Affiliate Marketing: what it is, how it works, and affiliate strategies

Before understanding how affiliate marketing works, let’s see what this term means.

Affiliate marketing is based on a commercial relationship where the advertiser uses publishers as a sales force, paying them commission only.

Affiliate Marketing means activating one of the most promising digital Performance Marketing models and one of the most consolidated methods for earning money online.

Since 2010 it has experienced constant and exponential growth since it is an online business with a consistently positive ROI (Return Of Investment).

Therefore, among all those available, affiliation is one of the best-known and most efficient performance channels. Being a powerful tool, widespread but also rather complex to manage, to understand its potential, it is necessary to acquire adequate information.

There are many cases of successful affiliate marketing; they are under our eyes every time we browse online, even if we are not always aware of it. If this intrigues you, I suggest you rely on experts in the field, enrolling in the Affiliate Marketing Course to learn the techniques of this strategy.

I will explain some basic concepts in this article to understand how affiliate marketing works. In particular:

  • what is meant by affiliate marketing;
  • how to start doing Affiliate marketing;
  • what to sell in affiliation;
  • how much money may be made through affiliate marketing.

What is Affiliate Marketing

Affiliations are sales processes where you make money by promoting other companies products or services.

It is based on the principle of inbound marketing, where the end user, after searching the internet, finds information or products of interest and, at the same time, comes across promotions of related items or services.

The path is traced by clicking on these promotions, starting from its first action up to the purchase of the selected product.

affiliate workflow online

For affiliation to take place, a software capable of tracing the customer’s journey (affiliate link) is needed, and the remuneration system can be activated.

The commission to the publisher is paid as a percentage of the sale only in the event that it materializes. For this reason, it is defined as a performance because it is a win-win commercial relationship.

Therefore, Performance Marketing is a promotional channel that is part of the new forms of marketing born online. It consists of a commercial agreement between:

  • merchant or advertiser – the owner of the product/service has the role of the advertiser with a budget to spend and a goal to achieve: to sell his products. Once a sales commission has been established, a percentage of it will be paid to the publisher and one to the affiliate platform. So, unlike regular promotions, it will pay part of the revenue obtained for advertising.
  • publisher  – the owner of the affiliated website, which can count on a consistent audience. In the affiliate system, the publisher will host the advertisements. To make your blog or e-commerce site work, you will need to be able to implement SEO (Search Engine Optimization) or SEM (Search Engine Marketing) promotions. In doing so, it will acquire traffic on its web presence, but at the same time, it will promote the advertiser’s adverts. Sometimes the publisher is a direct affiliate program partner, so in this case, the advertiser will have only him as an interlocutor. 

Practical example

To understand how Affiliate Marketing works, I introduce the concepts of brokerage and commission.

Let’s assume that he has set a 10% commission on revenue. This compensation will be divided into two percentages: one for a direct commission to the publisher and one for the intermediation action. If I get 100 from a sale, the commission will be 10, of which 7 will be as direct commission to the publisher and 3 will be paid to the intermediary.

commission percentage affiliate

However, it is not a fixed rule in the commission system. There are situations in which the affiliate platform may recognize lower percentages, above all in the case in which the advertisers produce very large turnovers, and are accustomed to scaling the expenses of the affiliation system significantly.

Affiliate Marketing: how it works

The relationship between advertiser and affiliate can occur according to two different types of access to the affiliate software: the network or the program.

The affiliate network is a company or agency that comes between advertisers and many affiliates (Awin, to name one).

The second occurs when the software that allows affiliation is a partner program of the advertiser himself, who thus directly manages his affiliates (as Amazon does, for example).

There is a tendency to get confused about this distinction, but it is fundamental to understanding how affiliate marketing works.

Affiliate Networks

How do you get started in affiliate marketing? If you have products to sell, you can do so by directly contacting a publisher who has good visibility in industries related to yours and who directly manages the affiliate program.

Or you can turn to a network.

Affiliate networks are intermediary agencies that take care, thanks to a mandate received from all customers – affiliates and advertisers – to optimize the operation of affiliate marketing, dealing with all related aspects, including legal ones, and settling any disputes.

Among the best affiliate networks:

  • Tradedoubler (Europe);
  • Awin (formerly Zanox) for Europe; 
  • Finance Ads (vertical affiliate network, strongly established in Europe);
  • Commission Junction (The largest in the United States);
  • Netaffiliation (International);
  • Public Idées (Europe);
  • Tradetracker (Europe);
  • Admitad (International);
  • affiliaXe.

These websites are not blogs, nor will you find other products for sale inside them, as with programs. The network is the virtual place where the relationships between affiliates and advertisers are managed and optimized for the benefit of both parties.

