Introduction To Affiliate Marketing
This is the third part of the tutorial series “Journey Into Internet Marketing”. If you have not done so, it is recommended you read over Part 2 – Niche Research first.
One of the most effective marketing models on the internet involves a merchant selling his or her products through a network of affiliates. A merchant is responsible for providing the product that is bought by customers. The merchant also determines the price at which the item is sold. The affiliates play the role of a sales team by helping the merchant make more sales than they would be able to do on their own. Like many sales professionals, affiliates receive a commission from the merchant for their efforts.
The objective of an affiliate is to drive human traffic to a website that they own, and convince the visitors to her website to click on the links she has placed on her website. The links will take the visitor to the merchant’s website and when this happens a file is saved on the visitor’s computer, which allows the merchant to know that the visitor was referred by a particular affiliate.
The file that is saved on the visitor’s computer is called a cookie. Cookies are normally set to expire after a period of time, although indefinite cookies can also be used. This means that even if the visitor does not make a purchase on their first visit to the merchant’s site, but returns there at a later date, the affiliate will still be credited with the referral.
From the above, you can see that the job of the affiliate is to drive traffic to a merchant’s website via a link on their own website. This is how it typically works.
Let’s say Sophie’s PC has been infected by viruses, and she is desperate to disinfect her PC. She goes to Google and types in ‘cheap PC antivirus’. Google will then display websites that it thinks are relevant to that search term. We will assume that you have a website called thecheapestantivirus.com, and that it shows up on the first page of Google.
Sophie decides to visit your website and see what is on offer. Remember that as an affiliate your job is to presell her on the idea of checking out the website that you link to on your webpage. How do you this?
You could write about your experience with viruses and how you were able to get rid of the viruses by using an antivirus program that was cheaper than every other antivirus program you came across. You could go on to say that you installed the program, followed the instructions and all the viruses were eradicated within a few minutes of installing the program. You could also add that the program has protected your PC from viruses to the extent that you have not had another infection since you installed it.
You would also mention the name of the antivirus program and provide a link to the website of the antivirus vendor. Some visitors to your website will click on the link that will then take them to the merchant’s website, and that is where your job ends.
At the merchant’s website, they will be able to read more about the antivirus program and will be able to make a decision whether to buy the software there and then, or to keep on searching for other solutions to their problem. The job of the merchant’s website is to give them enough information that will help them decide to purchase the software if not there and then, then at a later time.
On this occasion, Sophie decides to shop around, so she bookmarks the merchant’s webpage and goes back to Google. Three days later, Sophie gets paid at work, and she is ready to buy an antivirus program. It so happens that the antivirus package you recommended on your website was indeed the cheapest she could find, so she goes to the bookmarked page and buys the software for $15.
Remember that a cookie was saved on Sophie’s computer, so the merchant knows that you are the affiliate that referred her. Since the merchant’s affiliate program pays out 40% commission to its affiliates, you will receive $6 from the sale of the software. You will also receive $6 for every other purchaser of the software that clicks on the links to the merchant’s website from your own website.
Most affiliate programs tend to aggregate commissions and pay out at set intervals with monthly and six weekly intervals being the most common. So though the revenue generated from Affiliate Marketing can be regular, it is not instant in many cases.
Commission rates vary across products, merchants and networks. Obviously, it is always better to get a higher commission but do not use the commission rate as the sole criteria for deciding what affiliate programs to join.
For instance a 10% commission on a $700 watch, is worth more than a 50% commission on a $100 watch. There is more to it though. The conversion rate of a product also comes into play. If two products sell at the same price, and pay the same commission, the product that has a higher conversion rate will earn you more money as an affiliate.
Some transactions such as the purchase of a watch are one off transactions. On the other hand, you have recurring transactions such as subscription to a satellite TV station. Commissions for one-off transactions are simple, because you just receive a percentage of the purchase price. For recurring transactions, however, there are a number of different ways that commission can be paid.
One option is to pay a commission upfront to the affiliate. This will usually be a higher percentage of the initial payment. For instance, if the monthly subscription to a satellite TV channel is $20, the merchant could decide to pay 100% of the initial purchase or even more than that to an affiliate that refers a new customer to them. This is because the company will usually earn a lot more money in the long term from recurring payments, than the initial purchase alone.
Another option is to pay the affiliate a recurring commission to match the recurring payment. So the station could pay affiliates a recurring 20% of the monthly subscription, meaning affiliates would earn a commission for as long as the referral remains a subscriber.
