The Pros & Cons Of The Affiliate Model

Aug 18th

Are you making enough money from your website?

There are a number of ways to monetize a site. Aaron covers the options in extensive detail in the "Monetization" members area , however today we'll take a close look at just one aspect of monetization, Affiliate Marketing.

What Is Affiliate Marketing

Affiliate Marketing is a marketing method whereby one business rewards another business for sending customers, visitors and/or sales.

Mostly, affiliate marketing rewards come in the form of revenue share on a sale. Site A (the affiliate) funnels visitors to Site B (the merchant). If a transaction is completed by the merchant, the affiliate receives a commission on the sale. Do this numerous times a day in a high-margin area, such as loans, and both the affiliate and the merchant can make a lot of money.

Affiliate marketing is nothing new.

In the carpet markets in Turkey, you get pestered by salesmen whos job is to tempt you off the street and across the threshold of a carpet shop. He - its invariably a he - might get paid for bringing you to the door (the online equivalent is equivalent to cost-per-click), or, if you buy a carpet he receives a commission (cost per action). Or perhaps a mixture of the two.

The benefit to the merchant is that he doesn't have to pay the full time wages of the salesman, and he only pays him on performance. The benefit to the salesman is that he doesn't have to own a shop, carry merchandise, deal with transactions, or any of the other costs associated with running a carpet shop.

Win-win.

In 2006, MarketingSherpa estimated online affiliates worldwide earned US$6.5 billion in bounty and commissions

The Players & How It Works

The Affiliate Marketing industry consists of three core players:

  • The Merchant
  • The Affiliate
  • The Prospective Customer

As the affiliate model became big business, further levels emerged, including sub-affiliates and affiliate networks. We'll take a look at the role of the networks shortly.

The Pros Of Affiliate Marketing

Easy To Set-Up - You simply need to select a program, sign-up, add the tracking code to your site, and you're good to go.

Focus On Your Core Skills - If SEO is your key skill, you can focus 100% on rankings and traffic generation. You leave all the customer handling, sales, returns, legal issues and transactions to someone else.

You'll also be amongst esteemed company. The top affiliate marketers who use SEO to generate traffic typically rank amongst the highest-skilled SEOs. They live or die based solely on their ability to rank well in highly competitive areas.

Low Startup Costs - setting up commerce delivery online can require a lot of start-up investment. The affiliate need not invest anything other than some time. If one area doesn't work out, the affiliate can quickly move onto another area. The merchant has to too many sunk costs to do likewise.

Multiple Income Streams - once you've honed your sills in one area, you can apply them to any area you choose. There is no limit to the number of merchants you can work for, so you are free to develop multiple revenue streams. Some merchants will give you ongoing revenues based on customer activities, too.

Cons Of Affiliate Marketing

Low Level Of Control - Unless you have a close relationship with your merchant, you have little control over offers.

If their competitors are offering better services and/or lower prices, you can't counter unless the merchant changes their offer in line with the market. You're also pretty much stuck with the same standard offer available to every other affiliate you're competing against, making it difficult to differentiate.

There are exceptions.

Sometimes super affiliates - those affiliates who consistently put through high sales volumes - get offered special deals. It's unlikely you'll know what these deals are unless you become a super-affiliate. Some programs allow pricing control, but mostly, you're dealing with cookie cutter offers.

Customer Base Not Locked In - The merchant keeps the customer.

Typically, you deliver the customer, the merchant pays you a one-time commission, then that customer remains theirs for all subsequent purchases. The value of the merchants business increases the more customers they have.

As an affiliate, you don't tend to have lock-in on the customer. Some affiliate deals offer you on-going revenue, however.

High Competition - One of the pros of affiliate marketing is that is is easy to sign up and get started.

This is also a negative.

If it is easy for you to sign up, then it is easy for everyone to do likewise. There are new affiliate hordes arriving each and every day. The incentive for the merchant and affiliate network is to sign on as many performing affiliates as they can, so they don't really care if you face ever increasing levels of competition.

This is why top affiliates look for private deals. More on this shortly.

PS: As I stated above, you'll be amongst esteemed company. The top affiliate marketers who use SEO to generate traffic are typically very highly-skilled SEOs. They live or die based solely on their ability to rank well in highly competitive areas. These people will also be your competitors :)

Pay On Performance - This is a great option for the merchant. They only pay when they sell something. What this does is transfer all the advertising risk to you.

You may spend weeks or months on SEO and make no sales. This might not even be your fault. You get great rankings and traffic, but the merchant has an uncompetitive offer, or loses customers at the point of sale.

Middlemen - As the affiliate area has grown, so too have the number of middlemen.

The biggest middleman in the chain is the affiliate network. The affiliate network is the go-between linking the merchants with the affiliates. Commission Junction is one example.

