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Affiliate Marketing”, Chapter 4 from the Book Online Marketing Essentials (Index.Html) (V This is “Affiliate Marketing”, chapter 4 from the book Online Marketing Essentials (index.html) (v. 1.0). This book is licensed under a Creative Commons by-nc-sa 3.0 (http://creativecommons.org/licenses/by-nc-sa/ 3.0/) license. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms. This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz (http://lardbucket.org) in an effort to preserve the availability of this book. Normally, the author and publisher would be credited here. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Additionally, per the publisher's request, their name has been removed in some passages. More information is available on this project's attribution page (http://2012books.lardbucket.org/attribution.html?utm_source=header). For more information on the source of this book, or why it is available for free, please see the project's home page (http://2012books.lardbucket.org/). You can browse or download additional books there. i Chapter 4 Affiliate Marketing 68 Chapter 4 Affiliate Marketing 4.1 Introduction If you recommend a restaurant to a friend, and that friend visits the restaurant because of your recommendation, the restaurant’s revenue will have increased because of your referral. This is “word-of-mouth” marketing. But you, as the referrer, do not see any of the cash benefit that the restaurant does! Imagine that the restaurant gave you 10 percent of the bill for every person that you referred to the restaurant. They would be paying you a finder’s fee for new customers. There are a number of businesses that market this way offline. Brokers for insurance products are an example, but these referrals can be hard to track. Online, they are very easy to track. This system of reward where compensation is based on referrals is called affiliate marketing and is used to describe this type of marketing in an online environment. Affiliate marketing is used widely to promote Web sites, and affiliates are rewarded for every visitor, subscriber, or customer provided through their efforts. Because of this, affiliates are sometimes viewed as an extended sales force for a Web site. Affiliates are paid for performance, so affiliate marketing is also referred to as performance marketing. History Like many eMarketing innovations, the beginnings of affiliate marketing are to be found in the adult industry. Cybererotica was probably the first to run an affiliate campaign with its CPC (cost-per-click) program, where it would reward referrers for each click-through to its Web site. Affiliate marketing moved closer to the mainstream, with programs offered by companies such as CDNow (its BuyWeb program launched in 1994), PC Flowers & Gifts (http://www.pcflowers.com), AutoWeb.com, and a handful of others. But the story that is most well known, and that ensured that affiliate marketing hit mainstream press articles, is that of the Amazon.com Associates Program. Legend has it that Jeff Bezos (the CEO and founder of Amazon.com) was at a cocktail party, where a woman told him that she wanted to sell books through her Web site. She did not have the infrastructure to sell the books, but Jeff Bezos realized that she could send her targeted traffic to Amazon.com where users could buy books, and she could get paid for each successful referral. From this meeting, Jeff Bezos launched Amazon Associates, the Amazon.com affiliate marketing program. 69 Chapter 4 Affiliate Marketing Referrers are rewarded for successful sales that occur as a result of their marketing efforts. The growth experienced by Amazon.com as a result of its affiliate program is well documented and probably accounts for about 40 percent of its revenue.“The Amazon Story,” Alibaba.com, August 26, 2007, http://resources.alibaba.com/topic/ 191364/The_Amazon_story.htm (accessed June 23, 2010). According to Econsultancy’s Affiliate Marketing Networks Buyer’s Guide (2006), total sales generated through affiliate networks in 2006 was £2.16 billion in the United Kingdom alone.Econsultancy, Affiliate Marketing Networks Buyer’s Guide (2006), October 2006, http://www.e-consultancy.com/publications/affiliate-marketing- networks-buyers-guide (accessed December 2, 2007). And MarketingSherpa’s research estimates that in 2006, affiliates worldwide earned $6.5 billion in bounty and commissions!Anne Holland, “Affiliate Summit 2006 Wrap-Up Report—Commissions to Reach $6.5 Billion in 2006,” MarketingSherpa, January 11, 2006, https://www.marketingsherpa.com/barrier.php?contentID=3157 (accessed December 2, 2007). Affiliate networks, which act as intermediaries between affiliates and merchants, came onto the scene in 1996, with the launch of LinkShare and Be Free. Commission Junction, another big player, was launched in 1998 and was bought by ValueClick in 2003 for about $58 million. 4.1 Introduction 70 Chapter 4 Affiliate Marketing 4.2 How It Works LEARNING OBJECTIVE 1. Understand the fundamental concepts of affiliate marketing. The core of affiliate marketing1 is a simple process: 1. An affiliate2 refers potential customers to a merchant3’s Web site. 2. Some of those customers perform a desired action4. 3. The merchant rewards the affiliate for each desired action resulting from the affiliate’s referral. Figure 4.1 The Affiliate Marketing Process 1. An agreement between two sites in which one site (the affiliate) agrees to feature content or an ad designed to drive traffic to another site. In return, the affiliate receives a percentage of sales or some other form of compensation generated by that traffic. 2. The affiliate (or publisher) markets the merchant’s products. The merchant has goods that need to be advertised, and the affiliate has the medium to publish those advertisements. The terms “affiliate” and “publisher” are interchangeable. 3. This is the owner of the product that is being marketed or promoted. 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 4. A specified task performed by a importantly, there needs to be some way of keeping track of the whole process. user, which results in the affiliate being awarded commission. Actions include We’re going to take a look at the different types of actions first of all, then discuss purchasing a product, signing up for a newsletter, or filling in keeping track of it all, and lastly take a look at some of the many means that a form. 71 Chapter 4 Affiliate Marketing affiliates use to send customers to merchants, and of course, to make themselves cash. Action and Reward 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 commission5. Different types of merchants will have different required actions. The actions and the types of commission can be summarized in the following: 1. Cost per action (CPA)6. A fixed commission for a particular action. 2. Cost per lead (CPL)7. A fixed commission for a lead (i.e., a potential sale). 3. Revenue share (also cost per sale [CPS])8. An agreed-on percentage of the purchase amount is awarded. 4. Cost per click (CPC)9. A very small part of the affiliate marketing mix, where the merchant pays a fixed amount for each click-through10 to their Web site. Let’s look at an example of each of these actions. CPA Here the action could be anything from downloading a white paper or software to 5. The bounty paid by a merchant signing up for a newsletter. to an affiliate when the affiliate makes a successful referral. 6. A fixed commission for a particular action. Why do you think a merchant would be willing to offer a bounty for each 7. A fixed commission for a lead download? (i.e., a potential sale). 8. An agreed percentage of the purchase amount is awarded. CPL Also, commission structure where the affiliate earns a percentage of a sale. Merchants that offer CPL commissions are usually those that need to convert a lead 9. This forms a very small part of into a sale offline. This means that they will generally need to complete the the affiliate marketing mix, transaction over the phone with the customer or that the process is quite and the merchant pays a fixed complicated. It is typically insurance companies and banking institutions that will amount for each click-through offer this type of commission. to their Web site. 10. A click on a link that leads to another Web site. 4.2 How It Works 72 Chapter 4 Affiliate Marketing Membership sites that offer a free trial period, such as online DVD rental businesses, 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. How do you think companies can ensure that the leads they get are qualified? 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.
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