It's important to remember that affiliate marketing is an online marketing technique that is oftentimes ignored by advertisers. E-mail marketing, RSS feeds, and search engines are high profile forms of online advertising. On the other hand, affiliate marketing tends to walk softly yet carry a big stick. Where e-retailer strategies are concerned, the affiliate usually plays a very significant role in their success.
There are two methods of compensation where affiliate marketing is concerned - Predominant Compensation and Diminished Compensation. Predominant Compensation is the main source of revenue and involves the following methods:
Revenue sharing or Cost-per-Sale (CPS) - 80% of the affiliate programs use this compensation method. The programs that fall in this group are oftentimes called generic or pay-par-sale type programs. Normally, you will find programs like ClickBank in this group.
Cost-per-Action (CPA) - 19% of the programs use this type of compensation. These are sometimes pay-per-action programs and fall into 2 groups - per click (see below under Pay-per-Click) and per e-mail address types of programs. There are several of these per e-mail programs listed at Commission Junction.
Diminished Compensation is a secondary source of revenue. The two techniques that should be mentioned here are Cost-per-Click (CPC) such as AdBrite, AdSense, and ClixSense, or Cost-per-Mille (CPM) which means cost-per-thousand as in ad impressions. However, these compensation methods are pretty rare any more and less than 1% (or a negligible percentage) of the affiliate programs use it.
So let's break the 4 different types of compensations down into how they function.
Cost-per-Sale (CPS) programs are where the advertiser (main site) pays the publisher (the affiliate marketer) a commission on a sale that was generated by a customer who was referred to the advertiser's website by the publisher. This type of compensation is also classified as revenue sharing.
Cost-per-Action (CPA) / Cost-per-Acquisition, sometimes called Cost-per-Lead (CPL) sites, involves an advertiser paying a publisher commissions for the visitors that the publisher refers to the advertiser's website and performs some sort of action e.g. creating an account, filling out a form, or signing up for a newsletter. Normally, you see affiliates of bank/lender sites, cell phone providers, internet service providers, and some other subscription services receive compensation in this fashion.
Google AdSense is one of the programs that falls under this group and is probably one of the more widely known programs. It's referred to as an "ad serving" program and it is run by Google. Website owners enroll in this program in order to enable image, text, and (most recently) video ads on their sites. Revenue is normally generated on a per-click or a per-thousand-impressions basis. The person gets paid based on either or these premises. Though normally not involved in CPA programs, Google is currently beta-testing a CPA type service.
Cost-per-Click (or PPC/CPC) sites involve the advertiser compensating the publisher a commission every time a visitor to the site clicks on the ad that the advertiser has running. Since the commission is only paid when a visitor clicks on the ad, it is irrelevant where the compensation is concerned as to how many times the ad runs.
Examples of websites that employ this type of affiliation method are Google AdWords, Microsoft adCenter, and Yahoo! Search Marketing. These are advertising models that are primarily used on advertising networks, content websites/blogs, and search engines where the advertiser only pays when the visitor clicks on the ad that links to the advertiser's website.
The advertisers bid on keywords that they predict their target audience will use in their search for various products and services. If the visitor types in a keyword that matches one on the advertiser's list, or looks at a web page that has the predicted relevant content, the ad then gets shown.
Pay-per-click ads will also appear on what is called content network websites and ad networks (such as the ones mentioned above) attempt to provide advertising that is related to the page that they are appearing on. Normally, no search function is used for this particular function. Many companies exist in this space, however the three that are mentioned above were listed as the biggest as of 2007. The price per click will vary based on the search engine with some running as little as $0.01 per click. With the more popular search engines, popular items can be much more expensive.
Cost-per-Mil/Mille (or CPM) sites are actually referred to as Cost-per-Impression (CPI) and are generally used to measure the cost and the worth of an e-marketing campaign. The applications of this type of technique usually are:
ad banners e-mail spam opt-in e-mail ads (usually charged on a CPA basis) text links
This method more closely resembles print and TV advertising when it comes to estimating the cost of an ad. Print ads are generally based on circulation, whereas TV ads are normally based on Nielsen ratings. Cost-per-Time (CPT) has become very popular with larger publishers when it comes to charging for their ads.
A third party ad tracker is normally used to monitor online advertising campaigns so that when someone requests a particular webpage (by clicking on an ad banner that advertises the page) the server that the ad originates from creates a log entry to count the impression.
Another form of the affiliate marketing concept is what is referred to as multi-tier programs. Some advertisers will pay an entrepreneur a commission based on a referral network that is composed of network sign-ups and their sub-partners. These types of affiliate programs operate in the same way as most of the other styles of MLM marketing and partnering in that commissions are set up in a hierarchy or downline type system.
It's basically a snowballing effect and is based on how many downline participants that you enroll. You earn commissions off of your downline, and their downlines, and those downline's downlines, and so on. And in some cases the income potential is staggering, though it turns out to be staggering on paper versus in reality.
