A Beginners Guide to Affiliate Marketing
Affiliate marketing is a form of performance based marketing. One of the main benefits of affiliate marketing over other types of performance based marketing such as pay-per-click, is you only pay when a sale or lead has been generated. In 2012 the UK affiliate market was worth £6.54bn, a 20% increase from 2011. An estimated £410m was paid last year in commission and fees to affiliates and networks.
Affiliate marketing contains 3 main parties:
- Merchant: The merchant is the retailer who is looking to generate sales/leads for their website.
- Affiliate: The affiliate generates the merchant traffic and ultimately sales/leads in return for commission.
- Affiliate Network: The affiliate network is essentially an intermediary between the merchant and the affiliate.
An affiliate network typically offers the tracking technology, reporting tools and handles all of the payment to the affiliates. In return the merchant will pay the network a small network override % from each transaction and in some cases a monthly fee. Whereas a merchant will typically be signed up to just one affiliate network any big affiliate will be signed up to every affiliate network.
How does it work?
- When a merchant joins an affiliate network there is usually a setup fee and at this stage a monthly fee, a network override % and an affiliate commission % will be decided.
- When an affiliate signs up to a program they are provided with tracking links.
- When a user clicks on one of the tracking links they are directed to the merchants website and a “cookie” is dropped. If they purchase from the merchant, the cookie will inform the network that a sale has taken place.
- At the end of the month the merchant will receive one invoice for all of the month’s transactions. This invoice will contain the affiliate commission, network override fee and if applicable a monthly fee.
- Once the invoice has been paid the network will then pay the commission to the affiliates.
Types of affiliates
There are tens of thousands of affiliates on the Internet; the main 4 types are as follows:
1. Voucher Code Sites
These are websites which offer consumers voucher codes. When the user uses the code the consumer gets the discount and the voucher code site gets the commission.
2. Cashback Sites
In some instances cashback sites account for 50% of affiliate sales and that number is growing. Instead of the site keeping the commission it passes it back on to the consumer, in return the site will normally charge a small annual fee to its users.
3. Charity (Schools, Fundraising)
These are websites set up by schools or charities who make it very clear to the consumer that if they purchase via their site, the school or charity will receive the commission. This is now actively being promoted as a form of fundraisng through schools.
4. General Websites
Sites that have banners running across the page are often running those banners through an affiliate marketing scheme or alternatively sites that are providing a comparison service such as Confused.com will be earning commission on any sales made through their site.
Whilst there are literally tens of thousands of affiliate sites out there, most merchants will find that 5 to 10 affiliates account for 80% of their sales. It obviously depends on your sector but in most cases merchant’s top affiliates will include companies such as:
As you can see the list is dominated by Vouchercode & Cashback sites. These now account for the majority of UK affiliate sales. In 2012 alone 1 in 3 Britons used a voucher code or cashback website (Nielsen, January 2013).
Understanding and choosing commercials
Before deciding on the level of affiliate commission it is very important that you do some research to determine what your competitors are offering. Generally commission will be paid on basket value (Exc Delivery) and in some cases Exc VAT.
Being added to an affiliate site is one thing but to generate revenue you need exposure and an affiliate is only going to do this if they feel your offering is going to earn them commission.
Whilst affiliate marketing in the UK used to be about incentivizing the affiliate, as both Vouchercodes & Cashback sites now dominate the arena your proposition now needs to incentivize both the affiliate and the consumer. So it is very important to factor in a worst case scenario to ensure that you have enough margin.
As discussed at the start of the article as well as affiliate commission a network override fee is also payable, this is typically a 20% – 30% override of the affiliate commission.
The below example illustrates what would happen if a merchant was offering a 10% Discount Code to users, 10% Commission to the affiliate & a 25% override to the network:
- £30 product MINUS 10% discount (£3.00) = £27.00
- £27.00 MINUS 10% affiliate commission (£2.70) = £24.30
- £24.30 MINUS 25% affiliate override (which is 25% of the affiliate commission £0.68)
- Total received by merchant after affiliate costs £23.62
- Cost Per Acquisition/Sales £6.38
Pros & Cons
- You only pay for the sales you make – there is no ‘wasted’ spend
- You are in total control of your spend
- It’s good for brand awareness
- If a customer used a cashback site to make their first purchase with you, it is likely they will always use that cashback site with every order
- It can take time to develop relationships with affiliates
- Affiliates are ultimately in control of the coverage they provide you