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.

4.2 How It Works

The core of affiliate marketing is a simple process:

1. An affiliate refers potential customers to a merchant’s Web site.
2. Some of those customers perform a desired action.
3. The merchant rewards the affiliate for each desired action resulting from the affiliate’s referral.

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 importantly, there needs to be some way of keeping track of the whole process.

We’re going to take a look at the different types of actions first of all, then discuss keeping track of it all, and lastly take a look at some of the many means that affiliates use to send customers to merchants, and of course, to make themselves cash.

4.3 Tracking: The Lifeline of Affiliate Marketing

The key to affiliate marketing is being able to track the whole process, from potential customers being sent to a Web site to completed action, so that the merchant is able to award the correct affiliate with the correct commission. This really is the crux of affiliate marketing.

Specialized affiliate tracking software is used to track affiliate campaigns, and this is usually supplied and supported by the affiliate network. Often, the merchant and the affiliate will also use their own tracking software to make sure that there are no major discrepancies.

Affiliates send traffic to merchants through links or uniform resource locators (URLs), and the tracking software allows each affiliate to have a unique identifier in the URL. These links set a cookieon the customer’s computer, which allows the software to track the sale.

For example, here is the URL of a product on a retailer’s Web site:

http://www.firebox.com/product/1201

Here is the URL for the same product with affiliate tracking:

http://scripts.affiliatefuture.com/AFClick.asp?affiliateID=238&merchantID= 214&programID=3897&mediaID=0&tracking=cube_world&url=http://www.firebox.com/index.html?dir=firebox&action=product&pid=1201

You can see some of the information being recorded. It has been shown in bold in the URL and includes the following:

• The affiliate network (Affiliate Future)
• The ID of the affiliate (238)
• The ID of the merchant (214)
• The ID of the program since a merchant might have more than one program on a network (3897)
• The media used (0)
• The destination of the click

Can you spot the original URL in the tracking URL??

When the customer completes the required action on the merchant’s Web site, the cookie will allow the tracking software to collect the information needed to award the commission. For example, if a customer were to use an affiliate link to purchase a gift from a merchant (using the same URL as before as an example), the following information would be collected:

• Referring URL and affiliate
• Total sale amount for commission
• Date and time of sale
• Unique order number of sale

All this information will allow the merchant to confirm that the sale is valid, as well as the amount of commission that is due, without ever releasing any of the customer’s personal information.

Affiliate tracking software collects information even if no action is completed. This is vital to the affiliates and to the merchants to see where they can optimize their campaign.

Information collected includes the following:

• Impressions
• Clicks
• Conversions

All this information helps to build up data in order to strengthen the campaign.

Affiliates will use this information to determine the success of their marketing efforts. Remember that affiliates invest money into marketing various merchants, and they only get rewarded on commission. An affiliate will use the above information to determine whether or not to promote a merchant and how much they should invest in promoting a particular merchant.

Merchants can use the information on their campaign to determine how best to optimize. For example, if a particular type of banner seems to do better than others, they could use that to improve other banners that they offer.

4.4 When Things Go Wrong

Successful tracking is fundamental to any eMarketing campaign, and especially so to affiliate marketing. As affiliates are only paid for performance, should anything go wrong in the tracking process, it is the affiliates that suffer. The merchant will still get the desired sales, but the affiliates won’t be rewarded.

So it is good to bear in mind some of the problems that can be faced with tracking.

4.5 How Do Affiliates Promote Merchants?

Affiliates are online marketers who are paid on a performance basis. Every type of marketing strategy will be found in the affiliate world, and affiliates can often be seen at the forefront of breaking technology and applying it to marketing strategies.

The basic aim of an affiliate is to send targeted traffic (that means customers who are very likely to perform the desired action) to a particular merchant’s Web site. Affiliates may promote as many merchants in as many industries with as many tactics as they wish, but usually affiliates will start to specialize.

Most of the tactics will be the same as those that the merchant employs but will reach a different part of the Internet population. Effective tracking takes care of any overlap and will help a merchant to adjust their spending for a most effective return on investment (ROI). The main types of affiliates can be broken up into the following:

• Personal Web sites
• Content and niche sites
• E-mail lists
• Loyalty sites (points or cash back or charitable donations)
• Coupon and promotions sites
• Comparison shopping (see also PPC [pay-per-click] advertising)
• Search affiliates (search arbitrage)

Affiliate marketing came to the fore as a way for personal Web sites to make money, though this now forms a small part of the marketing mix. Affiliate marketing does still provide some income for these Web sites. However, we will focus on those endeavors that are created purely for affiliate marketing.

Content and niche sites are Web sites created around a specific topic, and any products promoted will carry affiliate tracking. For example, an affiliate might create a site dedicated to digital cameras, with tips and downloads to help you get the most out of your camera. It could review a number of different cameras and offer links to purchase those cameras online. All those links will be affiliate links.

