Online affiliate marketing is a proven way in which brands and marketers can drive sales, transactions, and awareness about their products through a third party partner. The affiliate marketing gurus advocate the benefits of this performance-based tactic as an opportunity for advertisers to pay only for proven results. At the same time however, seasoned marketers warn that its cost-benefit analysis does not always pan out. The purpose of this article is to present a holistic overview of online affiliate marketing and determine its main benefits and disadvantages. Read ahead to identify whether online affiliate programs are a method that you want to utilize in your marketing efforts.
How it began
The early advertisers utilizing the affiliate marketing tactic included CDNOW and Amazon. In 1994, CDNOW launched a program with music-related websites. Sites that reviewed a particular album would also host a link to CDNOW where they could purchase this album. Two years later, Amazon started its Associates Program. The idea was that publishers would place banner and text ads for different products available on Amazon on their websites. When readers clicked through to Amazon and purchased the item, the publisher received a payment. To date, Amazon claims to have over 1 million affiliates worldwide. Since then, multiple companies have utilized the affiliate marketing tactic in their efforts and the field continues to grow.
According to the Internet Statistics Compendium from 2007, adult, gambling, retail industries, and file-sharing are currently the most active sectors for affiliate marketing, but travel, finance, and mobile phones are expected to grow as well. As an example, one of the most recent success stories include Debenhams' campaign. The second largest department store chain in the U.K. executed a mobile coupon trial with two popular affiliate sites, VoucherCloud and MyVoucherCodes. Although Debenhams used multiple channels to market the promotion, it was the affiliate marketing that led in results, driving 57 percent of in-store sales revenue. Debenhams continues to experiment with the online affiliate marketing space. It has recently introduced the opportunity for affiliates to use video content within its ads.
Definition and execution
So, what exactly is online affiliate marketing? It is a partnership between two sides -- the advertisers whose goal is to promote their products, and the publishers who are owners of online platforms (affiliates). The affiliate commits to promoting the advertiser's product or service through a link or a banner ad placed on their website. In exchange, the merchant commits to paying a certain commission to the affiliate. The amount of the commission is dependent on the payment model that the partners have previously agreed upon.
There are multiple types of compensation models for affiliate marketing. Depending on the advertiser's goals, the relationship between them and the affiliates can be based on revenue-share, CPA (cost-per-action), CPL (cost-per-lead or online lead generation where the advertiser pays for a sign-up from a consumer who is interested in the offer), CPC (cost-per-click) and CPM (cost-per-thousand, where publisher displays the advertising on his or her website, and receives payment based impressions). Some partnerships are based solely on one payment model while others employ a mix of a few, for example CPA and CPL models can be combined.
To begin an online affiliate marketing program, the advertiser needs to decide on the logistics of the execution. The advertiser can run affiliate programs in-house, wherein it has to identify potential affiliates, use a specific software to track the progress of the program, and send out the payments. This can be a very time-consuming process with each of the steps requiring significant man-hours and a dedicated team. Identification of the affiliates themselves is a very complicated process. Affiliates fall within various categories and can be anything from a personal website, to an online newsletter coupon or rebate website, to a shopping portal, and so on. There are no industry-wide standards for the categorization of the affiliates.
As an alternative, the majority of advertisers work with affiliate networks such as Affiliate Future, Google Affiliate Network, LinkShare, or CommissionJunction. These companies are full-service networks that act as the intermediaries between the publisher and the advertiser. They already have an established list of publishers and can handle tracking, reporting, and payment processing.
An important element of affiliate marketing campaigns is the success metrics. Evgenii Prussakov, an affiliate marketing expert and program manager who has contributed to the online marketing success of such top brands as Forbes, Nokia, Hallmark, Warner Music, Skype, and Forex Club, advises that there are multiple success metrics. Conversion rate, measured as the ratio of casual visitors against those who engage in the desired actions, is a critical factor. However, it is important to remember that the size of the company, the brand's importance, and the sector in which the business operates will affect the rate. For instance the following industries can expect, on average, the following conversion rates:
- Software: 4 percent
- Catalog: 3 percent
- Specialty: 1.4 percent
- Outdoor and sports: 1.3 percent
- Fashion and apparel: 1 percent
Prussakov also notes that it is important to interpret the conversion rate in the context of the following performance indicators:
Reversal rate, or the percentage of affiliate transactions that the brand has to cancel or void throughout the campaign. The less such transactions, the better for the advertiser.
