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Affiliate Marketing 101

Remember when you were a little kid, and you opened a lemonade stand in front of your house? When sales went slack, you sent your little brother down the block to drum up business from the kids playing in their front yards.

You didn't know it at the time, but he was your marketing affiliate. If you were like my older brother, you paid him a small share of the extra sales he generated. And at the end of the day you gave him a big hug.

Today, affiliate marketing is no different, except that it's all dressed up with Internet jargon, Web-based technology, online interactivity and computer-driven sales reporting. The hugs are missing, but that doesn't stop it from being one of the fastest-growing and most important ways to build brand awareness and increase sales, particularly since almost every other sales approach has already been so thoroughly mined.

How affiliate marketing works

The basic transaction in affiliate marketing goes like this:

  1. You, the marketer with a product or service to sell, make arrangements for lots of other Web site owners to become your "affiliates."

  2. Each of these affiliates (sometimes called "publishers") puts a link you have pre-approved on its Web site, allowing its visitors to hyperlink to your Web site.

  3. You pay your affiliates for this on the basis of click-throughs, inquiries or sales.

Computers keep track of the whole thing, and because they have detailed control over the Web experience, affiliate marketing programs can be set up to display an advertiser's message only to a very select audience. Impressions can be delivered on the basis of not only what Web site a person is visiting -- akin to what magazine they are reading or what TV show they are watching -- but on much more finely grained details, such as the keywords they are using to search online.

Companies as diverse as Amazon, American Express, National Geographic and even Rugman.com (selling "One-of-a-kind Oriental and Persian area rugs at unbeatable prices") have found that affiliate marketing is a powerful and cost-effective way to find new prospects and turn them into customers.

One reason this kind of advertising is often called "pay for performance" is that, unlike traditional advertising where you pay primarily for exposing your message to prospects, affiliate marketing fees are generally based on how well the campaign works. Pricing can be set on the basis of cost-per-click, cost-per-action, cost-per-lead or even cost-per-sale. To reinforce the notion that advertisers are paying primarily for customers, some people like to term this industry an exercise in revenue sharing.

To support the affiliate marketing process, a number of infrastructure companies, such as Advertising.com, Performics and AffiliateFuel, serve both the marketers and their affiliates. Individual affiliates find it easy and advantageous to join these networks, which help them obtain access to advertising that suits the same audiences their Web sites are already serving. Advertisers find it convenient to hire these networks to handle the signing and support of marketing affiliates, which includes everything from tracking referrals from and cutting weekly or monthly checks for each and every affiliate to answering affiliates' technical support questions on the intricacies of Web-based affiliate marketing, right down to how to place an advertising banner on their site.

But affiliate marketing can be handled in-house, too. There is dedicated software, such as AffiliateGuerrilla and AffiliateShop, that lets a company sign up and manage a large number of marketing affiliates without the help of an external affiliate manager. This approach lets marketers sidestep the standardized compensation programs offered by the networks, so they can write their own contract and create their own rules about how the affiliate marketing program will operate. It also lets them save on commissions, since there's no middle-man between them and their affiliates.

Cheating can be a problem, but doesn't diminish affiliate power

But while affiliate marketing is proving effective for many product and service marketers, it's not a perfect system. One of the biggest problems is cheating. Because the whole system is computerized, hackers have found ways to automatically trigger thousands of clicks on an advertiser's banners. And hackers aren't necessary for this. Many people have shown a willingness to sit at their terminals and click repeatedly on a Web site's advertisements just for the few pennies they earn from each click. To the advertiser, this kind of activity looks like thousands of people coming to the site as potential customers. In reality, of course, not one of these spurious visitors is interested in buying. Only the advertising expenditure is real.

Cheating goes the other way, too. New technology for affiliate marketing, such as tool bars, browser plug-ins, e-wallets and shopping bots, allow nefarious operators to hijack the reference markings linked with an affiliate's posted advertisement. This has the effect of diverting performance payments away from the Web site operator who honestly earned them, and eventually shattering the effectiveness of the entire affiliate team.

But despite the problems, affiliate marketing is a powerful force. It's one of the main reasons so many people are, for example, becoming bloggers. They're putting up highly personal Web sites in hopes of attracting a unique audience that they can then expose to the high-commission advertising from the marketers with which they're affiliated.

It's a rapidly evolving business, and no one can say what new technology will arrive tomorrow to change its shape and substance. But it's clear that for hundreds, if not thousands of manufacturing, sales and service firms, affiliate marketing is a viable approach to developing and maintaining a profitable online presence.

Robert Moskowitz is a consultant and author who speaks and writes frequently in the United States and abroad on such topics as white collar productivity, knowledge management, practical use of the internet, telecommuting, caring for aging parents,...

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