One thing worth noting about affiliate programs is that it is definitely a no-lose situation for merchants. The merchant will only pay out a commission when a sale is made. They do not have to worry about paying for non-performance, as is usually the case with traditional advertising.
This means that those companies that run affiliate programs can be much less selective about who they let on to the program. This is good news for people who want to try their hands at affiliate marketing, especially those that don’t have any experience. There are not many moneymaking opportunities as lucrative as Affiliate Marketing that you can join without any experience at all.
As you may imagine, there are a lot of affiliate programs available on the Internet. Most merchants actually outsource the management and running of their affiliate programs to dedicated affiliate networks. You will find that there are two major kinds of affiliate networks. Those that cater to digital products like videos, mp3s and ebooks, and those that cater to non-digital products like jewellery, electronics, and financial products.
Here is a short list of the larger networks:
Non Digital Products
The way that affiliate networks work is that the networks are responsible for recruiting affiliates for the merchants. They also provide textual and graphic links that affiliates can place on their websites. The networks are also responsible for tracking all the sales and origination of sales. They are able to keep detailed statistics for every merchant, product and affiliate. At the end of every payment cycle, the network will then reward all the qualifying affiliates by paying out commissions.
To qualify for a payout, the networks usually require that an affiliate has met a minimum threshold for that period. If the threshold is not met the payment is rolled forward to the next payment cycle.
One of the most popular Affiliate Marketing models is Cost Per Action (CPA for short). With the CPA model, the merchant pays the affiliate a commission when a visitor the affiliate refers to the merchant’s site carries out a desired action.
The desired actions can range from something as simple as filling out a form with information such as email address, postal address or zip code, to downloading free software or even viewing a set number of pages. Because the value of different actions varies, you will observe that the commission for CPA offers also varies by a wide scale. It is also common for CPA offers to be in absolute rather than percentage terms. So expect to see CPA offers as low as $1 per action and as high as $100 per action.
When you think about it, an action such as providing an email address is not as valuable as making a purchase. A lot of metrics and statistics go into working out the value of an action. The cost is then determined based on the established value.
Based on these metrics and statistics, CPA is also referred to as Cost Per Acquisition. This reflects the fact that the underlying principle behind every CPA offer is the ultimate cost to the merchant of acquiring a new customer or client.
Let’s consider a motor insurance firm. Based on their tracking statistics, they could know that out of every 30 forms that are filled out, one sale is made. That means that the action of a sale is thirty times as valuable as the action of submitting a form. A merchant who is happy to pay $60 for each referral that takes out an insurance policy will then be happy to pay $2 for a referral that fills out a form.
They know that by the time they have paid $2 for 30 referrals, they would have made one sale on average. So the final cost per sale actually works out the same in both instances.
From an affiliate’s point of view, it is easier for referrals to fill out forms than to make purchases. So if an affiliate sends over twenty referrals that fill out a form, they would earn $40. However if the merchant only paid when a sale was made, they wouldn’t have earned anything until one of the referrals made a purchase.
Psychologically, we know that people are much happier to do things that do not require them to spend money or hand over the details of their credit card. This results in a much higher conversion rate for these actions.
The bottom line with CPA offers that don’t involve sales is that the merchant is happy, because they know that eventually one of the referrals will make a purchase. The affiliate is also happy because they are getting paid even when their referrals do not make a purchase. It is a real win-win situation.
We can see that CPA offers are based on the premise that even though the conversion rate for non-purchase actions are higher from the affiliates point of view, from the merchants point of view they are still getting value for money because a series of individual non-purchase actions will ultimately result in a purchase. The cumulative cost of the individual actions that lead to one purchase is still the same as the cost of one individual purchase.
Contextual Advertising is yet another form of Affiliate Marketing that involves an advertising network sharing the proceeds of its fees with affiliates.
Contextual Advertising comprises targeted advertising that is placed on the websites of affiliates by the advertising network. The advertising includes a link to the advertisers’ websites, and each time the link is clicked the advertiser pays a fee to the advertising network. In turn, the advertising network pays a portion of that fee to the affiliate that owns the website.
This is a typical example of the Pay per Click (PPC) model. Google is actually one of the major advertising networks, and its Adsense program is almost certainly the most popular contextual advertising program on the Internet. Other successful contextual advertising networks include Yahoo! Publisher Network, Microsoft adCenter and Kontera.
