In a Nutshell, Affiliate Marketing is all about Referral

Let's say you recommend a restaurant to your friend. Your friend visits the restaurant and in turn the restaurant makes money - all thanks to you! Normally you wouldn't get rewarded for this, one of the most simple and natural forms of marketing called word-of-mouth marketing. However, in some instances it is possible to earn a commission or fee for recommending a product or service; this is known as referral marketing. Referral marketing has worked in the offline world for many years; but it is online that referral marketing has really found a home.

The Internet is a connected place. People navigate by a series of links, each site referring the user to another site with each person referred to a website being a potential client. As each click can be accurately tracked, it is very easy to reward sites for referring customers. This system of reward where compensation is based on referral is called Affiliate Marketing.

It Takes Two or More to Tango

The basic parties in an affiliate program are:

The Merchant: The individual or company that wants to sell its service or product

The Affiliate: The individual or company that allows their website to be used for the marketing of the merchant's product

There can also be more parties in the mix, depending on how big the affiliate program is. Some larger affiliate programs require a lot of work to maintain the relationship between the affiliate and the merchant. In these cases the merchant can hire an experienced company to run their affiliate campaign for them, or they can join an affiliate network.

Affiliate networks help suitable affiliates and merchants to find each other amongst the thousands of affiliate programs on the Internet. In return for this service they usually charge a set up fee, or take commission on sales.

No Referral, No Reward!

The unique aspect of Affiliate Marketing is that affiliates are only rewarded when they make a referral. This is called a "pay per performance" model of advertising. That means unlike traditional online advertising, with a cost per impression basis, no money is wasted on advertising that doesn't end in a lead or sale.

How the affiliate is paid is decided upon at the initial contract stage and is usually on either a cost per lead (CPL) or cost per acquisition (CPA) basis.

CPL: The affiliate is paid for an enquiry made through their website - usually by filling in a form or by sending an email
CPA: The affiliate is paid for a sale made though their website

Most merchants prefer a cost per acquisition basis, as this ensures that the affiliate is paid only when the sale is complete - the merchant therefore never loses any money.

Affiliates can also be paid either on a commission basis, where the affiliate earns a percentage of the sale, or on a fixed fee basis.

The merchant can set this payment structure to be the same for all affiliates. However, it is usually in the merchant's interest to allow each affiliate to be rewarded differently, depending on their performance. For example:

• 1-5 sales = 10% commission of sale

• 6-10 sales = 15% commission of sale

• 11-15 sales = 20% commission of sale

When the merchant offers incentivised payment schemes the affiliate is likely to be motivated to deliver more sales. More sales benefit both the affiliate and the merchant.

Sounds Good. But Does It Really Work?

Yes it works! One of the first affiliate programs ever created helped Amazon.com to become the giant it is today. Jeff Bezos, the CEO and founder of Amazon.com apparently thought up the idea at a cocktail party while talking to a woman who wanted to sell books through her website. It occurred to him that she could refer her website traffic to Amazon.com, and earn a commission on the books her traffic bought. Thus the Amazon Associates program was born in 1996 and is today one of the most popular and successful affiliate programs on the Internet.

Keeping Track

It is very important to track each affiliate's activity and their adverts in order to ensure that they are rewarded correctly. This is done with specialised affiliate program software.

The basic data to track includes:

• The number of impressions (how many times the advert was seen)

• The number of clicks (how many times the advert was clicked on)

• The number of conversions (how many times the enquiry/sale was completed)

• The price of the sale and which product was sold

These statistics should also be used to optimise the affiliate's campaign. Some adverts work better on certain sites, depending on the demographics and content of that site. Also, affiliates should keep note of where the advert is placed - as placement can affect how often an advert is clicked on.

Although it is the affiliate's responsibility to place adverts on their site, it is the merchant's responsibility to ensure that the affiliate is aware of any promotional changes and new adverts available for downloading. It is also in the best interest of the merchant to provide the affiliate with tips on how to improve their campaign, as more sales benefit both parties.

Growing and maintaining this relationship with affiliates is very important for the merchant. Regular contact in the form of affiliate-program emails is a common way of keeping the affiliate up-to-date with new promotions and ideas on how to optimise their campaign.

Relevance

As with all advertising, the success of an affiliate campaign is dependent on relevance. The more relevant an affiliate program is to the affiliate's audience, the more likely it is to be successful. For example, a site about holidaying in Cape Town might consider joining affiliate programs that advertise accommodation, car hire, day trips, travel insurance or travel guides about Cape Town.

Returns from a relevant and well-managed affiliate campaign can be much higher than any CPM (cost per thousand impressions) online advertising.

It's a Win-Win Situation

The advantages of the affiliate program for the merchant include:

• Reaching a larger online audience by advertising on many sites

• Free branding on affiliates websites

• Not paying for advertising unless a lead or sale has occurred

The advantages for the affiliate include:

• Earning regular revenue through their website without having to sell anything themselves

• Access to advertisements and a tracking system

• Advice and support on how to run and improve the campaign

So, whether you are a merchant, with a product to sell, or a website owner with an audience to sell to, you can benefit from starting or joining an affiliate program.