What is Affiliate Marketing and How It Works

A way for a company to sell its products by signing up individuals or companies (“affiliates”) who market the company’s products for a commission.

There are two ways to approach affiliate marketing: You can offer an affiliate program to others or you can sign up to be another business’s affiliate. Affiliates are an extension of your sales force and represent your online brand. Affiliate marketing occurs where a third-party advertises products or services on behalf of a merchant in return for an agreed commission for a sale or lead. Because of this, affiliates are sometimes viewed as an extended sales force for a website.

Affiliate marketing can be used to promote any type of website – there just needs to be an agreed-upon action resulting in an affiliate earning commission. Different types of merchants will have different required actions. The actions and the type of commission can be summed up as:

  • Cost per Action (CPA) – a fixed commission for a particular action. Here, the action could be anything from downloading a white paper or software to signing up to a newsletter.
  • Cost per Lead (CPL) – a fixed commission for a lead (that is, a potential sale). Merchants who offer CPL commissions are usually those who need to convert
    a lead into a sale offline.
  • Revenue share (also CPS or Cost per Sale) – an agreed-on percentage of the
    purchase amount.Revenue sharing is the ideal commission structure as both the merchant and the affiliate are rewarded for performance – the more sales, the more revenue generated for the merchant, and the more commission for the affiliate.
  • Cost per Click (CPC) – a fixed amount for each click through to the website
    (although this forms a very small part of the affiliate marketing mix). It is an internet advertising module used to direct traffic to the websites, in which advertisers pay the publisher when the ad is clicked.