The advantage of affiliating with a network is that the advertiser’s revenue is the sum of the promotional activities of several affiliates rather than just one. The payout (division of net profits in the form of dividends) is paid according to the contract terms.

To better understand how affiliation works, let’s take an example: that of a blogger who deals with technology. If the blogger writes consistently, over time, he will have the opportunity to acquire good authority and some traffic from the search engine and social media by sharing his articles and resources.

typical cycle affiliate marketing

Part of this flow will probably build loyalty over time by becoming a fan, follower, or newsletter subscriber. It means that his audience will come to trust him when making decisions in the technology sector, giving him the opportunity to monetize.

So, by signing agreements with companies that, for example, sell technology products – in dropshipping or through more traditional logistical systems – you will talk about it competently and credibly to a target audience already interested in that topic. In this way, whenever a user visits the company’s site from his article and buys some product or service, the blogger will also earn a commission.

Affiliate Program

The program could be the right solution if you want to start making affiliations as an advertiser. Let’s say, for example, that your sector is luggage and that you have a well-industrialized product and a well-structured e-commerce site: contacting Booking, for example, could significantly boost your turnover.

The user visiting the publisher’s site to book a trip may need a new suitcase. In any case, among the best affiliate programs today, we recommend: 

  • Amazon;
  • Aliexpress;
  • Michael Kors;
  • Asos;
  • Luisa Via Roma;
  • Maison du Monde;
  • Ebay;
  • Fiverr;
  • Shopify;
  • Expedia;
  • Booking;
  • Sephora.

Amazon has therefore created an affiliate program that works and has become the most powerful in the world, Amazon Associatesamazon associates program

Legend has it that it was Amazon who invented an affiliation system. The story tells of a blog that proposed to Jeff Bezos, CEO of Amazon, to have Amazon banners and receive payment only if he managed to get him to sell more books (at the time, Amazon was born from here). Bezos, enthusiastic about the idea, set up a system to do just that.

To date, it boasts millions of affiliate sites for a turnover around billiards.

In the case of programs, the payout is fixed at a minimum amount: until commissions exceeding that threshold are generated, the payment is not paid. 

How to do Affiliate Marketing?

What to sell in affiliation? This is the first question you must ask yourself: only in this way will it be easier to identify your role within this strategic method.

With an e-commerce site, affiliate marketing will help you make your products known to prospects, especially at the beginning.

In the case of a blog, you can earn with affiliations by selling promotional spaces: always make sure that they are consistent with your business and your content to not affect your credibility.

program tracking of affiliates

How you sell with affiliate marketing depends a lot on your industry and experience. In any case, doing affiliate marketing without a website is not advisable: the best affiliate networks not only require it, but evaluate its quality before establishing commercial relationships, both in the case of publishers and merchants.

To learn how to do Affiliate Marketing, it is essential to analyze examples of typical advertisers and publishers to identify our business goal and understand how to start earning with affiliations.

The 10 basic steps:

  1. Agree with the advertiser on the remunerative action/s, commissions, and the need to use or not use a landing page;
  2. Generate tracking codes and, when required, set up the platform to deliver the creatives;
  3. Promote the program with a newsletter to subscribed publishers;
  4. Recruit the best-performing publishers relevant to the type of advertiser;
  5. Perform periodic screening of publishers who apply for membership;
  6. Monitor results;
  7. Plan publisher incentive actions;
  8. Verify the actions and possible cancellation of the fakes;
  9. Constantly renew creativity;
  10. Communicate promotions and any opportunities to increase results to affiliates.

Let’s see how to do affiliate marketing as an advertiser or affiliate.

Advertiser

To start doing affiliate marketing as an advertiser, you could manage an affiliate program in different contexts. Here are the main ones:

  • E-commerce company;
  • Finance companies (banks, consumer loan companies);
  • Insurance (car insurance, home, etc.);
  • Instant selling company (Groupon);
  • Comparators (car, motorbike, etc.).

E-commerce company (e.g., Expedia, Yoox, IBS, Groupon, etc.)

  • CPA model (Cost Per Action – sale)
  • Remuneration model for publishers: revenue share

Assuming that the average shopping basket on the e-commerce site is 300 USD, the average margin of the advertiser is 30% (net profit 90 USD); the commission will be a percentage (tends to be 5 – 10%) of the average net profit. A fixed CPA if the products sold generate a fairly or uniform average unit revenue (always calculated on 5 – 10% of the net profit).

Heads-up: it can be challenging to obtain large volumes if the customer is not a big player who can boast a big reputation on the market.

Finance Company, Comparators, Insurance (e.g. Findomestic, Direct Line, Mutui Online)

  • CPL (Cost Per Lead) model;
  • Remuneration model: pure CPL.

