Affiliate marketing is big.
How big is affiliate marketing?
Well pretty big, when in fact more than 5.2 Billions will be spent on affiliate marketing in the US alone. Crazy stuff.
So you got it right. Affiliate marketing is one of the most important marketing channels for most brands in 2018 and forward.
Before we dig deeper into best practices, definitions, and what to do. Let’s first understand the basic of affiliate marketing.
Background to Affiliate marketing
To understand affiliate marketing first we need to understand online advertising.
What is online advertising?
It’s a basic deal where the advertiser buys traffic from an online publisher.
It all starts from here.
On one end, publishers create and optimize online pages and online assets that attract traffic.
On the other end, advertisers are looking for traffic.
This is the starting point, publishers generate traffic and advertisers look for traffic sources.
With Affiliate marketing, publishers and advertisers have the opportunity to negotiate and define their deal. To play under their own terms, when both parties trying to maximize their revenues.
By working on performance based deals and not placement based deals…
What does it mean in real life?
Remember, the publisher wants to make as much money as possible from his traffic, in the same time the advertiser wants to reach more audiences and get more sales.
When the advertising deal is only on placement base, then the risk is fully on the advertiser.
The advertiser is required to pay in advance without knowing how much sales or leads he will get in return. For example Dior can spend 3K on Google Adwords, and see $200 in sales as a return. This is the worse situation for an advertiser when he’s expenses exceeds the income, and respectively ROI is negative.
How exactly is that relates to affiliate marketing?
Well it’s the core of affiliate marketing. Advertisers want more traffic from publishers in their niche. They can either buy ads from a third party (Google, Facebook and so many publishers and exchanges) or directly.
Affiliate marketing allows publishers and advertisers to cut the middle man.
Instead of Google or other exchange enjoying significant part of the revenues, the parties rather take the risk for themselves and enjoy the benefits of the transaction. This way, they are not required to share their income with any ad server or exchange.
If Google for example takes 50% of ad revenues for website X, Website X can partner up with Advertiser Z and sell the traffic directly. Meaning, they will have additional 50% they can share.
If that’s the case why do people and companies still buy ads? and how come not all publishers sell ads directly and simply make more money?
Fact is that most publishers and advertisers at least test affiliate marketing since 81% of brands and 84% of publishers leverage affiliate marketing.
There are few main reasons for that:
1. Sales challenge – a publisher wants to make money from his blog. Let’s assume that the blog attracts 20,000 visitors a month and that they come from different countries. In such case, if advertisers are mostly interested in one country, the publisher can’t sell a big portion of the traffic.
For most blogs, managing sales and reporting to multiple customers would be an overwhelming task.
2. Collection challenge – if a publisher works with 10 different advertisers, he needs to track and collect payments from all of them. Although it sounds trivial, for a small publisher collection becomes a real challenge. Why? Like any field, collection of money is an ongoing task. This becomes more tricky in cases where the advertiser isn’t profitable. If the advertiser isn’t profitable then he is simply not afraid of losing the publisher.
41 percent of U.S. small businesses say invoice payment collection is their largest cash flow management challenge (Global Business Monitor)
3. Technology challenge – serving ads is not a simple business. The more features you have – targeting, rtb, placements and so on, the more money you can make from serving ads. To be competitive you need to provide proper reportings to advertisers (preferably real time), reports that reflect on costs, impressions and overall performance. Most publishers don’t have the resources to do that.
What is affiliate marketing?
According to Entrepreneur, affiliate marketing is – “A way for a company to sell its products by signing up individuals or companies (“affiliates”) who market the company’s products for a commission.”
In other words, affiliate marketing is the practice of extending the company’s marketing operations through third parties on a performance basis.
I will explain everything guys no worries.
Let’s start with the definition, and we’ll take it forward from there… There are 3 main parts to my definition:
a) The practice of affiliate marketing
b) Extending marketing operations through third parties
c) On a performance basis
What is the practice of affiliate marketing?
