What Is Affiliate Marketing and How Does It Work?

Are you looking for a way to make money online but have no products or services to sell? Or, perhaps, you do have an excellent product or service but lack the skills and resources to promote it!

Affiliate marketing could be the solution you’re looking for.

It allows merchants (also often called advertisers) to promote their products and services without allocating significant resources to marketing.

It also enables affiliates (sometimes called publishers) to make money without maintaining product inventories, investing in services, or supporting customer relations.

This solution is not new. One of the first merchants to turn to affiliates in order to promote their products were CDNOW in 1994 and Amazon in 1996.

CDNOW — which was acquired by Amazon in 2002 — silenced their affiliate program in 2012, but Amazon’s program remains an attractive opportunity for many online marketers.

As shown in our recent overview of affiliate marketing in the U.S., there are thousands of merchants out there ready to pay a commission in order to obtain more:

• Product or service sales
• Leads generated
• Subscribers to their clubs or newsletters
• …and even inbound calls

In the U.S., the number advertisers using affiliate marketing is expected to reach 80% by 2020, while the market is expected to be worth $6.8 billion.

You too can become a successful player in this market.

If you have your own products or services, you can recruit affiliates to promote them and pay a commission on every sale or lead they generate.

If you are an affiliate or publisher, you can find products and services to promote and earn a commission on every “qualified action” that you generate for the advertisers that you market.

In both cases, the best way to start is by understanding what affiliate marketing is and how it works, and I’ll explain everything in the following lines.

Affiliate Marketing Definition

Affiliate marketing can be defined as the process of promoting another party’s products or services on a commission.

Geno Prussakov provided a more in-depth definition in A Practical Guide to Affiliate Marketing, describing it as:

Performance-based marketing, whereby affiliates promote a merchant’s product or service and earn a commission on every visit, subscription, or sale they send to the merchant.

As the definition reveals, affiliate marketing provides for a great partnership opportunities between merchants and their affiliates (publishers). The merchant sells more, and their affiliates earn commissions on the conversions that they generate.

How much the parties earn depends on the affiliates’ performance. That is why affiliate marketing is often referred to as “performance marketing”.

The main parties involved in affiliate marketing are the two already mentioned above: the merchant and their affiliate.

However, neither could make a profit without a third-party, namely the customer (or consumer)

A fourth party comes into play quite often and intermediates the relationship between merchants and affiliates: the affiliate network.

There is also an affiliate manager that plays an integral role, and that would be the fifth party.

To better understand the role of each of these five parties, let’s review them one by one below.

The Parties Involved in Affiliate Marketing

1. The Merchant

They are the party creating or bringing a product or service to the market. They can be a wholesaler or a retailer, a manufacturer like H&M, a web hosting provider like Bluehost, or a software developer, to give just a few examples.

Whether they create the products themselves or buy them from their suppliers, the merchant owns the respective products and services. They handle transactions and related logistics (payments, packaging, shipping, etc.) as well as customer service.

In affiliate marketing, they are the “employer” or the party willing to share their profit with the publisher who will help them sell more.

They decide what type of actions they will compensate for and how much. They do it through their affiliate program. The latter serves as a foundation for the business arrangement between the merchant and their affiliate. It supports such vital elements as tracking, reporting, payments, and much more.

Affiliate Marketing Payment Models

• Pay-per-sale or Cost-per-sale (abbreviated as PPS or CPS)
• Pay-per-lead/Cost-per-lead (PPL/CPL)
• Pay-per-call/Cost-per-call
• Pay-per-click/Cost-per-click (PPC/CPC)
• Pay-per-view/Cost-per-view (PPV/CPV)
• Pay-per-install/Cost-per-install (PPI/CPI)

The last three payment models have been associated with unwanted, even fraudulent activities, so they are rarely used these days. Pay-per-call models are most effective for high-consideration and/or high-value sales (of products or services).

The most popular and effective payment models these days are PPS and PPL, or paying affiliates for sales or leads that they refer.

Some merchants only agree to pay commissions on completed sales. However, quite a few merchants also understand the value of leads and agree to reward them accordingly.