The network often provides valuable reporting tools and tracking, as well as affiliate and merchant support. Of course, all this costs money and places an additional layer between the affiliate and the merchant. Whilst the network may provide benefits in terms of reporting and support, it also reduces the level of control and contact the affiliate has with the merchant.

Limited Growth Potential - Because you can't lock in your customers or adapt deals to suit changing market conditions, growth potential is limited. Like the carpet salesman, you rely on a new stream of visitors each and every day with no way to grow what you do, other than by adding sub-affiliates.

There is a solution to many of these problems, however.

Direct Partnerships

There are many affiliates making very good money following the model I have outlined above.

However, as affiliates get more and more successful, they often look to partner direct with merchants. This way, they cut out the middlemen - leaving more profit for the affiliate - and gain a closer relationship with the merchant.

Some affiliates structure the entire deal, and take a percentage of the merchants earnings over time. Whilst this approach requires upfront organization, the long term payoffs can be huge compared to the traditional network-driven affiliate model.

But how do you do it?

First, you need to look at areas where there is high returns and low levels of competition.

Make a list of merchants who have a web presence in your chosen area and have the ability to take online orders or inquiries. Approach these merchants directly. It's a good idea if you can demonstrate potential traffic levels and sales, so come armed with this information.

Look to sign up exclusively i.e. you're the only affiliate working with them. Also try to get a cut of ongoing revenue i.e. if the customers becomes a repeat customer, you receive repeat commissions. The bonus to the merchant is that you're a salesman willing to work on a commission basis. There is little risk involved for the merchant, and most will be only too happy to at least consider your proposition.

These types of deals require a high deal of trust and transparency, so it's unlikely you'll get everything you want right away. Suggest a trial run to prove your worth, then negotiate favorable terms once you've proved yourself. If the merchant turns you down at that point, then you simply go to his/her competition, with your accumulated data, and make the same offer.

This way, you should be able to build up a private label affiliate system. You can bring on your own hand-picked sub affiliates to work with you, too, and if you've selected your market correctly, you should face little or no competition. As you have a close, direct relationship with the merchant, you can work on structuring product and service offerings that remain competitive. It becomes more of a partnership that can be nurtured and made valuable over time.

Some of the biggest money-making affiliate opportunities you'll never hear about.

That's because they involve private label deals.

Published: August 18, 2009

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Comments

August 18, 2009 - 6:04pm

So why not just go straight to wholesalers and make an arragnement with them? Offer to promote their products and get an aggressive commission for each order. The average 7%-8% commission on CJ is kind of low compared to how much money you really could be making. Just find someone how has no clue how to market and partner with them. Lots of people are doing "wholesale to the public" kinds of deals. Isn't that what those Direct Buy infomercials are about also?
What do you think about dropshipping? The product selection is often pretty narrow though.

There's a good post on wholesaling vs. dropshipping on FresheVenture.com. She does a pro/con analysis similar to what you did in this post... so your article is pretty timely.

Lastly, do you know of a shoppping cart that integrates with Wordpress AND lets you sell affiliate products?

August 18, 2009 - 7:27pm

What do you guys think of the explosion in CPA marketers? I'm a sucker for internet marketers and am on a lot of their lists (hey, don't hold it against me) and I'm seeing a TON of people saying how this is THE way to make money online. Funny thing is I hear how a lot of the CPA networks are locking people out (and it's a good thing too)

Finally, when it comes to selling online, what do you think of this crazy stat saying 63% of transactions occur offline after an online search (http://files.shareholder.com/downloads/SCOR/0x0x101467/c60d8600-c8c8-404...)

That makes it seem like spending time and money on SEO/PPC is a waste if people are going to buy from brick and mortar stores anyway. I can see selling small goods online, but what if I want to sell something like bookshelves, or bunkbeds, or ladders? The big box retailers have a definite advantage here. They can dominate the paid and organic rankings for these items and then benefit when the buyer comes and buys the item from their store.

How do you overcome this?

Thanks,
Raza

August 18, 2009 - 9:20pm

Probably best to ask these questions in the forum :)

As for going direct to wholesalers, sure. However, many high margin areas are services as opposed to goods i.e. loans.

August 22, 2009 - 11:00pm

Simple question Aaron, what is best affiliate niche to get into right now?

Any feedback on the best paying programs as well?

August 23, 2009 - 2:15pm

I don't think there is any benefit for me to answer that question publicly for free. The only 2 possible results are

  • nobody pays attention to the answer
  • people pay attention and I just created competition for myself - harming my future income for $0 today
August 25, 2009 - 6:10am

I've been researching aff programs for a couple of my clients in the apparel industry. I really like the idea of exclusive or semi-exclusive affiliate networks.

@Aaron Wall - ;P

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