Affiliate marketing is a concept unique to the Internet. It was conceived by P.C. Flowers and Gifts way back in 1989 on the Prodigy network, a precursor of the Worldwide Web. The simple idea was to pay a commission to an affiliate who referred a lead to their site that resulted in a purchase.
Affiliate marketing might be called "commission marketing" or "referral marketing" or "bounty marketing," as in paying a commission, referral fee, or bounty for a prospect that becomes a sale.
Benefits of Affiliate Marketing Programs
- Source of Qualified Prospects The biggest benefit of starting an affiliate marketing program is the stream of qualified prospects that result (Tweet). Assuming the affiliate sites are compatible with your company, the traffic they send should be premium, pre-qualified prospects who are much more likely to become customers than traffic arriving at your site through search or social sources.
- Modest Cost of Affiliate Programs Let's say you pay affiliates 10% of any sale that happens during a visit to your site that originated at the affiliate's site. Does that mean you give up 10% of your revenue as a result? Not exactly.Amazon has become a master at crafting clever affiliate programs, and you are advised to study their terms when crafting your own plan. For example, commission is only paid if the sale happens in the same visit that originated on the affiliate's site. If the prospect browses your site and comes back tomorrow to buy, the affiliate is usually not entitled to commission. Affiliates can be the source of thousands of customers, yet only get commission for those few purchases made in the same session as their original visit.
- Branding Benefit of Affiliate Programs Speaking of Amazon, the company runs one of the biggest affiliate marketing programs in the world. It started in 1996 and Amazon patented certain operational components. Amazon used the affiliate program to get the company's name and logo spread across thousands of sites, contributing to Amazon's successful initial stock offering. So affiliate programs have a branding benefit and appeal to investors as well as serving a lead generation function.
- Cost-Effective Advertising Affiliate programs can be seen as a form of advertising, with the benefit that you don't pay for the ad until you close the sale. This differentiates it from other pay-per-click advertising, where merchants are charged every time someone clicks on a link to their site, regardless of whether it ultimately results in a sale; or pay-per-exposure advertising, also called pay-per-placement, where you pay for the space or for having your ad shown, regardless of whether it is clicked on.
The Coupon Shopping Problem
Alas, nothing is perfect. As Mark Cohen reports in The New York Times: "[A]ffiliate marketing has a dark side: It can be a sure path to fraud." There are two major potential problems with affiliate marketing programs. The first is coupon shoppers.
Coupon shoppers go to your site, put something in the shopping basket, but then wonder if maybe they can find a less expensive price. They do a Google search, find an affiliate site, click on "$5 off," and then complete the sale. So, you're out the discount plus the affiliate commission for something that actually took place after the purchase decision.
Unscrupulous sites can take advantage of that by advertising coupons they don't actually have. If the comparison shopper goes to the coupon site, doesn't find the coupon, clicks back to the shopping basket and completes the purchase, the affiliate site claims a commission.
Fortunately, there are ways to program your system to reduce this kind of invalid claim, though there's not much you can do about shoppers seeking discount coupons after they've already decided to buy.
Cookie Stuffer Fraud
This is a real problem that attacks the underlying way that affiliate marketing works on the Internet -- with cookies. A cookie is a little piece of code that is implanted on the buyer's computer upon clicking the affiliate website's link to your website's shopping cart. When the purchase is completed, the affiliate's cookie is recognized as the source of the sale and is credited with the commission.
Cookie stuffing is the practice of dropping affiliate cookies on end-user computers without them actually clicking on an affiliate link, or knowing they are accepting the cookie (Tweet This). It works like this:
Let's say you go to a blog about a favorite musician and read a review about a new CD. Two weeks later you decide to buy the CD. You buy it online, and the online merchant pays an affiliate commission to the blog you visited two weeks ago. Why? Because when you visited that blog, an affiliate cookie was put on your computer, unbeknownst to you.
You might think, hey, no big deal. Here's where it adds up to a big deal. Shawn Hogan and Brian Dunning made approximately $35 million in affiliate commissions from eBay by stuffing affiliate cookies through a multitude of websites -- more than 650,000 of them. Anyone who went to those websites and at some point made a purchase on eBay triggered an affiliate commission, even though they made no conscious decision to make that purchase through an affiliate program.
Hogan and Dunning eventually pleaded guilty to wire fraud. If your affiliates are abusing your program by inserting an affiliate code onto computers without consent or implied consent, you could be losing a lot of money (Tweet This). The best way to guard against this is to monitor your affiliate program and investigate any abnormalities.
Keeping Affiliate Marketing Programs in Perspective
Large-scale cookie stuffing schemes are relatively easy to detect. Moreover, to do any real damage, cookie-stuffing schemes must be huge, and therefore are more likely target major online retailers. As Jim Edwards of Business Insider points out:
"The problem with affiliate marketing is that there isn't much money in it. eBay pays about $70 million annually to its 26,000 affiliate marketers, according to court papers. The average payment is around $2,700 a year. Remove Hogan and Dunning from the equation -- Hogan alone was 15% of eBay's total payout -- and the average payment drops even lower."
So, unless your business is huge like Amazon.com or eBay, the risk of your affiliate marketing program resulting in significant fraud is small -- and largely preventable. The games some affiliates play probably will cost you less than what the average brick-and-mortar store allows for undetected employee and customer theft.