- Activity index, or the percentage of affiliates active in the program over a given period of time
- Traffic to the website driven by affiliates
- General increases in the sales or other goals that the advertiser was working towards
All of the above should be taken into consideration when an advertiser is measuring a success of its online affiliate marketing campaign.
Benefits and disadvantages
Having established the logistics of online affiliate marketing campaigns, I would like to discuss the reasoning behind them. To offer a comprehensive overview of affiliate marketing, the following section will discuss the benefits and disadvantages of affiliate tactics. First, an advertiser can be convinced to execute such campaigns because of the following reasons:
- Affiliate marketing is essentially performance marketing, so the most obvious benefit is that the advertiser only pays for solid, proven results
- By executing online affiliate marketing, advertisers can potentially reach a wide audience, which will generate more awareness for their brands, and more customers in the long term
- The cost-benefit analysis can be favorable if marketers decide to work with affiliate networks, which can take care of all of the execution stages. This can reduce the advertiser's engagement to a minimum
- Affiliate marketing results can inform the company's market research department about consumer trends and demands, because the consumers arrive to the advertiser's website from across the web
At the same time, however, marketers should be wary of some of the drawbacks of online affiliate marketing campaigns because the advertiser may spend a lot on commission, set up and maintenance fees, the affiliate marketing model may not be cost-effective. Also, the advertiser can be duped by affiliates who engage in false advertising. When campaigns are not managed well, the brand can suffer from working with affiliates who create fake traffic to the website, or click on the ads to get the commission. Others may order the product themselves or make false claims about the brand in order to convince its audience to participate, which may harm the advertiser's brand image and ultimately sales. Additionally, the messaging and location of the ads may not align with the advertiser's standards
The above disadvantages can be fixed if the campaign is managed well.
Here are some of the best practices that should guide an advertiser who is launching an affiliate program. These tips will educate brand managers on how to avoid the above-mentioned drawbacks while maximizing the benefits of affiliate marketing.
If possible, advertiser should carefully screen the affiliates that he or she is working with, and have a good mix of various platforms. New affiliates should also be recruited on a regular basis. The selected affiliates should possess established branding and an audience that trusts their judgment. It is often the quality, not the quantity, of the publishers that defines a successful affiliate marketing campaign.
Maintain good relationships
The advertiser should also establish and maintain good relationships with the potential affiliates. Although identifying the right partners, establishing and managing the relationship takes time, it is also beneficial in the long-term. This will stimulate the affiliates to perform better. These engaged affiliates will be more likely to pay greater attention to the particular campaign, spend more time on it, and care about the results.
Consider your payment models
When deciding on the payment model, the advertiser should consider the models that are the most applicable to the advertiser's industry. According to Evgenii Prusakov "traditionally, detail-oriented advertisers employ the pay-per-sale model, service providers use the pay-per-lead one, while B2B vendors successfully combine both." In the decision-making process, the advertisers should calculate the maximum that they can afford to pay the affiliates, research competing affiliate programs to ensure that their offer is competitive, and decide what part of the commission should be left for additional bonuses or other financial incentives.
When negotiating the details of the agreement with the affiliates, it is important to be as detailed and specific as possible. Besides determining the payment model, the advertiser must also clarify what qualifies as an action, a lead, or impression. During the negotiations the advertiser should also specify if there are any restrictions that the affiliate should take into consideration, such as leads only from certain locations.
Use good analytics software
Most of the disadvantages mentioned above can be successfully eliminated if the advertiser or affiliate network uses good analytics software. The programs should also be regularly managed, which should ensure that the affiliates comply with the advertisers' rules.
Consider multi-tier programs
The advertiser should also specify whether multi-tier programs are of interest to the company. In these executions the particular affiliate is allowed to recruit sub-affiliates who will work on his behalf for a revenue share, while the advertiser will have to pay only the original affiliate.
Combine your techniques
Depending on the industry, advertisers should also consider combining multiple online marketing techniques for best results.
Joanna Janus is senior manager of digital marketing at HIP Genius.