Affiliate program
Affiliate marketing is a type of performance-based marketing in which a business rewards one or more affiliates for each visitor or customer brought about by the affiliate's own marketing efforts. The industry has four core players: the merchant (also known as 'retailer' or 'brand'), the network (that contains offers for the affiliate to choose from and also takes care of the payments), the publisher (also known as 'the affiliate'), and the customer. The market has grown in complexity to warrant a secondary tier of players, including affiliate management agencies, super-affiliates and specialized third party vendors.
Affiliate marketing is commonly confused with referral marketing, as both forms of marketing use third parties to drive sales to the retailer. However, both are distinct forms of marketing and the main difference between them is that affiliate marketing relies purely on financial motivations to drive sales while referral marketing relies on trust and personal relationships to drive sales.
Affiliate marketing overlaps with other Internet marketing methods to some degree, because affiliates often use regular advertising methods. Those methods include organic search engine optimization (SEO), paid search engine marketing (PPC - Pay Per Click), e-mail marketing, and in some sense display advertising. On the other hand, affiliates sometimes use less orthodox techniques, such as publishing fake reviews of products or services offered by a partner.
Affiliate marketing is frequently overlooked by advertisers. While search engines, e-mail, and website syndication capture much of the attention of online retailers, affiliate marketing carries a much lower profile. Still, affiliates continue to play a significant role in e-retailers' marketing strategies.
Origin
The concept of affiliate marketing on the Internet was conceived of, put into practice and patented by William J. Tobin, the founder of PC Flowers & Gifts. Launched on the Prodigy Network in 1989, PC Flowers & Gifts remained on the service until 1996. By 1993, PC Flowers & Gifts generated sales in excess of $6 million per year on the Prodigy service. In 1998, PC Flowers and Gifts developed the business model of paying a commission on sales to The Prodigy network (Reference-Chicago Tribune-Oct, 4, 1995).(Ref The Sunsentinal 1991 and www.dankawaski.com).
In 1994, Mr. Tobin launched a beta version of PC Flowers & Gifts on the Internet in cooperation with IBM who owned half of Prodigy (Reference-PC Week Article Jan 9, 1995). By 1995 PC Flowers & Gifts had launched a commercial version of the website and had 2,600 affiliate marketing partners on the World Wide Web. Mr. Tobin applied for a patent on tracking and affiliate marketing on January 22, 1996 and was issued U.S. Patent number 6,141,666 on Oct 31, 2000. Mr. Tobin also received Japanese Patent number 4021941 on Oct 5, 2007 and U.S. Patent number 7,505,913 on Mar 17, 2009 for affiliate marketing and tracking (Reference-Business Wire-Jan, 24, 2000). In July 1998 PC Flowers and Gifts merged with Fingerhut and Federated Department Stores (Reference- Business Wire- March 31, 1999).
On March 9, 2009 Mr. Tobin assigned his patents to the Tobin Family Education and Health Foundation. The Foundation licenses the patents to many of the largest affiliate marketing companies in the US and Japan. Mr. Tobin discusses the P.C Flowers & Gifts service on the Internet as well as the other nine companies he has founded in his book entitled “Confessions of an Obsessive Entrepreneur”.
The concept of revenue sharing—paying commission for referred business—predates affiliate marketing and the Internet. The translation of the revenue share principles to mainstream e-commerce happened in November 1994,[3] almost four years after the origination of the World Wide Web.
Cybererotica was among the early innovators in affiliate marketing with a cost per click program.
During November 1994, CDNOW launched its BuyWeb program. CDNOW had the idea that music-oriented websites could review or list albums on their pages that their visitors may be interested in purchasing. These websites could also offer a link that would take the visitor directly to CDNOW to purchase the albums. The idea for remote purchasing originally arose because of conversations with music label Geffen Records in the fall of 1994. The management at Geffen wanted to sell its artists' CDs directly from its website, but did not want to implement this capability itself. Geffen asked CDNOW if it could design a program where CDNOW would handle the order fulfillment. Geffen realized that CDNOW could link directly from the artist on its website to Geffen's website, bypassing the CDNOW home page and going directly to an artist's music
Amazon.com (Amazon) launched its associate program in July 1996: Amazon associates could place banner or text links on their site for individual books, or link directly to the Amazon home page.
When visitors clicked from the associate's website through to Amazon and purchased a book, the associate received a commission. Amazon was not the first merchant to offer an affiliate program, but its program was the first to become widely known and serve as a model for subsequent programs.
In February 2000, Amazon announced that it had been granted a patent on components of an affiliate program. The patent application was submitted in June 1997, which predates most affiliate programs, but not PC Flowers & Gifts.com (October 1994), AutoWeb.com (October 1995), Kbkids.com/BrainPlay.com (January 1996), EPage (April 1996), and several others.
Web 2.0
Websites and services based on Web 2.0 concepts—blogging and interactive online communities, for example—have impacted the affiliate marketing world as well. The new media allowed merchants to become closer to their affiliates and improved the communication between them.
Web 2.0 platforms have also opened affiliate marketing channels to personal bloggers, writers, and independent website owners. Regardless of web traffic, size, or business age, programs through Google, LinkShare, and Amazon allow publishers at all levels of web traffic to place contextual ads in blog posts.
