How Affiliate Marketing Works?

The core of affiliate marketing is a simple process:
1-    An affiliate refers potential customers to a merchant’s web site.
2-    Some of those customers perform a desired action.
3-    The merchant rewards the affiliate for each desired action resulting from the affiliate’s referral.

However, there are many different ways an affiliate might market a merchant’s offering, there are many different types of action that can be rewarded, and, most importantly, there needs to be some way of keeping track of the whole process.

We’re going to take a look at the different types of action first of all, then discuss keeping track of it all, and lastly take a look at some of the many means that affiliates use to send customers to merchants, and of course, to make themselves cash.

Action and Reward (Or horses for courses)
Affiliate marketing can be used to promote any type of web site – there just needs to be an agreed upon action that will result in an affiliate earning commission. Different types of merchants will have different required actions. The actions and the type of commission can be summed up as:

• CPA (Cost Per Action) – a fixed commission for a particular action
• CPL (Cost Per Lead) – a fixed commission for a lead (i.e. a potential sale)
• Revenue Share (also CPS or Cost Per Sale) – an agreed percentage of the purchase amount is awarded
• CPC (Cost Per Click) – this forms a very small part of the affiliate marketing mix, and the merchant pays a fixed amount for each click through to their web site.

Let’s look at an example of each of the actions above:

CPA
Here the action could be anything from downloading a white paper or some software to signing up to a newsletter.

CPL
Merchants that offer CPL commissions are usually those that need to convert a lead into a sale offline. This means that they will generally need to complete the transaction over the phone with the customer, or that the process is quite complicated. It is typically insurance companies and banking institutions that will offer this type of commission. Membership sites which offer a free trial period, such as online DVD rental, can also
use this commission structure.

You might be wondering why merchants are willing to pay for a lead, instead of only for completed transactions.

Well, affiliates prefer this model, as they are not in control of the offline conversion process. It is the merchant’s job to be able to complete the transaction. Some merchants may be wary that the leads will not be of a high enough quality. This is why they will usually have conversion targets with which the leads generated need to comply as a means of quality control.

Revenue Share
Revenue sharing is the ideal commission structure as both the merchant and the affiliate are rewarded for performance – the more sales, the more revenue generated for the merchant, and the more commission for the affiliate. Web sites where a sale can be performed instantly are ideal for revenue sharing. Online retailers and instant online travel agents are perfect examples of merchants who offer a revenue share commission. The affiliate earns a percentage of the sale.

CPC
CPC commission is rarely used, and is primarily a way of driving large volumes of traffic, usually to a new site. An affiliate would be awarded commission for every click through to the merchant web site. Although this type of commission was prevalent in the very early days of affiliate marketing, it has been largely abandoned due to click fraud.

We have seen that there are different types of actions that can result in commission being awarded, and that these usually suit the web site that is being promoted. This means that any industry that is online can most likely be promoted through affiliate marketing.

Affiliates have so many options open to them to promote merchants’ web sites. But before we get to that, we need to take a look at tracking – the thread that holds it all together.

Tracking (The lifeline of affiliate marketing)
The key to affiliate marketing is being able to track the whole process from potential customers being sent to a web site through to completed action, so that the merchant is able to award the correct affiliate with the correct commission. This really is the crux of affiliate marketing.

Specialised affiliate tracking software is used to track affiliate campaigns, and this is usually supplied and supported by the affiliate network. Often, the merchant and
the affiliate will also use their own tracking software to make sure that there are no major discrepancies.

Affiliates send traffic to merchants through links or URLs, and the tracking software allows each affiliate to have a unique identifier in the URL. These links set a cookie on
the customer’s computer, which allows the software to track the sale. For example, here is the URL of a product on a retailer’s web site: http://www.firebox.com/product/1201

Here is the URL for the same product, but with affiliate tracking:
http://scripts.affiliatefuture.com/AFClick.asp?affiliateID=238&merchantID=214&programmeID=3897&mediaID=0&tracking=cube_world&url=http://www.firebox.
com/index.html?dir=firebox&action=product&pid=1201

You can see some of the information being recorded. It has been shown in bold in
the URL:

• The affiliate network – Affiliate Future
• The ID of the affiliate (238)
• The ID of the merchant (214)
• The ID of the programme (3897) (a merchant might have more than one programme on a network)
• The media used (0)
• The destination of the click

Can you spot the original URL in the one with the tracking?
When the customer completes the required action on the merchant’s web site, the cookie will allow the tracking software to collect the information needed to award the commission. For example, if a customer were to use an affiliate link to purchase a gift from a merchant (using the same URL as before as an example), the following information would be collected:

•   Referring URL and affiliate
•   Total sale amount for commission
•   Date and time of sale
•   Unique order number of sale

All this information will allow the merchant to confirm that the sale is valid, as well as the amount of commission that is due, without ever releasing any of the customer’s personal information.

Affiliate tracking software collects information even if no action is completed. This is vital to the affiliates and to the merchants to see where they can optimise their campaign.

Information collected includes:

•   Impressions
•   Clicks
•   Conversions

All this information helps to build up data in order to strengthen the campaign.

Affiliates will use this information to determine the success of their marketing efforts. Remember that affiliates invest money into marketing various merchants, and they only get rewarded on commission. An affiliate will use the above information to determine whether or not to promote a merchant, and how much they should invest in promoting a particular merchant.

Merchants can use the information on their campaign to determine how best to optimise. For example, if a particular type of banner seems to be doing better than others, they could use that to improve other banners that they offer.