Since the advertising served by these networks are directly relevant to the content of the page on which it is served, the adverts are said to be in context with the environment.
The success of contextual advertising rests on the ability of the network to determine the context of the content on the affiliate’s web page, and thereby place advertising that is relevant to the content.
In the early days, the techniques used to determine the context of a webpage were considered to be invasive of the privacy of web users, and created quite a furore at the time. Not surprisingly, the success enjoyed by these programs was rather limited, and they did not survive for very long.
Modern networks like Google use the keywords of a web page to establish context and determine what kinds of ads are relevant to the page.
Since the ads are targeted and relevant, there is an increased likelihood that visitors to the page will click on one or more of the ads. This improves the chances of earning money for both the advertising network and the affiliate.
If my web page is about holidays in Spain, it is not very likely that a visitor to my web page will click on an advertisement for cheap smoke alarms. However, if the ads on my web page are about cheap holiday villas in Spain and car rental companies in Spain, I am much more likely to get a click through on the ad.
In contrast to the CPA model, no further action has to be taken by the visitor on arrival at the advertiser’s website. The desired action is a click through, and once this is achieved the advertising network bills the advertiser.
I will be paid a commission by the advertising network each time someone clicks on one of the contextual ads on my holidays in Spain web page.
If I had other pages on the same site that talked about holidays in Ireland, then the ads that appear on those pages will not be about Spain, but about Ireland. Every single page on my website will have advertising that is targeted to the context of the content on that page.
Adsense and other contextual advertising programs have become very popular over the years. They are one of the easiest ways to make money online. All you need to do is sign up with the advertising network and insert some code into your web page. You could literally start earning money the next day especially if you own a heavily trafficked website.
One potential problem with programs like Adsense is the tendency for them to be abused by affiliates. People have been known to sign up with Adsense, and then spend all day clicking on the ads that appear on their website. In the early days, people were able to get away with such fraudulent action. However, Google and other networks have now put safeguards in place to discourage such actions.
To further reduce the incidence of fraud, networks and sometimes even the advertisers themselves require affiliates to go through a strict approval process before they are allowed to join the program and display ads on their website.
I have just discussed contextual advertising in its most common form. It is worth noting, however, that there are different categories of contextual advertising, some of which are discussed below:
Content Target Advertising – the entire content of a web page is scanned, and only ads that match the keywords of the content are displayed. So if a web page is about cars, then ads about car dealers and car repairs will be displayed.
Site Target Advertising – this requires the advertiser make their own choice of target site from a list of sites provided by the advertising network. Ads related to the advertiser are then displayed on the chosen sites. For example, Microsoft could choose to have their ads displayed on MyBestSoftware.com
Bid Based Advertising – affiliates can bid how much they want to be paid to display the ads on their website. Advertiser can also indicate how much they are willing to spend. An example is when an advertiser indicates the maximum they are willing to pay is $1 per click, and then an affiliate indicates that the minimum they will accept is $0.50 per click. Since, both advertiser and affiliate bids intersect, the ads will then be displayed on the affiliate’s website.
We have presented Affiliate Marketing in all its glory. You should now be familiar with the different models of Affiliate Marketing, and how Internet Marketers can earn money as affiliates.
The whole idea of an affiliate is to presell a visitor to visit a merchant’s site. The commission earned by an affiliate depends on the action taken by the visitor when they get to the merchant’s site, and the model of Affiliate Marketing that is in place. As soon as the visitor takes the desired action, the affiliate is credited with a commission. In most cases, the affiliate is not paid immediately.
The amount received by the affiliate will either be a percentage of a predetermined amount or an absolute amount in itself.
There are many models of Affiliate Marketing including Pay Per Click (PPC), Pay Per Lead (PPL), Pay Per Sale (PPS) and Cost Per Action (or Cost Per Acquisition).
Both affiliates and merchants favour CPA in particular. The value of an action taken by a visitor is statistically valued, and the cost of the action is derived from the calculated value of the action.
We also looked at Contextual Advertising and how it is used to serve relevant and targeted adverts on a web page. It is one of the easiest ways to earn money online, but has been subject to abuse in the past. There are different models of Contextual Advertising, but the most popular one is PPC.
Almost anybody with a computer and Internet access can become an affiliate. The trick is in identifying lucrative products to affiliate with, and then drive traffic to the website of the merchants offering the products.
It is now recommended you proceed on to Part 4 – Clickbank & Affiliate Networks