Forms of new media have also diversified how companies, brands, and ad networks serve ads to visitors. For instance, YouTube allows video-makers to embed advertisements through Google's affiliate network.
Historic development
Affiliate marketing has grown quickly since its inception. The e-commerce website, viewed as a marketing toy in the early days of the Internet, became an integrated part of the overall business plan and in some cases grew to a bigger business than the existing offline business. According to one report, the total sales amount generated through affiliate networks in 2006 was £2.16 billion in the United Kingdom alone. The estimates were £1.35 billion in sales in 2005.[10] MarketingSherpa's research team estimated that, in 2006, affiliates worldwide earned US$6.5 billion in bounty and commissions from a variety of sources in retail, personal finance, gaming and gambling, travel, telecom, education, publishing, and forms of lead generation other than contextual advertising programs.
Currently the most active sectors for affiliate marketing are the adult, gambling, retail industries and file-sharing services. The three sectors expected to experience the greatest growth are the mobile phone, finance, and travel sectors. Soon after these sectors came the entertainment (particularly gaming) and Internet-related services (particularly broadband) sectors. Also several of the affiliate solution providers expect to see increased interest from business-to-business marketers and advertisers in using affiliate marketing as part of their mix.
Compensation methods
Main article: Compensation methods
Predominant compensation methods
Eighty percent of affiliate programs today use revenue sharing or pay per sale (PPS) as a compensation method, nineteen percent use cost per action (CPA), and the remaining programs use other methods such as cost per click (CPC) or cost per mille (CPM).[citation needed]
Diminished compensation methods
Within more mature markets, less than one percent of traditional affiliate marketing programs today use cost per click and cost per mille. However, these compensation methods are used heavily in display advertising and paid search.
Cost per mille requires only that the publisher make the advertising available on his website and display it to his visitors in order to receive a commission. Pay per click requires one additional step in the conversion process to generate revenue for the publisher: A visitor must not only be made aware of the advertisement, but must also click on the advertisement to visit the advertiser's website.
Cost per click was more common in the early days of affiliate marketing, but has diminished in use over time due to click fraud issues very similar to the click fraud issues modern search engines are facing today. Contextual advertising programs are not considered in the statistic pertaining to diminished use of cost per click, as it is uncertain if contextual advertising can be considered affiliate marketing.
While these models have diminished in mature e-commerce and online advertising markets they are still prevalent in some more nascent industries. China is one example where Affiliate Marketing does not overtly resemble the same model in the West. With many affiliates being paid a flat "Cost Per Day" with some networks offering Cost Per Click or CPM.
Multi-tier programs
Some advertisers offer multi-tier programs that distribute commission into a hierarchical referral network of sign-ups and sub-partners. In practical terms, publisher "A" signs up to the program with an advertiser and gets rewarded for the agreed activity conducted by a referred visitor. If publisher "A" attracts publishers "B" and "C" to sign up for the same program using his sign-up code, all future activities performed by publishers "B" and "C" will result in additional commission (at a lower rate) for publisher "A".
Two-tier programs exist in the minority of affiliate programs; most are simply one-tier. Referral programs beyond two-tier resemble multi-level marketing (MLM) or network marketing but are different: Multi-level marketing (MLM) or network marketing associations tend to have more complex commission requirements/qualifications than standard affiliate programs.
From the advertiser's perspective
Performance marketing
In the case of cost per mille/click, the publisher is not concerned about a visitor being a member of the audience that the advertiser tries to attract and is able to convert, because at this point the publisher has already earned his commission. This leaves the greater, and, in case of cost per mille, the full risk and loss (if the visitor can not be converted) to the advertiser.
Cost per action/sale methods require that referred visitors do more than visit the advertiser's website before the affiliate receives commission. The advertiser must convert that visitor first. It is in the best interest for the affiliate to send the most closely targeted traffic to the advertiser as possible to increase the chance of a conversion. The risk and loss is shared between the affiliate and the advertiser.
Affiliate marketing is also called "performance marketing", in reference to how sales employees are typically being compensated. Such employees are typically paid a commission for each sale they close, and sometimes are paid performance incentives for exceeding objectives.[15] Affiliates are not employed by the advertiser whose products or services they promote, but the compensation models applied to affiliate marketing are very similar to the ones used for people in the advertisers' internal sales department.
The phrase, "Affiliates are an extended sales force for your business", which is often used to explain affiliate marketing, is not completely accurate. The primary difference between the two is that affiliate marketers provide little if any influence on a possible prospect in the conversion process once that prospect is directed to the advertiser's website. The sales team of the advertiser, however, does have the control and influence up to the point where the prospect signs the contract or completes the purchase.
Pros and cons
Merchants favor affiliate marketing because in most cases it uses a "pay for performance" model, meaning that the merchant does not incur a marketing expense unless results are accrued (excluding any initial setup cost). Some businesses owe much of their success to this marketing technique, a notable example being Amazon.com.
Implementation options
Some merchants run their own (in-house) affiliate programs using popular software while others use third-party services provided by intermediaries to track traffic or sales that are referred from affiliates (see outsourced program management). Merchants can choose from two different types of affiliate management solutions: standalone software or hosted services, typically called affiliate networks. Payouts to affiliates or publishers are either made by the networks on behalf of the merchant, by the network, consolidated across all merchants where the publisher has a relationship with and earned commissions or directly by the merchant itself.