Many merchants actually combine the two payment models, rewarding both sales and leads.

It goes without saying that the commissions on leads are smaller than the commissions on sales.

2. The Affiliate

Often referred to as publisher (or sometimes an “associate”), the affiliate is the one who markets the merchant’s products or services.

They choose what products and services to promote and what methods and techniques they use to attract potential customers and convince them to buy.

Depending on the tools and strategies used, there are several types of affiliates. You’ll find the complete list in Geno Prussakov’s Quick Start Guide to Affiliate Marketing and this post of his.

The most popular types include content, coupon, data feed, display, loyalty, social media, and video affiliates.

For a merchant, it is preferable to work with affiliates who fall into several of these categories at the same times.

This means the affiliates will use several marketing methods and channels to reach target customers and generate leads and sales.

Affiliates have a lot to gain by combining various marketing techniques and strategies, too. They will have an easier time convincing merchants to accept them into their affiliate program and they will be able to reach out to a wider audience, drive more sales, and earn more money.

3. The Customer

The customer (or consumer) is the one who completes the sale, the one driving profit to both the merchant and their affiliate. They are the target for both merchants and especially affiliates.

To reach them and convert them, the latter may use product or service reviews, rankings, how-to tutorials, unboxing and other videos, display ads, social media posts, mobile app placements, paid search (if allowed by the merchant), and many other marketing techniques.

It is important to note that buying through an affiliate link does not bring about additional costs for the customer since the merchants’ retail prices already include affiliate marketing costs.

On the contrary, some affiliates actually enable the consumer to save money by sharing their profits with them. Common examples here are: coupon and discounts-oriented affiliates, as well as loyalty and cashback affiliates.

4. The Affiliate Network

They are the intermediary between the merchant and the affiliate, the party bringing merchants and affiliates together and providing both of these parties with the technology to power their relationships.

For merchants, an affiliate network means an opportunity to list their products and services where publishers can see them and apply to become affiliates.

For publishers, the same network becomes a huge database of brands, products, and services from where they can choose the ones to promote in order to make money.

Some popular affiliate networks nowadays are CJ Affiliate, Rakuten LinkShare, ShareASale, Pepperjam, and ClickBank.

4. The Affiliate Manager

Just as any serious marketing campaign, the merchant’s affiliate program must be managed. Affiliate manager is the person who is tasked with overseeing and developing the merchant’s affiliate marketing program.

We will discuss the specifics of what affiliate managers do in the “How Affiliate Marketing Works from the Merchant’s Perspective” section below, but at this phase let’s emphasize that affiliate program management may be either insourced or outsourced (to an OPM agency like AM Navigator, for example).

Now that you know what affiliate marketing is and what parties it involves, let’s dive into how affiliate marketing works.

How Does Affiliate Marketing Work?

There are two main perspectives to affiliate marketing: the merchants’ and the affiliates’. Let’s review them separately.

How Affiliate Marketing Works from the Merchant’s Perspective

Once a merchant decides to turn to affiliates to market their products or services, they need to start planning and setting up their affiliate program.

This does involve some costs. The good news is that the costs are easy to keep under control and often lower than the cost of any other marketing campaign.

You’ll find answers to most questions related to setting up and managing an affiliate program in the following work by our very own Geno Prussakov:

• Online Guide to Affiliate Marketing for Merchants compilation of blog posts and articles
• Affiliate Program Management – An Hour a Day bestseller and a must-read for every merchant or affiliate manager
• Affiliate Marketing – Advertising LinkedIn Learning video course

If you are a merchant ready to start your own affiliate program, these three resources will provide you with most of the information you need.

If you need further guidance, a quick search on this blog will help you locate helpful posts, and you can always drop a comment and ask for the information you need directly. The total number of affiliate marketing posts on our blog, actually, exceeds 1,400 content pieces.

Also, be sure to avoid the 8 mistakes Geno warns about here!

In order to set up their affiliate marketing program, a merchant will have several important aspects to take care of and related decisions to make:

1. Platform Choice

Merchants basically have two options: to build their affiliate program on an “in-house” platform using paid tracking/management software, or to join an affiliate network and pay for access to the network’s technology and resources.

