Article by: Digital Marketing Institute
Have you ever wondered why so many websites and organizations spend the effort to write reviews and provide information about a product or service? The chances are they are not doing it out of the goodness of their heart, for the betterment of the Internet or to objectively help in the purchase-making process of the average consumer.
What?… You mean these reviews have an ulterior motive? If we look closely, we will see that the review site is an affiliate of the brand being reviewed and the review is being used to sell the product.
Confused? Fear not, as this article will outline the history of affiliate marketing online and the benefits of including it in your online marketing media mix.
The Early Days of Affiliate Marketing
In the late 1980s, William J. Tobin pioneered the concept of affiliate marketing by driving traffic from consumers wishing to send flowers to loved ones. Simply said, he didn’t own a flower store or delivery business. He was able to put together an arrangement and framework. That would allow him to promote interested buyers to other companies and receive a commission for the sale.
Affiliate marketing has evolved and become more complex in terms of audience analysis and communication. The underlying idea remains the same. Affiliates send consumers to other brand websites. Then, affiliate gets a commission for generating sales.
As the effectiveness of affiliate marketing grew for both advertisers and affiliates, larger companies started to get on board with the idea. The most notable early adopter was Amazon, who launched their Associates Program in 1996. This program lets anyone sign up and place links to Amazon products on their website. If a sale resulted from the affiliate generating traffic to Amazon, the affiliate would be paid (and Amazon got a sale).
In the late 1990s, two major affiliate networks were launched: ClickBank and Commission Junction, which now goes by the name CJ Affiliate by Conversant. Networks allowed small businesses that couldn’t afford their own affiliate program to access affiliates and leverage them to increase sales.
Many people are still unsure of the affiliate marketing concept. Although affiliate marketing has been around for some 30 years and has generated billions in revenue for some of the biggest brands. We will cover the components of an affiliate marketing program and how to optimize them to maximize marketing return. This will help you decide whether to go the affiliate route or incorporate these elements of your marketing mix on your own.
The Basic Elements of Affiliate Marketing
For most affiliate programs, there are four stakeholders:
1. The advertiser: This is the brand or company that wants to sell a product or service.
2. The affiliate or publisher*: The website that drives traffic to the advertiser’s website.
3. The affiliate network: In simple terms, this is the software that tracks traffic and sales.
4. The consumer: The person who visits the affiliate’s website, clicks a link or banner, and buys the product from the advertiser.
* It’s perfectly fine to say either affiliate or publisher when talking about the website that drives traffic to the advertiser’s website.
How Do You Set Up an Affiliate Program?
While you can create your own purpose-built tracking software (if you have such a requirement, money, and time to sign up affiliates), this isn’t always the best option. The best way to explain how to set up a program is to go through an affiliate network.
Firstly, you need to choose what network you want to go with. This can be down to their fees, the type of affiliates they have on their books, creative/banner capabilities, and how/when they pay out on commissions. Once you have decided on your network and opened an account, you must set up the terms for affiliates – in most cases your affiliate network account manager will help with this.
Affiliate program terms cover topics such as commissions paid on sales, the types of sales that qualify for commission, different commission rates for different products, your brand guidelines, and whether affiliates can use your brand term in pay per click (PPC) advertising to drive traffic to your website for people searching for your brand.
Most advertisers don’t allow affiliates to brand bid in PPC because the advertiser won’t want to compete with affiliates for consumers who are already in the market for the brand. As a result, affiliates have to use clever ways to get traffic to their website to drive clicks to the advertiser’s site.
This type of marketing is most common in eCommerce. The affiliates are paid in a simple way because everything is done online, and commissions can be computed easily.
How Does an Affiliate Program Work?
As an advertiser, you need to make sure you have a product to sell and a load of websites (affiliates). Then, you need to be able to quantify the sales from the program and pay the affiliates.
Adding tracking parameters to the URL links on the affiliate’s website allows you to track the performance of a program. The affiliate network creates these criteria and sends them to the affiliates. Affiliates who wish to be paid for the purchases they generate should include these tracking parameters in every URL on their website that links to your website.
