Affiliation business models are an evolution of advertising business models. Instead of making money based on a user action, like an impression or a click, they make money based on conversion. Under the affiliate business model, a business pays commissions to affiliates who promote and sell products on its behalf. Therefore, if the user converts through the link provided by the affiliate, it will generate a commission. That is why affiliate business models often have a completely different logic than advertising business models. Advertisers make money from bot impressions and clicks. The affiliate mostly makes money if there is a conversion (even though affiliate schemes also include pay-per-impression and pay-per-click campaigns).
While affiliate marketing and the concept of revenue sharing predates the internet, the strategy has become a staple for many online businesses and has played a significant part in the success of eCommerce itself.
Entrepreneur and inventor William J. Tobin was the first person to implement affiliate marketing in an online business. The online flower retailer was founded in 1994 and had amassed almost three thousand affiliate partners before it was sold to Federated Department Stores six years later. Tobin was encouraged to patent his technology in 1996, but the patent itself was not issued until 2000.
This opened the door for Amazon who, after witnessing Tobin’s success, launched its own affiliate program in 1996. The Amazon Associates affiliate program was the first such program made available to the general public. Webmasters could display custom banners that linked back to the Amazon website with a unique tracking ID and receive a percentage-based commission on any resultant sales.
Today, approximately 2.3% of all websites using advertising networks are Amazon Associates members. The model remains popular because it is a relatively passive source of income for merchants. For the affiliate, the business model allows them to promote products and earn an income without the hassle of shipping and customer service.
The affiliate business model relies on the interaction between two or more of the following elements:
The affiliate (publisher)
The affiliate is the entity that promotes a third-party product to its target audience in exchange for a commission on every successful sale. The first affiliates promoted products by reviewing them in blog posts, but products are now promoted on social media accounts and in videos.
The merchant (advertiser)
The network (middleman)
In some cases, there is also a network that connects merchants with affiliates and handles product payment and delivery for a fee. Many affiliate networks rely on the affiliate business model to generate all their revenue.
Or the individual who buys the product after being referred by the affiliate. Historically, the customer was unaware that their purchase was part of affiliate marketing. But recent legislative changes made by the Federal Trade Commission (FTC) now stipulate that the affiliate must disclose its relationship to the merchant when promoting products and services.
- Pay-per-click (PPC) – where the affiliate is paid whenever their links are clicked. Note that in most cases, the affiliate must create and manage ad campaigns at their own expense and are only paid once a conversion (sale) takes place.
- Pay-per-impression (PPI) – where the affiliate is paid when a consumer visits the merchant’s site. In some cases, pay-per-impression also encompasses revenue based on how many times consumers view display or text ads.
- Pay-per-lead (PPL) – here, the affiliate is paid when an individual clicks on an affiliate link and completes some desired action such as filling out an online form. Payroll software company Gusto pays $25 to affiliates for every lead that signs up for a free trial of its product.
- Pay-per-call – where affiliates are paid for each call they make to a potential customer. This approach is favored by service companies such as home-improvement contractors and real estate agents.
- Pay-per-sale (PPS) – the most common form of payment where the affiliate receives a percentage commission from every sale they facilitate. Merchants set the exact percentage, with rates varying according to the product category. For example, Amazon offers a 1% commission on baby products but 3% on headphones, musical instruments, pet products, and furniture.
- Under the affiliate business model, a business pays commissions to affiliates who promote and sell products on its behalf. The Amazon Associates affiliate program was the first such program to be made available to the general public.
- The affiliate business model may have up to four essential elements: the affiliate, the merchant, the network, and the customer. Many customers were unaware they were participating in the model until an FTC ruling forced affiliates to disclose their position.
- The affiliate can earn money in five core ways: pay-per-click, pay-per-impression, pay-per-lead, pay-per-call, and pay-per-sale. In each case, the merchant dictates how much the affiliate will be paid for completing a certain action.
Connected Business Models
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