Seasonality is also an important consideration for content sites. Web sites can be created specifically for Christmas, Mother’s Day, and many more key retail seasons.

Some affiliates run large opt-in e-mail lists, and they market particular merchant offers through their e-mail newsletters. Some renegade affiliates use spam e-mail to promote merchant offers, but as affiliate marketing has matured, there are usually terms and conditions to prevent such promotion.

As affiliates earn a percentage of a sale, some affiliates “split” this with the customer and create cash-back or points-based shopping sites. There are also some that donate a percentage of the commission to a charity.

Some of the most successful affiliate marketers are those who promote various merchants through paid search PPC advertising on search engines. These affiliates seek to find the highest earnings per click (EPC) for the lowest cost per click (CPC), this is also referred to as search arbitrage.

Affiliates will find any means possible to promote offers. As new products and platforms become available, marketers and affiliate marketers find new ways to make them work. Some other examples of affiliates promoting merchants include the following:

• Toolbars and other browser extensions
• Social network applications

All that is required is that the click-through to the merchant’s Web site is tracked.

4.6 Affiliate Networks

As well as the affiliate and the merchant, there is a generally a very important third party in the affiliate marketing mix—the affiliate network.

While some small affiliate programs and some very large affiliate programs (such as Amazon Associates) are run by the merchant, most merchants opt to use an affiliate network to provide most of the technical solutions required for an affiliate program.

Affiliate networks provide tracking solutions, reporting on programs to both affiliates and merchants, hosting of creative banners, commission payment options, and support to both affiliates and merchants. Affiliate networks have many affiliates, and many merchants, signed up to them, so they are ideal sources for recruiting affiliates if you are a merchant or for finding merchants to promote if you are an affiliate. Affiliate networks provide a one-payment solution to merchants, as the merchants will be invoiced for all the commission collectively owed, which is then dispersed to the affiliates.

Affiliate networks usually charge the affiliates nothing to join. They can charge a merchant a setup fee, which will cover the cost, making sure that the tracking solution is successfully integrated, and can charge a monthly management fee, depending on the level of support offered to the merchant. Affiliate networks usually charge the merchant a percentage of the commission earned by the affiliate (called a commission override), so that there are incentives for the networks if they perform well. As a rough guide, this is typically 30 percent of the commission rewarded to the affiliate.

Some leading affiliate networks include the following:

• Commission Junction. http://www.cj.com
• LinkShare. http://www.linkshare.com
• Affiliate Window. http://www.affiliatewindow.com
• TradeDoubler. http://www.tradedoubler.com

4.7 Tools of the Trade

Affiliate marketing today forms a fundamental part of most e-retailers’ strategies. So what tools does a merchant need to have a successful program?

Any retailer should have a product feed, either XML (extensible markup language) or CSV (comma-separated values). A product feed is a way to provide information about the products on a merchant’s Web site in a way that breaks up the information easily and is standardized. A product feed will probably contain the following information for each product:

• Product name
• Product URL (uniform resource locator)
• Product picture
• Product price
• Description
• Shipping price
• Stock status

Affiliates, particularly search affiliates, can use this to promote individual products.

A product feed is made available on a simple URL and displays content that affiliates can use in their campaigns.

Merchants need to create a set of banners and buttons that can be placed on affiliate Web sites. At a minimum, the following sizes should be available:

• 468 × 60 (banner)
• 125 × 125 (square)
• 120 × 60 (button)
• 120 × 600 (skyscraper)

Having interactive banners, such as gift wizards or product searches, means that potential customers can interact with the brand before they even come through to the merchant’s Web site.

If the merchant or the affiliate network hosts the banners, the banners can be updated without the affiliates having to do anything. This means that the message can be kept current across all the merchant campaigns.

Merchants need to consider who will be keeping tabs on and driving the success of the affiliate campaign. Merchants might be able to run the program in-house with current staffing resources or can hire an affiliate manager. It is also possible to outsource the management of the affiliate program to an agency that specializes in affiliate marketing.

Lastly, merchants need to keep in touch with their affiliates the networks have channels for communicating with a large number of affiliates, but it is also worthwhile to interact on some of the affiliate marketing forums in order to keep informed.

4.8 Setting Up a Campaign

Affiliate marketing is becoming an integral part of eMarketing—how would you go about setting up and launching a new campaign without it? Affiliate marketing should grow your business, and grow with your business, so it’s important to plan and prepare for long-lasting success.

First, you need a clear idea of your business’s identity, goals and unique selling points. No doubt you will have competitors that affiliates already promote; you need to be able to give affiliates compelling reasons why your program is better.