I mean it’s definitely not rocket science…
The practice of affiliate marketing is based on relationships, negotiations and marketing skills.
What is the role of an affiliate manager?
As an affiliate manager, you are required to maintain and grow the number of affiliates in the program as well as optimizing them.
Affiliate marketer is required to have a versatile skill set, such as mastering customer service and business development skills.
Customer service is needed – to support all the existing affiliates.
Plus, there’s the need to reach out and engage with new affiliates constantly. That’s the Business development side.
Commission and trustworthiness play a big part here, however the personal touch is what mostly migrates affiliates from one brand to the other. Read more on affiliate marketing best practices with examples
Extending marketing operations through third parties
Usually affiliate deals are performance based.
However, using affiliates in a way that is not ROI centered can help and significantly improve your marketing operations.
Often, affiliates are being utilized as an extension of the advertiser’s marketing operations from backlinking, to brand awareness, all the way to social shoutout and reputation management.
There are many ways to use affiliates and publishers to grow your business I have explained multiple ways you can utilize your affiliates to obtain marketing results other than sales or lead generation – in this article
As for third parties, they vary in sizes from small businesses to enterprises and all the way to individuals.
On performance basis
The final part of the definition, is the strong connection between affiliate marketing and performance marketing.
The standard for affiliate marketing deals is on performance basis.
What is performance marketing?
Performance marketing is a channel where the publisher’s commission is being measured by metrics that directly affect revenues. From leads to sales – it comes in many shapes and forms.
For your convenience, these are the standard deal structures for buying traffic
|Placement||Flat fee for placement like a billboard|
|CPM||Cost per 1,000 impressions|
|CPC||Cost per click|
|CPL||Cost per lead|
|CPI||Cost per installation (for apps downloads)|
|Rev-Share||Advertisers and publishers split revenues|
|CPS||Cost per sale|
|CPA||Cost per action (action is defined by the advertiser, mostly conversion of some sort, first time buyer, or else)|
This table is on a descending order, starting from placement which is not tied to performance at all, as advertisers pay a flat fee just to be there (think Times Square). However nobody promises or undertakes to drive results.
To better explain, I can buy ads in millions of dollars and put my brands in many billboards across the US. Nothing protects me from selling less than $100K and lose money in millions as an advertiser.
The more we go down the table, the more we are getting to performance metrics. All the way down to CPL, CPS and CPA.
CPS for example is a very clear metric on the advertiser’s perspective. If a CPS price is $6 and my revenue from each sale is $10, I have $4 profit for each sale. I know in advance exactly how much profit I will make from this channel. The only question is how many sales this traffic source will bring.
Why advertisers love affiliates?
It’s simple. In 99% of the time, affiliate marketing deals are performance based. In addition, publishers are getting paid mostly on post payment.
Think about it.
For the advertiser it’s a risk free marketing channel. He pays only (or mostly) post payment, so cash flow is not an issue. The advertiser pays per lead or per conversion, so he knows in advance his ROI for the transaction, and he will always remain profitable unless numbers change (and then all you need to do is modify deals accordingly).
This is the best case scenario. I’m growing my brand, without risking anything. I pay only when I get sales. Only per metrics that directly impact my income. Ultimately, I don’t need to risk money to scale up.
Why publishers choose to become affiliates?
Obviously the publisher rather work on impression & click basis. This way his commission is based on very measurable things that depend only on him. If that is the case why so many publishers choose to do affiliate marketing under performance base?
When there is a good match between the publisher’s audience and the specific advertiser, the publisher gets the best payout for his traffic.
Advertisers pay premium for performance based deals because of their nature. For example, if the maximum CPA (cost per acquisition for the brand to remain profitable) is $25 the advertiser will go very close to that for affiliate channels.
In other channels, advertiser’s focus is always to reduce acquisition costs. With affiliates the situation is different.
As long as ROI remains positive, the advertiser’s focus would be on maintenance rather than reducing costs. From the advertiser’s perspective there’s no risk. Therefore, the advertiser in many cases will be open to overpay in terms of max CPA to get deals with more and more publishers.