Similar to adding Google Analytics code, the advertiser must also add a tracking code or pixel (from the affiliate network) to the HTML of their website. This means that every time someone clicks a link, it is tracked by the affiliate’s URL tracking parameter talking to the pixel code on your website, and if a sale occurs on your website this sale is attributed to the affiliate as they drove the traffic.
Additionally, the affiliate network will track the transaction’s value and you will pay the affiliate a commission on it. So if the terms of your affiliate program state that you will pay 2.2% of the value of the transaction to the affiliates, that is the commission you pay. This is what’s called cost per acquisition (CPA) pricing – you only pay affiliates if they generate a sale (unlike PPC where you have to pay for the click regardless of whether it generates a sale or not).
This pricing model is what makes affiliate marketing so attractive to advertisers. There is a reduced risk on media spend as you are only paying when you sell something. The key is to understand what is the optimum commission rate to make the program profitable for the advertiser. The optimum commission rate should be attractive for the affiliates to want to work with the advertiser.
How Do Affiliates Drive Traffic that Converts?
We know that affiliates add tracking parameters to links on their website. These links can track sales and traffic that they have driven to the advertiser’s website. The question is, why would people click those links in the first place? In most cases, affiliates do things like write a review of a computer or game. Then at the end of the article or review, there is a link to buy the product.
Many of these reviews appear as lists, e.g. ‘Top 10 PC Buys for 2019’. This means a seemingly credible review can actually serve to drive sales of those products. Affiliates will earn a larger reward as a result of increased sales.
Essentially, advertisers are borrowing some of the credibility of the affiliate’s brand to drive additional traffic which might convert. This is quite evident in the financial services and travel sectors. Destination review sites such as TripAdvisor, Kayak, etc. get significant commissions from advertisers, so they write reviews about a destination, promote the review on their newsletter, social media, or through organic search, and will include links to hotels, transport, flights, insurance, etc. within the review.
This way, consumers get to have a third-party review of a product, service, or destination. Then hopefully they click through to the brand website and buy. In brief, the customer gets a glimpse of something they’re interested in. This results in a sale for the advertiser and a commission payment for the affiliate who pushed the consumer through the funnel.
How to Optimize an Affiliate Program
Advertisers can encourage affiliates to drive more traffic by offering higher percentage commissions, sometimes for short periods of time. This can be quite common during sale periods.
If the affiliate knows they can earn more commission, they will place advertiser links in premium locations on their website. Then, promote it harder using their own channels. All of this should encourage more sales for the advertiser.
It’s also possible to change creative banners which display on the affiliate websites. Many networks allow advertisers to upload their creative banners to the network and this will be served on the affiliate’s websites alongside reviews and other content. All of this can drive sales for the Advertiser and commissions for the affiliate.
Recent Developments in Affiliate Marketing
The emergence of influencers has been a significant development in the world of affiliate marketing. Many of the links from influencers’ social accounts, newsletters, and other sources will in fact be affiliate links. The brands will pay influencers for promoting their product through affiliate links.
However, a game-changing development in affiliate marketing was the implementation of the General Data Protection Regulation (GDPR) by the EU in May 2018.
Affiliate networks had amassed detailed persona data and profiles to drive sales for advertisers before, but this technique was no longer as viable as pre-GDPR. Many of the networks have adapted to the change though.
Summary
Affiliate marketing is a useful channel to include in your media mix if you are an eCommerce advertiser. You can access thousands of affiliates who will drive traffic and sales for you using affiliate networks. It tends to represent 1%-5% of your overall eCommerce transactions. Hence it can drive incremental sales to your bottom line if done correctly.
As it’s a commission-based payment system, there is a risk of fraud. For instance, affiliates submitting invalid sales and expecting to get paid. However, most networks are very good at identifying fraud and you won’t have to pay.
It can be time-heavy in terms of managing creative and payments. In order to justify and understand the return on investment, keep it simple.
Advertisers and publishers (affiliates) have new opportunities as online commerce evolves and users seek third-party recommendations.