It is indicated when the customer’s goal is to obtain a contact to transform into a customer at a later time; the customer calculates the CPL based on the lifetime value of the user, the average value of the converted user, and his own internal conversion cost (CRM, call center, etc.). The commission-sharing model between the publisher and the network does not change.

Heads-up: model is highly exposed to fake conversions.

Instant Selling, Private Selling (Privalia, Groupon)

  • Mixed model;
  • Remuneration: CPL + CPS.

It is adopted when the customer aims to generate contact with high conversion rates in short periods. Publishers and networks are therefore stimulated to give greater visibility to the program by the double commission. The commission rate between the publisher and the network is the same.

Heads-up: these are business models that are constantly evolving; even the remuneration models will likely change in a short time (reduction of commissions, elimination of the CPS part).

Affiliate

Even doing affiliate marketing as an affiliate has considerable scope for maneuver. The right actions to take are related to your business and your goals. Consider that digital marketing offers many possibilities even as a freelancer.

You will not be able to ignore your reference sector, but you will be able to compete in the vast world of affiliations by making use of consolidated promotion tools and methods, such as:

  • Sites / Blogs (display ADV)
  • Comparison engines (Trovaprezzi, Kelkoo…)
  • Couponing Site (Discount Codes.com)
  • Email Marketing (Antevenio)
  • Keywords Marketers

Display Adv/Retargeting

These banner formats give excellent visibility to the brand or product covered by the program. Some sectors have low Post click conversion power but more opportunities if the program includes Post view.

Of course, the content of the banner must be inherent to the topics covered on the site that hosts it. Furthermore, it must be discreet and, at the same time, captivating to become the ram’s head of the affiliate link.

Retargeting or remarketing is based on the statistic showing the highest percentage of conversions along the navigation path, but hardly on the first click. The advertisements will be re-proposed several times to users interested in that product or topic.

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Comparison engines

Banner formats / Product card feeds: in this case, the user views the advertiser’s product data sheets within the comparison engine. You can count on great conversion power because the user is exposed to advertising in pull mode, but it only works if the product is competitive in price because it is directly compared with its competitors!

Coupon site / Loyalty sites

Format text + image / Banner: Couponing Sites are sites that collect and publish discount and promotion operations from e-commerce sites; Loyalty sites are operations linked to the collection of points on loyalty programs, which advertisers can join through promotions on the sale of their product.

How does affiliate marketing work in this case? Well, you have great conversion potential, thanks to the promotional factor. They are sites very popular with internet users. 

Email marketing

One of the most effective push modes. The product is promoted through sponsored emails sent (or even from newsletters created for free ) by publishers to large user databases. They have an excellent conversion power in Lead programs, which is not recommended for sales programs because the redemption power on the sale is very low.

Keyword marketers

They are agencies that buy keywords on Google to promote the client’s product. They are a great solution when the advertiser does not manage his own campaign on Google. Most of the conversions are generated on the brand keyword. 

In summary, let’s see the pros and cons of the different business models:

CPA

  • Higher average commissions;
  • Long-term sustainability;
  • It is not easy to generate large volumes if there is no solid product behind it.

CPL

  • Lower commissions;
  • Easier to generate results;
  • Possibility of fielding many more affiliates;
  • Very exposed to fake leads.

CPA + CPL

  • All the advantages of the two models;
  • It is difficult for commissions to remain stable for long periods.

Earning with Affiliate Marketing

In the previous paragraphs, I told you about the characteristics of this methodology, the different paths you can take based on your goals, and the type of business you want to build.

But in practice, how can you make money with Affiliate Marketing? How can it become profitable? First of all, we need to start with the concept of the sales network and know its main functions:

  • Ability to generate as many contacts as possible, which in the offline world would mean traffic to one’s point of sale;
  • Creating a relationship of trust with potential customers.

So how does it all work online? Indeed, there is a legacy in the offline world that is being adapted in the digital sector. Yes, but then, online, how does this Affiliate Marketing channel work? 

Online affiliates ( bloggers, influencers, editorial portals, magazines, etc.) are all those subjects who have an audience and can generate traffic from search engines, social networks, and other channels, as well as being able to acquire the trust of an audience to whom you can then convey a product or service. The advertiser gets visibility and pays only for the generated results the affiliate link tracks. 

Affiliate Marketing: earning

There is an initial premise to be made: there is little talk of affiliation and its mechanisms. This lack of diffusion is not at all due to the concept that the machine does not work or has technical problems, does not bring results, or requires too much care. It is mainly due to the bad, not to say bad, management of its real potential.

Users have promised false potential and objectives and have tried several times, in the long run, to use it to do wrong things and not exploit it as an actual online earning method. 