That puts the deal in a place where most marketing costs are being distributed to the traffic source.
It is obvious that publishers and advertisers are the ideal partners. I mean, advertisers in fact are the only business model for the publisher’s content.
Still there’s constant tension between them.
What is their problem?
It all comes from trust issues.
For example – a blog for women shoes, covering new designs, new trends, and industry news as well as product reviews.
Now if you want to monetize this blog you have few options – (a) sell ads directly; (b) sell ads through third parties; (c) partner up with an advertiser
In the cases where you have a direct deal with the advertiser (like in a&c) then you can’t trust the middle man to validate the deal. You can find yourself chasing brands to get your commission, being shaved in your commission, unable to track your performance and so on.
This is the main reason why publishers keep on using the traditional middle man – ad networks when selling ads, and affiliate network or affiliate platform when selling traffic on performance basis.
To rap it all up, we will now take a look at all the players in affiliate marketing – Publishers, Advertisers and affiliate networks.
What do publishers want?
The biggest challenge for publishers who work on affiliate deals is the fact that once they work on performance base they rely on the advertiser. This dependency is evident in two main things:
1. Tracking – when we work on conversion base, once the visitor leaves the publisher’s website and lands on the advertiser’s page, he’s unable to track performance. In other words, he might be at risk of losing commission due to inability to track performance.
2. Payments – When the deal is in post payment basis, the publisher is driving traffic and providing the advertiser with credit counting on future payment. This sets the mode of constant stress as the publisher is at risk of losing money and not being paid. This tension may lead to lack of trust between the parties.
Based on the mentioned potential risks, we know that publishers want the following:
a) Maximize the revenues on their traffic (commission + conversion rate)
b) A partner they can trust
c) Advertisers who would be an ideal fit to their audiences and placements
d) Favorable payment terms (prepayment)
What do advertisers want?
That’s really straight forward:
(i) more sales
(ii) maintain positive ROI
(iii) find marketing solutions with third parties without the need to hire or take the risk
(iv) Branding and reputation management
(v) Favorable payment terms (postpayment)
The parties may select an affiliate network as a solution to secure the interest of the publisher and the advertiser.
What is an affiliate network?
Affiliate network is the middle man. An affiliate network provides the technological and financial solutions to the parties, enabling affiliate deals when there’s lack of trust. Affiliate network provides its own affiliate platform (technology) as well as a pool of publishers they work with closely.
Affiliate network focuses on the following:
1. Financial – securing the publisher’s commission.
2. Monitoring – helping advertisers avoid publishers scams.
3. Legal – enabling the deal to work between the parties – in terms of contract and tracking. In addition, managing an arbitration mechanism to secure the parties interest in case there’s a conflict between a publisher to an advertiser.
4. Technology – integrating between the publisher and the advertiser. In addition, providing a trustworthy tracking solution for both parties to work together and optimize their performance.
What do affiliate networks want?
For affiliate networks, their best case scenario is a competitive niche where brands are fighting for every traffic source.
1. High demand for traffic – when the demand for traffic is higher than supply, brands get bankrupt and as a result publishers are not paid. Respectively, it drives publishers to work with affiliate networks to secure their payments moving forward.
2. Lack of trust between advertisers and publishers.
3. A lot of advertisers – moreover, the more brands there are – the more set up fee, and monthly minimum you can charge. All affiliate networks love that.
4. Niche where publishers and advertisers are not technologically savvy. This allows affiliate network to dominate, as the publishers and advertisers are in need for the affiliate platform to help them on the technological level.
Affiliate marketing is a great channel for any brand looking to expand his reach and get more customers. Unlike most marketing options, affiliate marketing is super attractive from the advertiser’s perspective.
This marketing method allows advertisers to grow their brands without taking risks that affiliate marketing will not be cost effective.
Publishers enjoy affiliate marketing as an opportunity to optimize and get the maximum return from their traffic.
Understanding the parties and their interests is crucial for anyone doing affiliate marketing and wants to do it the right way.