Affiliate Marketing 101 - Learn The Basics

Countless businesses around the world utilize Affiliate Marketing to increase their sales, generate leads, mitigate financial risk associated with buying traffic, and inevitably to expand their overall reach. This post will discuss what affiliate marketing is, the various models supported by affiliate marketing, and some examples to better understand how it all works!

So, what is Affiliate Marketing?

Affiliate marketing is a performance-based marketing strategy where a business recruits third-party marketers, or affiliates, to promote their products or services. In exchange, affiliates earn a commission for each sale, lead, or action generated through their marketing efforts. Affiliate marketing is a cost-efficient way of increasing sales and generating additional revenues, without incurring significant risk of high-cost marketing services that may not yield positive results, as the business will only pay for their desired outcomes.

Many businesses are accustomed to the risk of high-cost marketing campaigns that so often lead to crippling results. We’ve all been there! Spending hundreds or thousands of dollars, yet yielding little to no additional leads or sales. While scenarios like this can of course be improved with better ads, better strategies, better creatives, etc., affiliate marketing provides a far less risky scenario where your marketing dollars are actually spent on the outcomes you’re expecting, such as a potential customer filling out a lead form, or purchasing your product. With affiliate marketing, you will ONLY pay for the specific action desired, and with most campaign models, you will never pay for non-converting traffic!

For this articles, we'll call 3rd party marketers “Affiliates” and the company/product owner who utilizes those marketers as “Advertisers”.

What is an Affiliate?

Affiliates (a.k.a. Publishers), are individuals or companies that enter partnerships with product/service owners to market their products in exchange for a commission, or fixed rate for any desired outcome. An affiliate may be an expert with Google Ads, Meta Ads, and/or a wide variety of other paid marketing sources. An affiliate may also be a search engine optimization expert, ranking websites incredibly well for high-volume keywords that may be related to your product/service. They may have tremendous email lists with relevant audiences to your product or service, and be able to reach millions of relevant consumers in a single email drop. The possibilities are endless. Most successful affiliate marketers are experts in one or more marketing methods and traffic sources, and have tremendous flexibility to promote a wide variety of products and services. Affiliates, at their own expense, will drive traffic to your product/service, and will work to both maintain profitability for their own businesses, while focusing on delivering the outcomes that your affiliate program desires.

Compensation Models:

There are a wide variety of models that can be utilized to create affiliate marketing campaigns, creating clear cut goals for affiliates to achieve and be compensated for. The overarching acronym that is most frequently used is “CPA”, which means “Cost-Per-Action”. Generally, CPA means that the advertiser will pay for the desired action or outcome, whether it be a sale, a lead generated, a phone call, an app install, etc. The “CPA” acronym is not used very frequently, as the individual models are broken out and focused on. I will list out many of the models and describe each. It is very important to understand these models to determine the best format for your own affiliate program(s).

CPS (Cost-Per-Sale) is the model where the Advertiser pays only when a sale is generated to their product.

Example of a CPS campaign: A company makes and sells baseball bats. Their cost is $20 for manufacturing, and each bat sells for $100. On a CPS model, utilizing affiliates to increase their sales, the company offers $40 to affiliates for each sale. The company still retains a $40 profit per unit sold via affiliates ($100 – $40 commission – $20 cost = $40 profit), and although their margin on the affiliate sale is decreased from $80 per bat to $40 per bat, they did not have to incur any cost other than the commission to generate that sale!

CPL (Cost-Per-Lead) is the model where Advertisers pay for leads for their service or product. A lead is an individual or organization that has expressed interest in your product or service. There are no guarantees that a lead will turn into a sale, but a strong lead generation campaign is often matched with a strong sales flow that entices a percentage of those leads to convert into sales.

Example of a CPL campaign: An auto insurance provider would like to grow their business. Since competition in the space is high and the cost of marketing (especially via TV ads and radio ads) are extremely high, an auto insurance company will try to find cheaper alternatives to reach a significant amount of people. For auto and other insurance providers, the value of a sale and lifetime value of a customer are quite high, so purchasing leads becomes a viable option. The Advertiser may pay $15 per lead, which can be as simple as a 5-field form submit including your zip code, name, email address and phone number. If the company buys 100 leads at $15 ($1500 expense), they may only need 2-3 of those 100 leads to convert into sales to profit, given an annual auto insurance plan can cost $500 – $1000! And while 97-98 of those leads may not immediately convert into a sale, the Advertiser is still able to retain that data, and email or call the lead at future dates to try to sell their service down the road to those leads that did not initially convert. Via the CPL model, the Advertiser pays the Affiliate to generate leads for them, without the requirement that leads turn into sales. Advertisers may have quality thresholds that must be met, but ultimately the responsibility falls to the Advertiser purchasing leads to convert those leads into sales.

CPI (Cost-Per-Install) is the model where Advertisers who own Mobile Applications (primarily iOS or Android), Browser Extensions, or even Desktop games will pay for a simple install of the application onto the users device. Similar to the CPL model, the responsibility here is on the Advertiser to be able to monetize the user, and typically the CPI model is utilized by App owners who want to buy a significant amount of new users to their app in a relatively short period of time (often referred to as “Burst Campaigns”).