Let us briefly dwell on an estimate of Affiliate penetration of 1%. Let us try an example to understand the concept better. Let’s imagine that we spend 1000 USD on advertising: 990 USD brings us 5000 USD or 500%; that missing 1%, or 10 USD, alone earns us another 500 USD. So 10% of our markup is brought in by that 1% in Affiliate Marketing.

Summing up, in this way, we built a solid digital marketing system with our 990 USD; they correctly fertilized that last euro, which, paid by us only when the results were achieved, brought home an additional 10% return on investment.

In reality, a low diffusion of the Affiliate, which has undoubted potential, is not to be considered so negative. Instead, it can be said that Affiliate Marketing is natively part of the small and residual piece of planning.

Let’s look at the image below: it is a customer journey purchase for those who need to renew or activate new car insurance.

purchase customer journey

In an ecosystem in which most transactions still take place in different percentages from desktops, tablets, and smartphones and we have interested consumers on average in 69% of cases, we see above all that search touchpoints, which contribute to a typical transaction and which generate immediate and measurable value, they are still today almost all performance marketing tools managed through affiliation:

  • Pcs (Search);
  • Advice;
  • Social Media;
  • Cash Back;
  • Broker;
  • Email;
  • Provider.

How does it fit into the media mix, and what is its efficiency? Looking at the picture, we see that in an ideal inverted pyramid, where on the abscissas, we put effectiveness, and on the ordinates, we put efficiency; the most efficient tool goes to the bottom of the pyramid.

marketing media mix

In that order, we will then have:

  • Rich-media / Video Strategy (effective in terms of volume, but less efficient);
  • Engagement Retargeting / Display ADV (towards those who did not click/interact);
  • Search (e.g., text-link ads, however more efficient than display, where a click gives an initial performance signal);
  • Affiliate Marketing / Retargeting (less effective for achieving large volumes, but more efficient).

In addition to these considerations, the low diffusion is also because earning money on the Internet with this methodology requires substantial preparation in digital marketing in general.

Performance Marketing KPIs

The remuneration model of Affiliate Marketing is mainly that of the following:

  • CPA, Cost Per Action – goes by the cart and is a percentage;
  • CPL, Cost Per Lead – is represented by a fixed cost.

In addition to the above remuneration models, there are also:

  • CPM, Cost Per Thousand Impressions – i.e., views – is widely used for brand awareness;
  • CPC, Cost Per Click – when the user clicks and lands on the merchant’s site, remuneration is triggered.

Benefits of Affiliate Marketing

Affiliate Marketing is used to generate immediate and measurable results such as:

  • Sales;
  • Leads.

It is the most efficient means of marketing currently in digital. To be used well, it requires:

  • Creation of a solid affiliate base;
  • Daily and granular management.

Contrary to what is believed, the affiliates who bring results do not use the display adv medium.

market of affiliate chart

Finally, it is a tool that can suffer in terms of effectiveness if:

  • the brand/product is little known;
  • the product is not palatable.

Challenges of Affiliate Marketing

Sometimes, we find ourselves in the middle of crisis management, so how do we do it in these cases? What are the solutions? I’ll tell you a few shortly.

1) Excessive Traffic Vs. Few Conversions. High-traffic affiliates can generate excessive traffic, sometimes even bringing down the advertiser’s server. The conversion rate is significantly reduced due to the model of these publishers who play on huge numbers.

crisis management marketing

The solution is to block those affiliates; therefore, the number of conversions will be reduced, but the program will be functional again.

2) Excessive amount of fake conversions. Mostly it is registered in CPL programs, where it is easier to generate false conversions.

It can be solved by checking the affiliates: if there are Incentive marketing or sites offering co-registration programs among them, they must be eliminated. It is likely necessary to eliminate fake conversions also ex-post and compensate the advertiser in part.

3) Failure to track conversions. This problem should never arise in a mature program because all technical issues must have already been resolved at launch. Otherwise, you will need to: 

  • Make sure that the advertiser has not removed the tracking codes from its site; otherwise, compensation is claimed for untracked conversions;
  • If the codes are not re-entered within 48 hours after being reported, the cost of the clicks generated may be charged;
  • Avoid keyword marketing actions that do not comply with the program indications;
  • Delete all conversions generated by the affiliate if keyword marketers buy the client’s brand on Google.

Conclusion

At the basis of this method to earn money online, there is a branch of marketing called Inbound, a strategy based on pull actions. It is also important to have adequate knowledge of this discipline: the customer has changed, and knowing his behavior and how to attract his attention are more fundamental for sales today than ever.

Therefore I suggest you also evaluate a good complete path, thanks to an Inbound Marketing Course.

I believe I have answered some questions, and you now understand how affiliate marketing operates. I covered a lot of affiliation-related subjects because I am convinced that finding reliable guidance and having strong intuition are the keys to developing an effective approach.

If the world of affiliations has intrigued you, don’t waste your time! Request more information now

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