The advent of the internet has led to a new monetization strategy for creators and companies alike: affiliate marketing.
I’ve seen the power of affiliate marketing firsthand during my stint at iPrice, Southeast Asia’s largest price comparison site.
The following article will define what affiliate businesses are, how they make money, what pros and cons they possess, and how success can be properly tracked.
What Is the Affiliate Business Model?
Affiliate marketing is a monetization strategy in which one party promotes the product or service of another company.
The business or person promoting that offer then gets compensated for every click, sign-up, or sale that is generated.
At a minimum, there are 3 parties involved in an affiliate transaction. These are the:
- Affiliate/Publisher: The party that endorses the product or service and receives compensation in exchange for said promotion (normally whenever a sale is made).
- Advertiser/Brand: The provider of the product and service who compensates the affiliate in exchange for his promotion.
- Customer: The person that ends up purchasing the product or service recommended by the affiliate.
A fourth and optional party is the so-called affiliate network. They act as intermediaries between the advertiser and publisher by amassing a network (hence the name) of brands on their platform and then allowing affiliates to pick an offer they like to promote.
The vetting of both the brand and publisher is conducted by the network itself. In exchange for that service, the affiliate network gets to keep a percentage of the income that the publisher generates.
While the concept of revenue sharing in exchange for endorsements is a tale as old as time, it has certainly been amplified by the emergence of the internet.
William J. Tobin, the founder of PC Flowers & Gifts, is widely regarded as the pioneer of internet-based affiliate marketing. He even filed multiple patents throughout the late 1980s and 1990s for affiliate marketing and tracking.
However, the business model was amplified by the introduction of Amazon Associates, the marketplace’s now-legendary affiliate program. Amazon now generates billions of dollars in additional sales every year from the model.
One of the program’s biggest perks was its simplicity. Using a dedicated link was often all it took to get going. And the ease of use couldn’t have happened at a better time.
Multiple concurrent events, namely the ascend of blogging tools like WordPress, the ease with which people could set up shops and start selling over the internet (e.g., via Shopify), and the emergence of video-based platforms such as YouTube, led to the creation of millions of affiliates.
Today, the global affiliate industry is worth a staggering $17 billion. Moreover, 31 percent of all publishers state that affiliate income counts as one of their three biggest revenue drivers. But how do affiliates actually make money?
How Affiliates Get Paid
Affiliates can be compensated in a variety of ways. Said compensation is based on a multitude of factors, namely the industry itself and how competitive it is, the expected profits of the advertiser, the negotiation power of the affiliate, and so forth.
The most common compensation method within affiliate marketing is Pay per Sale (PPS), which some refer to as Cost per Sale. Here, an affiliate gets paid whenever his recommendations lead to a sale.
Most of the time the affiliate is compensated through a percentage-based commission. Amazon, for example, pays a commission of 3 percent whenever affiliates successfully recommend a product in the Home category (percentages vary based on the vertical).
Alternatively, some affiliates are also rewarded with fixed commissions. So, every successful sale would then yield a fixed dollar amount (such as $10), regardless of the price of the offering that’s being promoted.
And in other instances, affiliates get paid a recurring commission as well. For example, whenever someone successfully recommends a software product, a recurring commission is paid based on the monthly subscription that the customer pays. In the crypto and trading niche, affiliates often receive a portion of the fees that a trader is charged on every transaction.
PPS campaigns can, furthermore, be tweaked by adjusting the period when an affiliate gets compensated and for what. Coming back to the above Amazon example: advertisers only get paid whenever a customer purchases a product within 24 hours of clicking on the link.
However, the customer does not need to purchase the item he or she initially clicked on. The affiliate receives compensation as long as the user ends up buying something in that period – whether it’s the initial or another product.
The second compensation method is Pay per Lead (PPL). As the name suggests, the affiliate is rewarded whenever a customer signs up for a product or service. High-ticket items like insurance or mortgage loans often operate under such a scheme.
Similarly, advertisers may also utilize a Pay per Install (PPI) scheme. Just like with PPL, the affiliate receives a commission whenever someone installs a software based on their recommendation. Freemium games, which bank on upselling customers on paid features, often utilize a PPI model to increase downloads.
