What is Affiliate Marketing?

Last week, I had the good fortune of attending IIR’s Online Affiliates conference as a panel moderator. Of course, the panelists for “Product Placement Gets Context Centric” were great.

• Stuart Watson discussed the power of Dynamic Trade’s DDI service (Dynamic Trade recently signed a deal with Inktomi).
• CJ’s Todd Crawford explained how EnContext is helping merchants and affiliates find better points of integration.
• Dave Louden from Affinia pitched its Product Placement Network, which we discussed in an earlier column.
• SuperSig’s Peter Crofut pointed out that context happens in many places, including email.
• For sales channel-based brick and mortar companies, Rick Wardell of iMediation offered a very robust set of solutions.

Overall, the panel presented a fun collection of next generation affiliate stuff.

And while the panel was all about the future of affiliate marketing, what struck me most was the incredible demand for just the basics. The cocktail hour after the first day’s sessions was a parade of conversations about where to get started with affiliate marketing. About what exactly affiliate marketing is. About how to apply affiliate marketing to one industry or another. About how it can improve business. That got me thinking…

It Started With Amazon…

When it comes to the web, Amazon.com really started the affiliate ball rolling. In July 1996, it launched its “associates” program and now counts over 450,000 sites in its network. The basic model works something like this: A small website owner registers with Amazon (or any other affiliate program), she then puts various links, banners, and products on her web site. When her visitors click through on these links and purchase a book or other product, the small web site owner is paid a commission for generating the sale.

But Others Have Followed

While Amazon remains the most visible pioneer, the concept really isn’t new. In fact, one of its oldest practitioners, Amway, has even taken to the web and affiliate marketing with its Quixtar site.

Looking a bit farther afield, consider merchants that dont even have formal affiliate programs: auction buying clubs like Mercata and MobShop (formerly Accompany, which I thought was an equally descriptive name). These sites work on the premise of variable volume discounts as demand for an item increases, the price goes down. Both sites encourage buyers to get their friends to buy too. Instead of earning a commission, the “affiliate” is rewarded with a lower purchase price.

It’s Pay for Performance

In all cases, the goal is for marketers to only spend money when their particular performance objective is met. While Amazon only pays when a sale is made, merchants selling big ticket items like cars, or marketing services like credit cards, have modified the model paying instead for clicks or qualified leads.

In fact, compensation schemes are as varied as the merchants themselves from a 15 percent commission on Amazon books, to 1 percent on Dell PCs. On the financial services side, LendingTree offers up to $14 per qualified application and NextCard offers $20 per enrolled cardholder. Consumer retailers like FogDog offer a fairly typical 5 percent.

Consider a Third Party

As merchants have rushed to build programs, an entirely new category has been born: affiliate networks. Running a network of affiliates is not rocket science, but it does require quite a bit of time and commitment. For that reason, many merchants are finding that outsourced providers offer a compelling solution.

Some vendors like LinkShare provide tracking, reporting, and affiliate recruiting. Other programs like Dynamic Trade and Commission Junction offer additional services: cutting checks, sending out end-of-year tax forms, and responding to webmaster queries. Complete do-it-yourselfers should check out the listing of affiliate scripts at the CGI Resource Index. Several dozen scripts are listed, ranging from freeware and shareware to scripts costing a few hundred dollars.

In a few short years, affiliate marketing has become a significant force in how commerce on the web occurs. Thousands of merchants now use affiliate marketing to get business done. The model is now being flexed to drive behavior beyond mere commerce transactions.

And yet for all the jargon and hype, affiliate marketing is about connecting buyers and sellers and rewarding those that facilitate the connections. After all, the value isn’t in the transaction, it’s in the relationship…