Definition: Affiliate marketing is a hybrid advertising and referral channel by which third parties promote another company’s product or service and receive a commission for any sales generated. Affiliates can be a major revenue driver for ecommerce stores, translating their visibility into brand awareness and sales.

Affiliate marketing is a grey area between advertising and organic referrals. An affiliate marketer's greatest asset is its audience: they are able to command a revenue share because of their relevant visitors and the highly-qualified traffic they drive to online businesses.

Why Affiliate Marketing Works

Affiliate marketers become successful by cultivating an audience and developing a rapport with them. Affiliates often excel at driving organic traffic for informational search queries about a brand or industry. For example, they may rank high for "best [product]" or "[brand] vs. [brand]" searches. Many affiliates excel at generating traffic from long tail searches, using traditional content mediums such as blogs or reviews.

While some affiliates primarily drive new visitors to their website via new users from organic and paid traffic, others earn a substantial following by providing engaging content and developing a rapport with their audience. These affiliates earn the trust of their readers and can act as a type of spokesman or brand advocate for an online business.

Types of Affiliate Marketing

Successful affiliates often employ one or more of the following tactics:

  • Establish themselves as an expert in their industry
  • Share their own stories, telling how the products or services they’ve used have been helpful to them
  • Provide reviews of products or services
  • Develop in-depth buying guides that compare several products or services
  • Offer special discounts to their audience members for the products or services they promote

Affiliate marketers benefit from this arrangement, because they don’t have to produce the product or service they're promoting. They simply need to refer people to the company they are affiliated with. Affiliate marketers often use the Internet to promote products and services via methods such as:

  • Creating a website
  • Running a blog
  • Sending out email newsletters
  • Creating an app

While businesses, including ecommerce businesses, can benefit from affiliate marketing as a way of driving additional sales without upfront costs, there are risks to the process.

Managing Affiliate Marketing Risk

While businesses, including ecommerce businesses, can benefit from affiliate marketing as a way of driving additional sales without upfront costs, there are risks to the process. These can include an affiliate misrepresenting a business as well as fraudulent affiliate behavior. The following steps are suggested for successful affiliate management:

  • Check affiliate sites regularly: Verify that they are representing the product being sold properly, without making wild or unsupported claims.
  • Verify IP/Address correspondence: If an affiliate's orders commonly feature IPs that are not located near the shipping address used for the orders (for instance, international IPs used to place orders shipped domestically or to a different country than the order was placed in), this can be an indication of fraud.
  • Monitor conversion rates: Excessively high conversion rates from an affiliate site can be a sign that an affiliate is using incentives to generate orders or placing them fraudulently to generate commissions. A very low rate may signal that the affiliate is placing your link in a "banner farm" of some sort.

Affiliate commissions are not set in stone

Although most affiliate marketing is commission-based, payouts vary widely. Commissions may be only a few percent, or they might be half of the sales price. Additionally, some agreements have varying commissions, depending on how many units the affiliate marketer sells. Profit margins, product pricing, and LTV affect what an online retailer is willing to pay an affiliate for every sale generated.

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