How Does an Affiliate Program Work?

Editor’s Note: This article was originally published by Web Marketing Today. Practical Ecommerce acquired Web Marketing Today in 2012. In 2016, we merged the two sites, leaving Practical Ecommerce as the successor.

As you are probably aware, what is called an “affiliate program” or “associate program” is a relationship in which a merchant pays you (the “affiliate”) for links from your site to his site. Usually, the affiliate is paid only when an actual sale is made by the merchant as a result of your link.

This kind of advertising (and it is advertising) is called Pay Per Action (PPA) since the affiliate isn’t paid for carrying the merchant’s advertising link or graphic on his site, but only when a visitor performs a certain action (visits, fills out a form, makes a purchase).

An Example from Amazon.com

Amazon.com pioneered the affiliate program method. To explain how this works in action, I’ll describe Amazon.com’s program briefly.

You sign up as an affiliate on their site and are assigned an Associate’s ID. Mine happens to be “wilsoninternetse”.

Let’s say I have a review of a hot new book on my site, such as “The E-Commerce Book: Building the E-Empire” by Steffano Korper and Juanita Ellis (ISBN 0-12-421160-7). I would link the title to take my visitor directly to the book’s description on Amazon.com’s site. Here is what a URL to that book looks like:

http://amazon.com/exec/obidos/ASIN/0124211607/wilsoninternetse

Notice the elements: My Associate’s ID is last in the URL. Just before it is the ASIN (Amazon Standard Item Number), which in the case of books is the same as the ISBN (International Standard Book Number, a unique number assigned to every book and book edition published).

When the visitor clicks on this link, the Amazon.com web server is programmed to send the visitor to the book with that ISBN number to the web page. At the same time my Associate’s ID will be recorded with the visitor’s session ID (an arbitrary number assigned to each visitor every time he enters the site) so that if the visitor makes any purchases on that session, I will be credited with their purchase.

While every merchant chooses her payment system, this is how Amazon.com currently works (subject to change):

If my visitor purchases the exact book I have linked to, I receive 15% of the sales price of the book.
If my visitor gets to the Amazon.com site, begins to browse around, and buys another book, I get 5% of the sales price.
Payments are made quarterly so long as the total commission due that quarter exceeds the minimum amount.

Today “The E-Commerce Book: Building the E-Empire,” regularly $39.95, is on sale for 30% off or $27.97. If you purchased it from my link I would make 15% of $27.97 or $4.20. If you purchased the book after coming through another link from my site, I would make 5% of $27.97 or $1.40.

Win-Win

One of the reasons affiliate programs are so popular is the win-win situation for both the merchant and the affiliate.

Merchant Advantage

The merchant’s cost for advertising a particular product is limited (largely) to the percentage paid to an affiliate, and the merchant only has to pay when a purchase is made. This is much better than banner advertising, where the merchant pays whether or not any purchase occurs. In fact, the amount paid to an affiliate for a purchase through an affiliate link is probably only 10% to 20% of the cost of that sale through banner advertising (which charges in cost per 1,000 banner views, CPM).

What’s more, if your visitor likes Amazon.com, he is likely to go directly there the next time he wants to purchase a book, and Amazon.com has potentially gained a customer for life. (Of course, if the same visitor uses another link on your site to buy another book, you’ll also get credit for that purchase.)

You can learn more about affiliate programs from a merchant’s standpoint in my Web Commerce Today newsletter, Issue 8, “A Merchant’s Primer of Affiliate Programs,” where I explain how to set up such a program.

Site Owner Advantage

The site owner stands to make some money so long as enough visitors click on the affiliate links and make purchases. You don’t have to go to the trouble of setting up e-commerce functions, taking credit cards, or shipping products; you just join some affiliate programs and let someone else do the “dirty work.”

Caveats

If something sounds too good to be true, it probably is. To be realistic, view an affiliate program income as a nice bonus to your primary source of revenue, not the main source itself. To generate substantial income, you need: (1) a lot of traffic, (2) merchants with generous payout policies, and (3) products well-targeted towards the visitors who come to your site. The truth is that few sites generate enough traffic to make a lot of money with affiliate programs.