More and more merchants nowadays seem to use both tracking software and affiliate networks.

2. Creative Inventory

No matter if they manage their program in-house or through an affiliate network, merchants will need to provide their affiliates with banners, text links, video materials, product data feeds, and any other useful marketing collateral.

Some may find it helpful to create different landing pages or tools to enable their affiliates to create their own links and banners. These will bring about additional costs, but they will save the merchant or their affiliate manager a lot of time and effort.

3. Program Management

Marketing products and services through affiliates is not easy. It means setting up affiliate marketing agreements, putting together program’s rules and policies.

An even more important part will be recruiting and activating affiliates, as well as monitoring their performance.

Small merchants often try to manage everything themselves. Others pass on the responsibilities to one of their in-house staff members.

There are also merchants who prefer to outsource the work to an experienced affiliate marketing manager.

There are no universal dos or don’ts. What works for one merchant may not work for another, so it is important that merchants take all aspects into account.

They should pay special importance to the specifics of their products and services and to their budget and resources.

Once these aspects are taken care of, the merchant and their affiliate program manager will have to create the program’s structure (sometimes also called “program’s terms”). It is basically a set of rules and processes that govern the collaboration between the merchant and their affiliate.

Among the aspects it should cover, the most important ones are:

• Affiliate performance tracking specifics – whether or not the merchant will use cookies to track the leads and sales their affiliate generates, what cookie-less solutions they will use, and, if they use cookies, what life the cookies should have.
• Payment model and terms – what commission to pay, for what actions, when, and how.
• Locking period – A waiting period some merchants set for cases when their clients cancel orders or request refunds, to avoid paying commissions on those transactions.

These details, along with others, are the ones that influence a publisher’s decision to affiliate themselves with a particular merchant.

Once the affiliate program structure is in place, and the program is set live, the merchant will have to recruit affiliates. The methods would range from announcing the new affiliate program to existing customers to employing tools that can help you find your competitors affiliates, to at least 20 more affiliate recruitment techniques and approaches.

The publishers in the respective network can ask to join the merchant’s affiliate program. It is up to the merchant or their program manager whether they accept applications automatically or they review and vet each of them individually. Merchants may also set specific auto-approval or auto-decline rules (be they based on the affiliate’s geography, in-network ranking, status, feedback, or anything else).

Once a publisher is accepted as an affiliate, they can start using the creative tools made available to them and their own marketing methods and tools to promote the merchant’s products or services.

How Affiliate Marketing Works from the Publishers’ Perspective

Things are a little simpler on the publishers’ end.

As mentioned above, there are several types of publishers or affiliates. The difference between them lies with the specifics of their actions and the tools and techniques they use to promote the products and services of the merchant they’re affiliated to.

No matter to which category the publisher belongs, before becoming an affiliate, they have to choose the program to affiliate themselves with and apply. It can be an in-house program or a network-based program — there’s virtually no difference between how the two function.

1. Choosing an Affiliate Program

Before deciding whether or not to affiliate themselves with a certain merchant, publishers should consider several important aspects, discussed in depth in Geno Prussakov’s earlier-referenced Quick Start Guide to Affiliate Marketing:

• Merchant website ease of use and traffic leak potential (toll-free numbers, live chat, etc.). If a website loads slowly or is difficult to navigate, it may chase visitors away. Toll-free numbers and live chat options may convert leads into sales, bypassing the affiliate’s commissions.
• Merchant reputation and reliability. Publishers should affiliate themselves with reputed merchants who live up to their end of the deal. Otherwise, they risk losing sales commissions and/or not getting paid.
• Price competitiveness. Some merchants have such high prices that selling their products or services is close to impossible. Others create replicas of their websites featuring much higher prices to cover affiliate payouts. Publishers should focus on promoting merchants with competitive prices.
• Market saturation. Some merchants are in very competitive niches, while others already have a huge number of affiliates. A beginner to affiliate marketing will have a hard time selling and making money in a saturated market.
• Commission amount.  The first impulse publishers have is to affiliate themselves with the merchants that pay the highest commissions. However, this is not necessarily a smart approach. Sometimes, it makes more sense to promote products or services that pay lower commissions but are easier to sell. Other times, it is preferable to promote a merchant that rewards both sales and leads, even though with lower amounts, than to promote a merchant that rewards sales only.
• Commission recurrence. All publishers should look into whether the merchant they affiliate themselves with will pay them a commission for all sales they drive, or only for new customer sales. It makes sense to earn a commission on every sale.
• Terms and conditions. These are the rules of the affiliate marketing program, the ones dictating when and how affiliates get paid, what actions they can take in their marketing efforts, and more. These influence which sales and leads qualify for a commission and which don’t. Therefore, they should be carefully reviewed by every publisher before they apply to become an affiliate.
• Conversion rate. Some merchants do a better job converting leads into sales than others. Publishers should look for merchants with high conversion rates, and even value the conversion rate more than the commission they could earn. Why? Because selling hundreds or thousands of products and earning a low commission is preferable to selling a couple of products with a high sales commission.
• EPC (earnings-per-click). This metric allows publishers to figure out how much money they could earn by driving traffic to a merchant’s website. Although a higher EPC could mean more money, some websites and merchants are much easier to promote than others.
• Reversals and lock-in periods. Some merchants will not pay their affiliates for orders that get canceled, product refunds, or service cancellations. To cover for such situations, they set a waiting period for the due commissions. In most cases, order cancellations and refund requests have nothing to do with the affiliate’s performance, so merchants who refuse to pay commissions on these transactions are not always desirable partners.
• Performance tracking solutions. For affiliates, it is important to work with merchants who use effective tracking solutions. Otherwise, they risk losing money. Cookies-only tracking solutions, for example, are ineffective due to the increasing popularity of ad-blockers and private browsing solutions to name just two of the threats. Publishers should affiliate themselves with merchants who use cookie-less tracking methods as well.
• Creative resources and tools. As explained above, it is the merchant’s duty to provide their affiliates with some promotional materials, such as banners, text links, videos, and more. Some merchants provide numerous alternatives, while others focus on the basics. There are also merchants who invest in tools that allow their affiliates to create the materials they need. For publishers, it is important to have access to text links and banners for specific products or services or to be able to create them themselves. Therefore, the resources a merchant makes available should weigh heavily on the publisher’s decision of whether to join a particular affiliate program.

2. Becoming an Affiliate

Once a publisher has found the programs they want to join, they still need to apply and get accepted. Some merchants allow any registered customer to create their own affiliate link and use it to draw other customers. Many, actually, actively encourage this by placing a respective call-to-action on the order confirmation page — so that the customer can grab a unique tracking link and share it with their friends and followers.

Other merchants expect more from their affiliates and have specific rules in place. The publishers interested in promoting their products or services will have to prove that they meet those rules.

3. Promoting the Merchant and Getting Paid

Assuming that everything is in order and the publisher is accepted as an affiliate, it will be up to them how they market the merchant’s products and services as long as they play by the merchant’s rules or their Terms of Service agreement.

They can use content, ads, videos, apps, incentives, and various combinations of these in their marketing campaigns, but only as long as these marketing methods are permissible by the merchant. They can do the promotion through their own website or on the social networks, through their profiles, social media groups, forums, or paid advertising. But, as mentioned in the foregoing, they should also, first, double-check what is okay and what is not. This will help everyone, saving the possible future headache of reversed affiliate commissions.

The important thing to keep in mind is that the only limit to how much money an affiliate can make is their performance. Some may earn a few hundred dollars from affiliate marketing, while others earn hundreds of thousands, some – even millions, and then there are some that get acquired for a billion.

The Bottom Line About Affiliate Marketing

Whether you’re a merchant or a publisher, affiliate marketing could be your ticket to success.

Sure, true (and lasting) achievement doesn’t happen overnight, and it is never possible without learning, hard work, and perseverance.

You will need to find your way and figure out what works for you and what doesn’t, but you’re already on the right track, and we’re here to help. Don’t hesitate to ask questions and share your concerns in a comment below and we’ll do our best to answer as soon as possible!