getting someone to buy someone, but instead getting someone to try something, or ask for more information about something. In other words, affiliates are paid to generate leads. Often these are going to be leads for services that cannot be fulfilled through digital means.
Advertisers may also choose to run their programs using a pay-per-click model. If you recall, pay-per-click or cost-per-click is the model used in search advertising. So affiliate hyperlink that appears on the publisher’s website is tracked the same way as a search ad on a search engine results page.
Finally, pay-per-impression uses the same model as display advertising, but often without the graphical element.
Pay-per-sale and pay-per-lead are very common forms of affiliate marketing, while pay-per-click and pay-per-impression are uncommon. Pay-per-impression is especially rare.
Let’s look at an example from the advertiser’s side and revisit the Amazon Associates program and look at what pay models Amazon uses. As you can see from their Program Fee Rates schedule, that they pay out at different rates based on the product category with Luxury Beauty product paying the highest commission rate at 10% and video games and video game consoles paying the lowest at 1%. If we scroll down the page and look at Amazon’s Special Program fees, you can see that Amazon will pay out dollar amounts for specific actions that a consumer might take, in other words pay-per-lead. For example, if you’re running a website and include a link to Amazon Business and your referral turns into a successful registration for an Amazon Business account, Amazon will pay you $15. Not too shabby.
But what do things look like from the Publisher’s side?
Let’s visit one of the biggest Amazon Associates affiliates out there, Wirecutter. Wirecutter is a product review website that was purchased by the New York Times in 2016. The review a wide variety of products, but tend to focus on electronics and home items. As you can see, they review items and make their recommendations and—surprise, surprise—the links they embed take the user to Amazon. But how does Amazon know how to credit Wirecutter with a commission on a sale when the Consumer buys this product?
Affiliate Marketing Tracking Mechanisms
Well, here’s a hint on the first method. There are actually two different affiliate tracking mechanisms used to accomplish this. The first is the Affiliate URL. When a hyperlink is embedded into a Publisher’s website, it contains a number of extra elements that tell the advertiser or merchant about the affiliate and other information. Let’s breakdown the elements of an affiliate URL. The first component is the Product ID. The is the most basic part of the URL and absolutely required for the URL to get the consumer to the product page. Next, is the affiliate ID. This is everything assigned the “tag” parameter, in this case “thewire6-20”. This is the minimum required for the advertiser to be able to assign a commission to an affiliate. The next two parameters are optional. The Campaign ID is useful for a Publisher to track commission income categorized into different campaigns. and finally, for established affiliates with a large number of repeat customers, like Wirecutter, the Customer ID allows the affiliate to break down their income based on specific customers.
The second mechanism used is a bit easier to implement and is typically used in places where a hyperlink might be impractical. Think of a sponsorship in a Youtube video. Affiliate code may often be referred to as coupon codes, but in addition to providing a discount to the consumer, they also provide referral income for the affiliate associated with the affiliate code.
Affiliate marketing has become a very attractive source of passive income for many online entrepreneurs and just going on the thousands of videos on the subject on Youtube, it shows no signs of letting up. Whether you’re an advertiser, publisher or just a consumer looking to buy something, affiliate marketing might be a great digital marketing solution for an additional revenue stream.