Affiliate marketing is a business practice in which an organization places some sort of advertisement on an affiliate’s (or a partner’s) page in an attempt to generate traffic to its own website. In return, the advertising organization pays its affiliate using one of several different compensation methods – revenue sharing (also known as cost per sale, or CPS), cost per action (CPA), cost per click (CPC)/pay per click (PPC), or cost per mille (CPM), as defined below:
- Revenue sharing, or CPS, compensation accounts for about 80% of affiliate compensation programs and involves the payment of a certain percentage of sales revenues to the affiliate on behalf of the advertising organization.
- CPA compensation, also known as pay per action or PPA compensation, accounts for approximately 19% of affiliate compensation programs. In this model, the advertiser pays its affiliate when a user takes a certain action, such as making a purchase or submitting a form. Direct response advertisers consider CPA/PPA the best way to purchase online advertising because the advertiser pays its affiliate only when the user takes the specified action(s).
- A CPC or PPC compensation program requires the advertiser to pay its affiliate when the advertiser’s ad is clicked. The cost per click is the cost to the advertiser of a single click on its advertisement.
- CPM (or cost per thousand) compensation requires the advertising organization to pay its affiliate a predetermined amount that corresponds to the estimated cost of 1000 views of its ad.
Affiliates engage in a variety of different forms of affiliate marketing, from simply placing its partner’s ad on its site, to engaging in such techniques as search engine optimization, search engine marketing, and email marketing on behalf of its partner. Some affiliates even decide to ignore these methods altogether, choosing instead to simply publish reviews of its partner’s products or services on its own site.
Regardless of the compensation process or advertising method chosen by the advertising organization and its affiliate, practicing affiliate marketing is beneficial to firms that regularly engage in ecommerce. If the affiliate effort is approached intelligently, then the advertising organization will place its ads on sites that contain products that are similar to or information that is related to its own goods. In that manner, the advertising organization will reach a much larger audience than it could reach using its own efforts alone. Furthermore, if the advertising organization creates a positive experience for those that it attracts from its affiliates’ sites, then the organization might earn greater brand awareness (i.e., via positive word-of-mouth) and/or repeat sales.
Affiliate marketing is also appealing to the affiliate for a number of reasons. First and foremost, engaging in affiliate marketing bears no additional cost to the affiliate. The affiliate individual or organization establishes its status as an affiliate marketer by joining a free network, finding advertising organizations that are similar to his, her, or its own site, and placing those ads on his, her, or its site. Furthermore, because the advertising organization creates the product and handles all ecommerce activities, the affiliate organization does not have to worry about processing or fulfilling customers’ orders. Finally, since affiliates generate income at no cost, the practice of affiliate marketing is a hassle-free way for individuals and/or organizations to make money. Indeed, affiliate marketing is a win-win for all parties involved.