Fourth, the service industry often works on a Pay per Call model. The affiliate gets paid whenever a customer calls a number that he advertised. Serve-based businesses, such as home improvement companies or law firms, often rely on Pay per Call advertising to drive leads.
The fifth and last option is Pay per Click (PPC) advertising, meaning the affiliate receives compensation every time someone clicks on the offer. Advertisers often cap the money that affiliates can bank to avoid paying exorbitant sums of money without driving actual sales. Fraud, namely affiliates prompting others to click on a link as often as possible, may also occur.
Advantages of the Affiliate Business Model
One of the single biggest advantages of operating under the affiliate business model is the comparatively low cost of running such a business.
You don’t need to carry any expensive inventory nor hire people or purchase heavy machinery. Headaches, such as customer complaints, often fall under the responsibility of the advertiser as well.
All it can potentially take is a computer, a functioning internet connection, and a willingness to work hard to attract an audience.
Point in case: NerdWallet founder Tim Chen spent a combined $800 to set up the website back in 2009, which now generates hundreds of millions of dollars in revenue on an annual basis.
Consequently, due to their low cost, margins for affiliate businesses tend to be higher as well. For example, businesses listed on the marketplace Empire Flippers often boast margins above 80 percent and beyond.
Another perk of the affiliate model is its scalability. As you’re not carrying any inventory nor moving goods, one’s ability to sell is often only limited by the number of visitors that can be attracted to a promotion.
Additionally, affiliates often have many potential partners they can work together with. For example, Credit Karma’s Travel Card section lists over a dozen CC offers alone. Similarly, there are plenty of affiliate networks at your disposal, thus granting you access to thousands of potential brand partners in a matter of minutes.
Affiliate businesses, since they’re mostly being operated online, are also easier to track. Cookies and tracking pixels often allow both affiliates and brand partners to assess how effective their promotion campaigns truly are.
And since you can’t improve what you don’t measure, being able to do just that allows affiliates to find the most lucrative offers and double down on them (more on how to properly track KPIs later).
Lastly, unlike product-focused companies, many affiliate businesses are not limited to one revenue stream. Monetization via advertising, subscriptions, and so forth is fairly common.
Disadvantages of the Affiliate Business Model
The relatively low cost of starting an affiliate business is often also its biggest detriment. Competition is very fierce, especially in high-ticket niches like finance or real estate.
Another disadvantage that many affiliate businesses face is the dependency on other platforms. In its S-1 filing, the previously mentioned NerdWallet stated that they “are dependent on internet search engines, in particular, Google, to direct traffic to our websites and refer new users to our platform.”
Likewise, many affiliate businesses are built on (social) platforms like Facebook, Instagram TikTok, and YouTube. A mere change in the algorithms of those platforms could lead to a significant reduction in traffic and thus earnings.
This also means that affiliate businesses can potentially be very volatile and unpredictable. As such, it is advised that owners create multiple traffic streams with which they can attract users.
Another disadvantage is the dependency on partners. Many advertisers often only promote their products and services for a limited amount of time in hopes of drawing enough customers away from the affiliate. Therefore, it is advised to also diversify by consistently working together with different brands.
That dependency on partners is also highlighted in the terms that they set. Amazon Associates, the world’s biggest affiliate program by a landslide, has strict rules on affiliate disclosures, the usage of photos, the listing of prices, and so forth. Failure to comply can lead to immediate bans, often without any warning.
The affiliates themselves are also in somewhat of a disadvantageous position when starting out. Affiliate marketing often has a negative connotation associated with it due to the masses of affiliates promoting questionable offers for a quick buck. Building trust with your audience is therefore crucial.
This is amplified by the fact that the affiliate does not control what happens after a recommendation was made. He might have had the best intentions at heart but aspects such as shipment or the product itself may be compromised.
Examples of Affiliate Businesses
Anyone, whether it’s an individual person or a company employing thousands of people, can be in the business of affiliate marketing. On productmint, we have highlighted some of the world’s biggest affiliate-based firms– some of which you’ll find below.
Now, I could’ve just picked any type of YouTube channel. Ali’s is a decent example because it not only shows the power of affiliate marketing for content creators but the diverse set of revenue streams that come with it.
In the above video, he highlights his yearly earnings from 2021. That year, his YouTube channel generated over $200,000 in affiliate income alone (excluding November and December).
