Affiliate Marketing – How Does It Work?

Affiliate Marketing Definition

Affiliate marketing creates a connection between two actors – 1) the Merchant (aka the advertiser, or partner), and 2) the Affiliate (aka the publisher). If we think about the Affiliate Program in its entirety, we must add in an additional actor, the Customer, as well.

The Merchant offers the product for purchase, and the Affiliate tries to sell that product for the merchant and/or refer visitors to the merchant’s site. In return, the Merchant pays the Affiliate a commission for sales and/or established results.

Payment Arrangements

Commission plans are normally performance-based (which effectively shifts some of the risk from the Merchant to the Affiliate) and arrangements are often structured as Pay Per Click (PPC), Pay Per Sale (PPS) and Pay Per Lead (PPL) – or some blend.

Affiliate Program Classes

If we look at affiliate marketing in terms of depth, we have three distinct classes:  1) single-tier, 2) two-tier and 3) multi-tier programs.

Single-Tier Affiliate Marketing Programs

In Single-Tier Affiliate Program, the Affiliates get the commission, only for sending visitors or sales to the merchant’s website. Pay/performance and pay/click fall within this category.

Two-Tier Affiliate Marketing Program

In Two-tier marketing, the Affiliate gets the commission for every action performed by the people he’s referred directly, plus he gets the commission when any of the people he’s personally referred gets the commission.  Thus, he has a two-layer commission structure and the Affiliate earns a commission both directly and indirectly.

Multi-Tier Affiliate Marketing Program

Multi-Tier Affiliate Program is very similar to Two-Tier Marketing, but here, the Affiliates get compensated for the sales made by their downline in multiple, unlimited, tiers. 

Residual Income Marketing

In Residual Income Affiliate Marketing, the Affiliate marketer is rewarded for every sale that is made by any of his referrals.

In this type of marketing, Affiliates get paid for every sale that his referral makes at the Merchant’s website. The only requirement is that on the first time visit, the traffic must originate from the Affiliate’s personal affiliate link. Then, whenever that same person visits the Merchant website (even without using the affiliate link), the Affiliate will be paid for every sale made by the visitor.

Cookies are what make this strategy work.  A “cookie” is created on the first-time visitor’s computer. This cookie reflects the affiliate id of the Affiliate. Cookies usually expire after 3 months; however, some may be effective longer. 

When a visitor hits the Merchant’s site, his computer is checked to see if there is a previously created cookie. If a cookie is found, the affiliate id is retrieved from it and the Affiliate gets credited for any purchase made by the visitor.

Win-Win-Win

When the affiliate marketing relationship is well-planned and well-executed, everyone wins:

1. The Merchant gets greater market exposure and market penetration, locating customers that would otherwise be outside the Merchant’s market reach.
2. The Affiliate earns a commission for online sales, without the hassles involved with establishing a full e-commerce site or having to manage inventories and fulfil orders.
3. The Customer learns about, and can readily access desireable and useful products that s/he would otherwise not find – at least not easily.

Good affiliate programs are Win-Win-Win situations.

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