Example of a CPI campaign: A brand new game is launched in the Apple Store & Google Play Store, but the developer does not have a significant advertising budget to get the game jump-started and widely exposed to new users. They offer affiliates $0.50 for every installation of their game on users devices. Affiliates generate 20,000 new installs for the Advertiser in 1 month, costing the advertiser $10,000.

CPE (Cost-Per-Event) is the model where Advertisers pay for more than one action, often paying different amounts to the affiliate at different stages of a users progress through the flow of their product/service. This model is one of the more recently introduced models to the affiliate space, and has a wide range of practical uses, and can be very powerful for the right type of products/services.

Example 1 of a CPE campaign: The same gaming developer from the CPI example above has tested that model, but is not seeing the type of user engagement they were hoping for. Although they were happy with the initial burst of volume to their new app, they now want to shift their focus to engaged users. So in an effort to maximize their ROI on their marketing dollars, they decide to pay the Affiliate when users reach various milestones within their game. They know that once a user reaches level 5, they are most likely to buy in-game credits, or continue playing the game further. They know that when the user reaches level 10, their average revenue per user is $1.00, and they know when the user reaches level 25, their average revenue per user is $5.00. So the advertiser decides to structure their campaign as follows:

Event 1 – Install – Pays $0.00

Event 2 – Reach Level 5 – Pays $0.20

Event 3 – Reach Level 10 – Pays $0.30

Event 4 – Reach Level 25 – Pays $2.00

Total Payout – $2.50

Utilizing the model above, the Advertiser no longer has risk associated with paying for installs that may never turn into players. They compensate for users who reach their first benchmark of level 5, the stage where users are more likely to remain involved and/start spending money/start generating revenue. They then compensate the affiliate further when the user reaches level 10, where the value of the user is $1.00. At this point, they have paid $0.50 for a user who has likely generated $1.00 for them already, compared to the CPI example where they paid $0.50 before receiving any activity/revenue back from the user. Next, the Advertiser compensate the affiliate when the user reaches level 25, a strong benchmark for the Advertiser, where they have on average earned $5.00 for that user.

Generally with this model, the deeper the user gets within the monetization flow, the higher the payouts become, as a large percentage of users may drop off before reaching those important stages for the advertiser. So enticing deeper engagement with stronger payouts can encourage more users to take the desired actions.

Example 2 of a CPE Campaign: A bank is looking for new customers to open a bank account and make a deposit of $50 into that account. The bank is willing to pay $40 to the affiliate for generating these actions, and want to structure the campaign as a hybrid lead generation campaign that truly rewards the $50 deposit action desired, so they may set up the campaign like this:

Event 1: User opens a Bank Account – Pays $5.00

Event 2: User deposits $50 into account – Pays $35.00.

In this scenario, the bank benefits from new users opening accounts for only $5.00, and then meets their target of generating real financial activity from the user for the cost of $35.00.

CPC (Cost-Per-Click) is the model where Advertisers pay solely for targeted clicks or visitors to their page. CPC is most often utilized when a company generates revenue on their page from display/video ads, and each pageview has a value. This is often called CPC arbitrage, where a company can earn more per visitor than they pay for that visitor. Other scenarios where CPC is used with affiliates is when an Advertiser has an incredibly strong sales flow, and wants to simply maximize the amount of traffic they receive to their site/product. Since offering a CPC payout is a fixed rate per visitor, affiliates tend to love this model as they can control their costs and guarantee a profit on each click/visitor they send to the Advertiser. CPC however can be a high risk model for Advertisers, as there are no guarantees that visitors will ever turn to lead or sales, and the drop rate (users who leave the page before taking any meaningful action) can be significant.

CPM ("Cost-Per-Mille") is the model where Advertisers pay for every impression of their ad, or each time their ad is viewed. Mille in Latin translates to "thousand", and so CPM, or Cost-Per-Mille represents the Cost per 1,000 impressions. This model is most often utilized with Video & Display ads, where your ads will be exposed to viewers typically on high traffic websites. Think YouTube or other video sites that have ads running all the time. As an advertiser, you may pay $10.00 per 1,000 impressions of your video ad, and $2.00 per 1,000 impressions of your display ads. So that translates to $0.01 per view on video, and $0.002 per view on display. CPM campaigns are most notably used for generating significant exposure & branding, but are not typically recommended for performance/outcome based campaigns where strict profitability is required.

Pay Per Call is the model where Advertisers pay for every call that is directed to their call centers or directly to any specific phone number provided. There are many businesses that do their best selling over the phone, and having a “warm lead” on the phone can be the best way of converting an interested party into a paying customer. Often, Advertisers will set a minimum time-on-call as the conversion point, as the longer a person stays on a call, the more likely they are to convert into a sale. For example, a company may pay $20 for a home remodeling phone call that goes on for a minimum of 90 seconds.

Key Takeaways

It’s incredibly important when building an affiliate program to understand the basic elements of affiliate marketing and the models that can be utilized to grow your business. Which of the CPA models do you think best fits your company’s needs? Our Affiliate Marketing Consultancy can help you build your affiliate program from scratch and provide advice on the best ways to build a program that will be profitable for you and enticing to affiliate marketers to promote your business!