Ok, now that we’ve covered the ‘little guys’ it’s time to take a closer look at the heavy hitters of the affiliate industry. Wirecutter is one of the biggest pure-play review websites out there.
As such, Wirecutter generates income from the commissions it receives when readers click on a link and purchase one of the products recommended on the site.
The New York Times eventually purchased Wirecutter for $30 million in 2016. And the content on its site is so good that, in 2020, the Times even decided to paywall it – thus creating a lucrative second income stream.
UNiDAYS is one of the best examples with regards to how trust within a category or niche can really lead to outsized financial outcomes. The platform is a global affinity network that provides exclusive deals and discounts of up to 50 percent to students across the globe.
They work together with more than 800 world-renowned brands such as Apple, Foot Locker, Microsoft, Nike, and Samsung. What separates UNiDAYS from many other platforms is the fact that each member is authenticated, thus providing advertisers with the certainty that they are reaching real people.
That focus has translated to big business as well. In 2021, UNiDAYS generated £53 million in revenue on profits of £25 million. The firm, therefore, operates on a 50+ percent profit margin – one example of the profitability advantage we lined out above.
- Check out our business model case study on UNiDAYS here.
ShopBack is a cashback platform that provides consumers with discounts and other monetary incentives when shopping at selected partner stores. In fact, they used to be our fiercest competitor during my stint in Southeast Asia.
The platform works together with thousands of brands including Amazon, Nike, Uniqlo, and more. And it has utilized its popularity to expand into a variety of other products such as payments, BNPL solutions, and even groceries.
ShopBack has since gone on to raise $310 million in funding and is valued at well over $1 billion. Revenues are nothing to scoff at, either. For the fiscal year 2021, it generated around $42.4 million in revenue.
- Feel free to check our detailed piece on ShopBack’s business model here.
Fetch Rewards allows users to earn points in exchange for their scanned receipts. The app recognizes receipts from any grocery store, drug store, convenience shop, gas station, club store, liquor store, hardware store, and pet store.
Earned points can then be exchanged for gift cards or donated to charities. The brands that Fetch Rewards works together with benefit from being exclusively advertised on the app (e.g., only Burger King and not McDonald’s), better tracking of marketing spend, and increased customer engagement.
While Fetch isn’t disclosing its compensation structure, it can be assumed that its advertisers are charged on a PPS basis. Direct competitors of Fetch Rewards, namely Ibotta, Rakuten, and Upside (formerly GetUpside), operate under similar business models.
- Our business model case study on Fetch Rewards can be found here.
Honey is a browser extension that scans the web for coupons and automatically applies them when checking out at selected merchants. The firm works together with over 30,000 retailers across categories such as fashion, electronics, groceries, and travel.
Customers can even earn a digital currency called Gold when shopping at Honey’s partners, which they can then redeem in exchange for gift cards. Consequently, Honey makes money whenever a user redeems one of its coupons.
Inserting itself into the user’s browsing activity has certainly been a profitable business as well. FinTech giant PayPal paid a whopping $4 billion to acquire Honey back in 2019 and is now integrating more and more of Honey’s technology into its own ecosystem.
- Check out Honey’s business model case study here.
Credit Karma has made a name for itself by allowing people to access their credit scores and other relevant data at no cost. Previously, scummy companies would overcharge consumers for those very same reports.
By simply being decent and not scamming customers, Credit Karma has built high levels of consumer trust, one of the pillars of affiliate marketing. And it used that trust to expand into the business of recommendations.
Today, users of Credit Karma can compare anything from credit cards to mortgages. The company then collects a commission for every successful recommendation it makes. And those recommendations have translated to big business, too. In 2020, Credit Karma was acquired by Intuit for a whopping $7.1 billion – likely the largest exit of an affiliate-based company to date.
- Feel free to read our case study on Credit Karma here.
Essential Affiliate Marketing KPIs
Whether you are a one-man operation or a business employing thousands of people – tracking performance is absolutely essential.
In the coming section, we will highlight some of the most important KPIs an affiliate-based business has to follow.
Just one caveat before we get started: tracking one’s revenue and profit as well as traffic are quasi-essential metrics, which are applicable across any form of monetization and business structure.
As a result, we’ll leave them out in this chapter. However, they still should absolutely be accounted for.
