Introduction to Affiliate Marketing – Part 1/2

Because affiliate programs are so convenient and work so well, they have become the industry’s dominant method of online Marketing.

There are 4 different kinds of affiliate programs to compensate “Affiliates” (or referring sites) for generating traffic to the Affiliate Program operating Website: Pay-Per-Impression, Pay-Per-Click, Pay-Per-Lead and Pay-Per-Sale.

Pay-Per-Impression (CPM)Cost-Per-Mil (Mil = 1000) Impressions. Publisher gets from Advertiser $x.xx Amount of money for every 1000 Impressions (Page Views/Displays) of the Ad. The Ad can be Text (AdSense), Banner Image or Rich Media.

The Pay-Per-Impression and Pay-Per-Click Model are not common to be used in Affiliate Marketing anymore. They were used in the Past, but were mostly abandoned due to Fraud and lack of Results.

The CPM (cost-per-impression) compensation Model was revived by Google for Google AdWords in summer 2005. The feature is called “Site-Targeting” in AdWords and allows you to display your Adsense Ad on a specific Website that runs AdSense Ads.

Pay-Per-Click (CPC) ModelCost-Per-Click. Advertiser pays Publisher $x.xx amount of money, every time a visitor (potential prospect) clicks on the advertiser’s Ad. It is irrelevant (for the compensation) how often an Ad is displayed. Commission is only due when the Ad is clicked.

Like the Pay-per-Impression model was the Pay-Per-Click (PPC) Model popular during the dot com boom at the end of the 1990th but was mostly abbandoned by Advertisers for Advertisements on other Websites due to rampart problems with click fraud.

The PPC Model was kept alive by the PPC Search Engine GoTo.com which became later Overture.com and is now owned by Yahoo! and renamed from “Yahoo Sponsored Search” to Yahoo Search Marketing.

Google launched their PPC Service AdWords in 2000. Ask Jeeves, now simply Ask.com followed with their PPC Service in 2005 called Ask Sponsored Listings and MSN.com in 2006 with AdCenter. Other PPC Services are Miva/FindWhat.com and 7Search.com.

Contextual AdvertisingThe big come-back of PPC came when Google launched AdSense in 2003, the birth of contextual Advertising. What is Google AdSense? Here is a quote from Google’s History at Google’s corporate Website.

Google AdSense: “… offering web sites of all sizes a way to easily generate revenue through placement of highly targeted ads adjacent to their content. Google AdSense technology analyzes the text on any given page and delivers ads that are appropriate and relevant, increasing the usefulness of the page and the likelihood that those viewing it will actually click on the advertising presented there.”

Yahoo’s Version of AdSense called Yahoo! Publisher Network was launched (beta) in 2005. Microsoft is also working on their own Version of AdSense which is expected to be launched (beta) in 2006.

Search Engine Marketing (SEM)Classic PPC Search Engine Marketing (Cost-Per-Click (CPC) advertising) is not Affiliate Marketing. It is an entirely different type of Internet Marketing and only has some technical details in common with old PPC/CPC Affiliate Marketing.

Ads are primarily displayed at the Search Engine Search Results Pages (SERPs) next to organic, free, Search Results. Contextual Advertising introduced with Google AdSense is also not Affiliate Marketing since no direct Partnership between the Advertiser who creates and pays for the Ads and the Publisher who displays the Ads on his Website.

This type of Marketing is generally referred to as Search Engine Marketing (SEM) and is often and wrongly mixed up and confused with Search Engine Optimization (SEO) which is about improving the ranking of a Site in the organic, free, SERPs at major Search Engines via technical means and deep understanding of the complicated ranking algorithms used by modern Search Engines.

Pay-Per-CallThis is a new compensation model. No official abbreviation exist yet. Advertiser pays publisher a flat $x.xx amount in commission for phone calls received from potential prospects as response to a specific publisher Ad. Recently developed call-tracking technology allows to create a bridge between online and offline Advertising. Pay-Per-Call Advertising is still new and in it’s infancy.

Pay-Per-Call Advertising is neither Search Engine Marketing (SEM) nor Affiliate Marketing. It is expected to become the 4th major type of Internet Marketing next to Affiliate Marketing, Search Engine Marketing and Search Engine Optimization within the next years.

The Affiliate Marketing shifted almost entirely to the Pay-Per-Lead (CPA or CPL) and Pay-Per-Sale Model (CPS) which is also known as Performance Marketing. The paid commission is usually a percentage of the referred sales or a flat dollar amount.

The Pay-Per-Lead (CPA or CPL) ModelCost-Per-Action or Cost-Per-Acquisition (CPA), Cost-per-Lead (CPL). The Advertiser pays the Publisher a flat $x.xx amount in commission if a referred visitor performs a specific action on the Advertisers Site. It could be Actions like filling out a Form, Signing up for a Newsletter or Creating an Account.

The CPA Model is very popular with Online Services like Credit Card Providers, Insurance Services, DVD and Video Game Rental Services and Loans and Mortgages. Due to the usual high flat commission amount is the CPA very attractive for PPC Affiliates that do not have a permanent Website and an established User Base.

Before you consider the CPA Model for you problem, make sure to have mechanisms in place to validate the quality of referred leads. Your program will be vulnerable to become a victim of fraud, affiliates that generate tons of “fake” leads if you do not have anything in place to verify the quality of the produced leads.

The Pay-Per-Sale (CPS) ModelCost-Per-Sale (CPS). Advertiser pays the publisher a percentage (%) of the Order Amount (Sale) that was created by a customer who was referred by the publisher.

This Model is used by most Online Merchants today.

Here are same basic tips for Advertisers that consider starting an Affiliate Program with CPS Compensation Model:

Do not pay commissions that you end up loosing money on an order. You will gain new customers because of the Affiliate Program, but you will also pay commissions for returning customers.

Shoppers on the internet are more savvy today. Comparison Shopping Sites, Coupon Sites, Cash-Back Shopping and Charity Sites, that make up a large percentage of successful affiliates, are often visited by Shoppers first. See the Affiliate Program also as a Customer Retention Tool.

CPA or CPS?If your competitors have affiliate programs and you don’t, chances are good, that you are loosing a considerable amount of business to them, because the lag of an affiliate program for your site.

If you want to use an Affiliate Program as an Online Merchant for the whole purpose of customer acquisition, consider the CPA Model and pay a flat commission for new customers referrer by affiliates.

Do the math to come up with a Flat Commission that makes it worthwhile for affiliates to promote you. Affiliates are not waiting for you, the next Merchant that has a Program is only one click away.

What you do and what commission you pay is up to you. You can also mix compensation models. The best thing to do is always to check first what your competitors are doing and use their compensation model as reference.

Pay-Per-Sale is by far the most common compensation model. 2/3 to 3/4 of all Affiliate Programs today are Pay-per-Sale Programs. The operating Site only pays “Commission” to their Affiliates for actual Results (a Sale, Sign-up etc.) and not just for promises (ClickthroughsArticle Search, Banner Impressions).