With this in mind, you need to determine the goal of your affiliate marketing. If you are a new business, you might just want to build traffic and brand awareness. Depending on what industry you are in, your goal could be new customer leads or it could be increased retail sales. Make sure you are clear on what you want and that your Web site reflects this.

Then, you need to decide whether you are going to run your own program, from affiliate recruitment to tracking and paying, or whether you are going to use an affiliate network. If you are using an affiliate network, you’ll need to do your homework on the best network or networks to join. Look at the following:

• Where your competitors are
• Who has the kind of affiliates you want
• What the joining fees and monthly fees are
• How much support they can offer you
• What countries the network is in

You’ll also need to decide whether you will hire an affiliate manager to run your program, whether you might outsource your program management, or whether you already have the resources to run the program yourself. You need to do a full competitor analysis, focusing on your competitors’ affiliate programs. Look at the following:

• Commission tiers
• Cookie periods
• Creative offerings
• Affiliates they work with
• Networks
• Incentives offered to affiliates

Prepare the basics that you’ll need to start a program:

• Product feed
• Banners and other creative offerings

Using your competitor research, decide on commission, commission tiers, cookie period, and incentives.

Test the tracking software on your site and make sure that it does not conflict with any other tracking you are using.

Recruit affiliates. Use your competitor analysis to contact potential affiliates, promote your program through affiliate forums, use your affiliate network contact channels to approach affiliates, and approach sites that you think fit your user demographic.

And it doesn’t all stop once you’ve launched! The key to successful affiliate marketing is ongoing communication and marketing to your affiliates. You need to make sure you are on top of validating sales, so they get their commission. You need to ensure that you stay competitive with your commission offering, and you need to keep your affiliates up to date with any information that could make them send more customers your way—more revenue for you and thus more cash for them!

4.9 Pros and Cons

While affiliate marketing certainly deserves increasing recognition for its key role in growth, it is still a young industry with all the growing pains that that involves.

4.10 Case Study: Prezzybox.com

Prezzybox.com is a UK online retailer in a very competitive market: gifts and gadgets. With many other players in the market competing for the same customers, Prezzybox.com runs a successful affiliate program that sees them leading the way in performance marketing.

Affiliate marketing has played a sizeable role in the growth of Prezzybox.com and now accounts for about 35 percent of sales. Affiliate marketing has contributed on two levels, namely, brand growth and sales generation. In fact, Prezzybox.com has won several industry awards for its affiliate program. In 2008, these awards included “Best Use of Creative” and “Best Merchant Innovation.”

A substantial element of affiliate marketing is managing relationships with affiliates. The Prezzybox.com affiliate program and its affiliate managers have been voted best by affiliates, and its affiliate managers are regularly invited to speak at industry events and conferences. How have they achieved this?

Prezzybox.com has a wide affiliate base and constantly recruits new affiliates via affiliate get-togethers, affiliate forums and blogs, and through keyword searches on Google. Its super affiliates, those affiliates that drive the majority of affiliate sales, account for about 1 percent of all affiliates. Zak Edwards, managing director of Prezzybox.com, says, “We tend to offer all affiliates the same opportunities for promotion, but obviously focus a lot of our attention on our super affiliates.”Zak Edwards, personal communication via e-mail with Sarah Blake.

Super affiliates can be given extra commission as an incentive, and the affiliate managers ensure that these affiliates are up to date with all the latest offers, new products, and promotions. Prezzybox.com communicates these details to all their affiliates as well. However, they use mass communication for all their affiliates and one-on-one communication, such as phone calls or instant messages, with their super affiliates. One of the features of the affiliate program is an affiliate resource center, which has extensive support information for affiliates such as real-time product bestseller reports.

In 2007, Prezzybox.com launched a brand-new content item for its affiliates: Vidibox. These are video content units—banners that contain a product video and a link to that product on the Prezzybox.comWeb site. These video content units were very successful because the content was unique in the affiliate arena and so had a large take-up among affiliates. Being a more interesting way of displaying content, the Vidiboxes attracted a higher click-through rate, which again made them more appealing to affiliates.

Prezzybox.com’s commitment to an innovative and successful affiliate program has seen it earn immense respect in the affiliate arena, which is translating into ongoing, healthy sales growth. In fact, Prezzybox.com has outgrown its offices twice in six years and looks set to maintain this successful track record.

4.11 References

Shawn Collins, “History of Affiliate Marketing,” ClickZ, November 10, 2000, http://www.clickz.com/showPage.html?page=832131 (accessed December 2, 2007).

My Turnkey Business, http://www.myturnkeybusiness.com (accessed April 7, 2008).

Stefanie Olsen, “ValueClick Buys Marketer Commission Junction,” CNET, October 10, 2003, http://www.news.com/2100-1024-5090014.html (accessed December 2, 2007).