Conversation Rate (CR)
The conversion rate indicates what percentage of the visitors an affiliate attracts end up completing a transaction (such as buying a product that’s recommended).
It is calculated by dividing the number of sales by the total number of visitors over a given time period.
Conversion Rate = Total Sales ÷ Total Visitors
For example, if 2,000 people visited your website and 100 made a purchase, then your conversion rate is equal to 5 percent (= 100 purchases / 2,000 visitors).
Maximizing the rate of conversions is by far the most important lever an affiliate has at his disposal. Hereby, trust remains one of the crucial aspects of optimizing CR.
Let’s say you are a YouTube channel that talks about tech products. If you’ve actually held the product in your hands and tested it extensively, then the consumer will have more confidence in your recommendation.
Another important aspect is the funnel. A site like Wirecutter is able to generate tens of millions in revenue because its content is read when the intent is high, namely by people typing a keyword (like ‘best clothing steamers’) into a search engine and seeing Wirecutter as one of the top results.
Lastly, conversions can also be optimized through extensive A/B testing, for example by assessing button placements, landing page optimizations, text copy, and so much more.
Nevertheless, the actual percentage may vary greatly depending on the industry and product or service. For example, if you promote high-ticket items like laptops, then you’ll naturally have fewer people making a purchasing decision at your disposal due to the comparatively steep entry price.
Click Through Rate (CTR)
Similarly, the Click Through Rate indicates how often a visitor clicks on a certain page, link, or banner out of the total number of people visiting.
Click Through Rate = Total Clicks ÷ Total Visitors
Both the CR and CTR can help businesses to understand how effective they are at promoting certain aspects of their platform. Consequently, you’d want your CR and CTR to be as high as possible.
Generally speaking, the same tweaks that lead to higher conversion rates also apply when optimizing for CTR. Nonetheless, continuous testing and measuring remain the modus operandi for all affiliates.
Another aspect that’s worth noting is that a focus on increasing traffic is sensible as well. If, for example, you manage to double your visitor numbers while keeping CTR and CR consistent, then both your clicks and sales have essentially doubled.
The order volume indicates how much sales your business has attracted for the advertisers you work with.
You can calculate order volumes in a variety of ways. Some businesses simply count the number of sales they have attracted.
Others measure volume by the number of sales and multiply that by the price of the items that were sold.
Knowing how much additional orders and revenue you have attracted for a brand helps you when negotiating new terms with partners. Naturally, the more sales you bring in, the greater your value to that partner, which in turn can be used to maximize your take rate – conveniently the topic of our next chapter.
The take rate (also referred to as Rake) gives businesses a little more insight into how great their negotiating power has actually become.
The take rate indicates how much a firm makes (in percentage terms) from every transaction conducted on its platform.
It is calculated by summing up all revenue generated via the platform (such as PPS or PPC) and dividing that by the total amount of revenue or sales.
Take Rate = Fees ÷ Total Sales
For example, NerdWallet makes money from revenue per action, revenue per click, revenue per lead, and revenue per funded loan arrangements.
Now, since NerdWallet gets compensated via PPC as well, it won’t necessarily have insights into how much additional revenue those campaigns drove. However, it could still calculate its take rate based on the PPS and PPL deals it has with advertisers.
The higher one’s take rate, the greater the negotiation power that business possesses. It essentially serves as an indicator of how much you can extract from a given transaction.
Unfortunately, we do not live in a perfect world. Customers are inevitably going to return some of the products that you recommend.
The rate of cancellations can be measured as follows:
Cancellation Rate = Total Returns / Total Sales
Affiliates normally only get paid after a certain grace period, which is the time that the customer itself is given to return the product and claim a refund.
Knowing what offers normally get returned allows affiliates to focus on products that are more profitable and guarantee greater payouts.
Revenue per Brand
The last metric that is common among affiliate businesses is to track what brand or partner brings in the most revenue.
As with cancellation rates, you want to focus on the partners that are converting best, sell lucrative (i.e., high-ticket) items, and make customers happy (= lower cancellation rates).
Brand partners that operate on a PPS arrangement are normally keen to expand that collaboration as well because they’re likely still profitable even after paying commissions.
And there is a multitude of options to push a certain brand partner. Marketing strategies like exclusive discounts or giveaways can prompt customers to even spend more.