DEFINITION of 'Affiliate Marketing'

Affiliate marketing is an advertising model where a company pays compensation to third party publishers to generate traffic or leads to the company’s products and services. The third party publishers are referred to as affiliates and the commission fee incentivizes them to find ways to promote the company.

Affiliate marketing has increased in prominence with the Internet age. Amazon popularized the practice by creating an affiliate marketing program where websites and bloggers put links to the Amazon page for a product being reviewed or discussed in order to receive advertising fees when a purchase is made. In this sense, affiliate marketing is essentially a pay for performance marketing program where the act of selling a consumer on a product is outsourced across a potentially vast network.

BREAKING DOWN 'Affiliate Marketing'

Affiliate marketing predates the Internet, but it is the world of digital marketing, analytics, and cookies that have made it a billion-dollar industry. A company running an affiliate marketing program can track which links bring in leads and, through internal analytics, see how many leads are converted into sales.

How Affiliate Marketing Works

An ecommerce merchant that wants to be able to reach a wider base of internet users and shoppers may hire an affiliate. An affiliate could be the owner of multiple websites or email marketing lists; therefore, the more websites or email lists that an affiliate has, the wider his network. The affiliate that has been hired would then communicate and promote the products offered on the ecommerce platform to his network. They do this by implementing banner ads, text ads, and/or links on their multiple owned websites or via email to their clientele. Advertisement could be in the form of articles, videos, images, etc., which are used to draw an audience’s attention to a service or product.
A visitor who clicks on one of these links or ads on the affiliate’s site will be redirected to the ecommerce site. If s/he ends up purchasing the product or service, then the e-commerce merchant credits the affiliate’s account with the agreed commission, which could be 5 to 10% of the sale price of the product.
The goal of using an affiliate marketer is to increase sales which is be a win-win solution for the merchant and the affiliate.

The Pros and Cons of an Affiliate Marketing Program

The terms of an affiliate marketing program are set by the company wanting to advertise. Early on, companies were largely paying cost per click (traffic) or cost per mile (impressions) on banner advertisements. As the technology evolved, the focus turned to commissions on actual sales or qualified leads. The early affiliate marketing programs were vulnerable to fraud because clicks could be generated by software, as could impressions.

Now most affiliate programs have strict terms and conditions on how the lead is to be generated. There are also certain methods that are outright banned, such as installing adware or spyware that redirect all search queries for a product to an affiliate's page. Some affiliate marketing programs go as far as to lay out how a product or service is to be discussed in the content before an affiliate link can be validated.
So an effective affiliate marketing program requires some forethought. The terms and conditions have to be tight, especially if the contract agreement is to pay for traffic rather than sales. The potential for fraud in affiliate marketing is a possibility. Unscrupulous affiliates can squat on domain names with misspellings and get a commission for the redirect, they can populate online registration forms with fake or stolen information, they can purchase adwords on search terms the company already ranks high on and so on. Even if the terms and conditions are clear, an affiliate marketing program requires someone to be monitoring affiliates and enforcing the rules. In exchange for that effort, however, a company can access motivated, creative people to help sell their product or services to the world.

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