overview/history of Affiliate marketing

Affiliate marketing is an Internet-based marketing practice in which a business rewards one or more affiliates for each visitor or customer brought about by the affiliate's marketing efforts.

Affiliate marketing is also the name of the industry where a number of different types of companies and individuals are performing this form of Internet marketing, including affiliate networks, affiliate management companies, and in-house affiliate managers, specialized third party vendors, and various types of affiliates/publishers who promote the products and services of their partners.

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, paid search engine marketing, e-mail marketing and in some sense display advertising. On the other hand, affiliates sometimes use less orthodox techniques, such as publishing reviews of products or services offered by a partner.

Affiliate marketing – using one website to drive traffic to another – is a form of online marketing, which 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.

OBJECTIVES

At the end of this unit the student is expected to:

1. define and understand what is affiliate marketing 
2. trace the history and development of affiliate marketing 
3. know the various methods of available for affiliate marketing 
4. identify the advantages and disadvantages of affiliate marketing 
5. know the types of affiliate marketing available 
6. answer the question of challenges facing affiliate marketing.

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 UK alone. The estimates were £1.35 billion in sales in 2005. Marketing Sherpa'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 programmes such as Google AdSense.
Currently the most active sectors for affiliate marketing are the adult, gambling, and retail sectors. 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. Of course, this is constantly subject to change.

Predominant Compensation Methods

Eighty percent of affiliate programs today use revenue sharing or cost per sale (CPS) 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).

Diminished Compensation Methods

Less than one percent of traditional affiliate marketing programs today use CPC/PPC and CPM/CPT. However, these compensation methods are used heavily in display advertising and paid search.

CPM requires only that the publisher make the advertising available on his website and display it to his visitors in order to receive a commission. PPC 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.

CPC 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 such as Google AdSense are not considered in the statistic pertaining to diminished use of CPC, as it is uncertain if contextual advertising can be considered affiliate marketing.

CPM/CPC versus CPA/CPS (Performance Marketing)

In the case of CPM or CPC, 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 CPM, the full risk and loss (if the visitor can not be converted) to the advertiser.

CPA and CPS 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 advertiser the best-targeted traffic 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 targeted baselines. 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. Unlike display advertising, however, affiliate marketing is not easily scalable

Implementation Options

Some merchants run their own (i.e., in-house) affiliate programs while others use third-party services provided by intermediaries to track traffic or sales that are referred from affiliates. Merchants can choose from two different types of affiliate management solutions: standalone software or hosted service typically called affiliate network