The Basics of Affiliate Programs

Affiliate programs have truly grown over the last several years to become perhaps one of the Internet's premier business models. However, new to affiliate programs, aren't familiar with all of the concepts and terms involved. Naturally, this can make it difficult to properly evaluate the hundreds of programs out there and decide which are best for you.

I would like to cover some of the basics, and define some of the common terms that are used when discussing affiliate programs. For those of you new to affiliate programs this guide should help you quickly get up to speed on how affiliate programs can make an excellent, and profitable, addition to your web site. Here are some of the more common affiliate program terms you'll likely run into, and their basic definitions:
Affiliate: An independent party that promotes the products or services of a merchant in exchange for a commission. Also an associate, partner, reseller, or referral partner.
Merchant: A company that has set up an affiliate program and has agreed to share a commission with affiliates who promote their web site, products and/or services. Also termed an advertiser, vendor, or simply referred to as an "affiliate program."
Commission: The income you receive for generating a sale, lead or click-through to a merchant's web site. Sometimes called a referral fee, a finder's fee or a bounty.
Affiliate Program: Used in a broad sense, an affiliate program is any type of revenue sharing program where an affiliate web site receives a portion of income for delivering sales, leads, or traffic to a merchant web site. In a narrow sense, affiliate programs are commonly considered those programs that use a pay- per-sale model like our own. Also termed associate, partner, referral, reseller, or sponsor programs.
Pay-Per-Sale: A program where you receive a commission for each sale of a product or service that you refer to a merchant's web site. Pay-per-sale programs usually offer the highest commissions and the lowest conversion ratio. Also referred to as Cost-per- Action (CPA for short) and generically as an Affiliate Program.
Pay-Per-Lead: A program where you receive a commission for each sales lead that you generate for a merchant web site. Examples would include completed surveys, contest or sweepstakes entries, downloaded software demos, or free trials. Pay-per-lead generally offers midrange commissions and midrange to high conversion ratios (since visitor purchases are not required for you to be able to earn a commission). Like pay-per-sale, pay-per-lead is also referred to as a Cost-per-Action or CPA for short.
Pay-Per-Click: A program where you receive a commission for each click (visitor) you refer to a merchant's web site. Pay-per-click programs generally offer some of the lowest commissions (from $0.01 to $0.25 per click), and a very high conversion ratio since visitors need only click on a link to earn you a commission.
Pay-Per-Impression: A program where you receive a commission each time that a merchant's ad or link is displayed on your site. Pay- per-impression generally offers the lowest commissions, but a nearly 100% conversion ratio since a visitor merely has to view the ad to earn you a commission -- and this often results in the highest earnings potential. Pay-per-impression programs are generally measured in CPMs (see below) and form the standard of banner advertising for larger web sites.
Conversion Ratio: The ratio of visitors from your site that are "converted" into a sale, lead or click, and go on to earn the you a commission. A conversion ratio of 5% would mean that for every 100 visitors to your site, 5 would click-through, complete an action and earn you a commission. Many factors will influence the conversion ratio, including how targeted the affiliate program's products are to your visitor's interests, the price and value of the products being promoted, the merchant's ability to track all sales, and the overall effectiveness of the merchant's web site.
Click-Through Ratio: The percentage of visitors who click-through on a link to visit the merchant's web site. Higher click-throughs are preferable although not always a great measure of success. Pay-per-click earnings are highly dependent on the click-through ratios. Click-through ratios can often be improved through a variety of means: by making links more visible to visitors, adding personal comments or testimonials about the product, or even reducing the number of links a visitor can follow.
CPM: The practice of calculating a cost per 1000 ad displays. It is used by programs that pay on an impression basis -- with the CPM rate being the amount you earn for every 1000 times an advertisement is displayed. For example, a $5 CPM means you earn $5 every time 1000 ads are displayed on your site. CPM can also be calculated for pay-per-sale, pay-per-lead and pay-per-click programs by using this formula:
Amount earned / (number of impressions/1000)
Calculating the CPM of affiliate programs can be an effective means of comparing the results over time from various programs -- allowing you to put more emphasis on the strong programs, and dropping the poorly performing programs.
Two-tier Commission: Two-tier, or multi-tier, refers to the practice of a merchant paying commissions to both the affiliate that referred a sale, lead or click, and the affiliate that referred that affiliate to the program. A descendent of network marketing, two-tier programs are generally quite legitimate and offer the merchant an effective means to promote their affiliate program quickly. However, be wary of any programs that try to charge startup or membership fees to join. These programs should be avoided, as there are hundreds of others that do not charge to become an affiliate. Some are simply pyramid schemes in disguise.
Residual Commission: Residual commissions refer to programs that provide affiliates the ability to earn an income, month after month, for referring a sale to a merchant. They are usually those that offer some type of service for which the customer is charged an ongoing subscription fee. Examples include web hosting, tele- communications, and ecommerce solutions. They offer an effective benefit to affiliates since the affiliate can earn income for an extended period, perhaps even years, from a single sale.
Tracking Method: Tracking refers to the way that a program tracks referred sales, leads or clicks. The most common are by using a unique web address (URL) for each affiliate, or by embedding an affiliate ID number into the link that is processed by the merchant's software. Some programs also use cookies for tracking.
Cookies: Cookies are small files stored on the visitor's computer which record information that is of interest to the merchant site. Despite concerns that some people have, cookies are in no way dangerous -- and can not be used to steal names, email addresses, phone or credit card numbers. With affiliate programs, cookies have two primary functions: to keep track of what a customer purchases, and to track which affiliate was responsible for generating the sale (and is due a commission).
Be especially wary of programs that only use cookies since they have many inherent limitations: the user can turn them off, they expire after a certain date or time, and they can be deleted off the visitor's computer. Most programs use either unique URLs or affiliate ID numbers in conjunction with cookies to track properly. Cookies can then be used to give the affiliate credit at a later time of purchase, even if the visitor returns to the merchant's site as opposed to the affiliate's unique URL.
Banner Networks: A whole bunch of networks have popped up to better facilitate the pay-per-click concept. Most pay-per-click programs are part of a network where the network acts as middle- man between the actual advertisers and the affiliates which run the ads. And for this service, the network takes a percentage of the overall revenues.
Third-party Administrators: The best way to get starting in Affiliate Marketing is to sign-up with one or more of the different Affiliate Networks. Similar to banner networks, an increasing number of companies have sprouted up to help merchants facilitate their affiliate programs. Most act as consultants and software providers to merchants, and thus allow them to cost-effectively outsource their affiliate program operations. For affiliates, the networks often offer simplified registration, standardized commission tracking and reporting, and even consolidated commission payments.

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