How long does a cookie last for?
If you follow the steps mentioned above to see what cookies have been set on your browser, you’ll notice that there are a lot of different expiry periods for cookies. Cookies are not just used for affiliate marketing. They are also used to store information so that a web site “remembers” who you are next time you visit it. The domain owner gets to determine for how long a cookie should last. This is called the cookie period.

When it comes to affiliate marketing, it is up to the merchant to decide what the cookie period should be. The affiliate is only awarded commission should the desired action take place within the cookie period. Some merchants make the cookie last for the session only (i.e. if the user only purchases the following day, no commission is rewarded), whereas the standard cookie period for affiliate marketing is 30 to 60 days. Some merchants offer 999 day cookies, or even lifetime cookies.

There are merchants who offer what is called an affiliate lock-in. Here, the first affiliate to refer the customer earns commission on the lifetime of the customer: every purchase that the customer makes will earn the affiliate commission.

Affiliates tend to prefer a longer cookie period: it increases the likelihood of being awarded commission.

And when things go wrong…
Successful tracking is fundamental to any eMarketing campaign, and especially so to affiliate marketing. As affiliates are only paid for performance, should anything go wrong in the tracking process, it is the affiliates that suffer. The merchant will still get the desired sales, but the affiliates won’t be rewarded.

So, it is good to bear in mind some of the problems that can be faced with tracking.

Multiple referrals, one sale – who gets the bounty?
With so many affiliates, it is not uncommon for a potential customer to visit a merchant’s web site through the links of many different affiliates before finally making a purchase.

Who do you think should receive the commission?
For example: A user sees a banner on a web site that he visits promoting a weekend in Paris, booked with Eurostar. The user clicks on that banner and checks out the deals on the Eurostar web site. A cookie is set, as the first web site is an affiliate of Eurostar.

He doesn’t book right away, but after chatting to his girlfriend, they decide to book the trip. He goes to Google, searches for “Eurostar weekend in Paris”, and clicks on one of the PPC adverts. This has also been placed by an affiliate, but a different one.

This time he books the trip. But, which affiliate should be rewarded the commission? It has become standard practice that the most recent referral is awarded the commission, though there are some merchants who also offer compensation to other affiliates involved in sale process. In the example above, the affiliate who placed the PPC advert would get the commission for this sale.

Cookies getting a bad reputation
Consumers sometimes get anxious when they hear things like “tracking” and “collecting information”, and so they delete cookies from their computer. If this happens, then the sale will never be attributed to the affiliate. This practice, however, does not seem to have a drastic effect on numbers, and so most affiliates will calculate this into their ROI.

Clashing cookies
Merchants will often use some kind of tracking so that they can better optimise their own marketing efforts. Or, a merchant may make some kind of technical change to their web site. It is crucial that any of these changes are tested first with the tracking software, to make sure that it does not create any conflict. It is generally accepted practice that even if it is a merchant’s marketing effort that is responsible for the final sale, the affiliate still gets the commission if it is within the affiliate’s cookie period.

Placing an order by another method
If the customer completes the action, but does not do so online, the affiliate will not receive commission. So, if a customer visits an online retailer through an affiliate link, but places an order over the phone, the affiliate will miss out on commission.

how do affiliates promote merchants?
Affiliates are online marketers who are paid on a performance basis. Every type of marketing strategy will be found in the affiliate world, and affiliates can often be seen at the forefront of breaking technology and applying it to marketing strategies.

The basic aim of an affiliate is to send targeted traffic (that means customers who are very likely to perform the desired action) to a particular merchant’s web site. Affiliates may promote as many merchants in as many industries with as many tactics as they wish, but usually affiliates will start to specialise.

Most of the tactics will be the same as those that the merchant employs, but will reach a different part of the Internet population. Effective tracking takes care of any overlap, and will help a merchant to adjust their spending for a most effective ROI.

The main types of affiliates can be broken up as:

•   Personal web sites
•   Content and niche sites
•   Email lists
•   Loyalty sites (points or cash back or charitable donations)
•   Coupon and promotions sites
•   Comparison shopping (see also PPC advertising)
•   Search affiliates (search arbitrage)

Affiliate marketing came to the fore as a way for personal web sites to make money, though this now forms a small part of the marketing mix. Affiliate marketing does still provide some income for these web sites. However, we will focus on those endeavours which are created purely for affiliate marketing.

Content and niche sites are web sites created specifically around a topic, and any products promoted will carry affiliate tracking. For example, an affiliate might create a site dedicated to digital cameras, with tips and downloads to help you get the most out of your camera. It could review a number of different cameras, and offer links to purchase those cameras online. All of those links will be affiliate links.

Seasonality is also a key time for content sites. Web sites can be created specifically for Christmas, Mother’s Day and many more key retail seasons.

Some affiliates run large opt-in email lists, and they market particular merchant offers through their email newsletters. Some renegade affiliates would use spam email to promote merchant offers, but as affiliate marketing has matured, there are usually terms and conditions to prevent such promotion.

As affiliates earn a percentage of a sale, some affiliates “split” this with the customer and create cash back or points based shopping sites. There are also some that donate a percentage of the commission to a charity.

Some of the most successful affiliate marketers are those who promote various merchants through paid search: PPC advertising on search engines. As these affiliates seek to find the highest Earnings Per Click (EPC) for the lowest Cost Per Click (CPC), this is also referred to as search arbitrage.

Affiliates will find any means possible to promote offers. As new products and platforms become available, marketers and affiliate marketers find new ways to make them work. Some other examples of affiliates promoting merchants include: 

•  Toolbars and other browser extensions
•  Social network applications

All that is required is that the click-through to the merchant’s web site is tracked.