What Is Affiliate Marketing and How Does It Work?

Affiliate marketing is a specific type of digital marketing where third-party promoters earn commissions from selling a merchant’s product(s) to customers. It can help your small business increase its brand awareness and make more sales, all while keeping costs low and saving time. Some common types of affiliate marketers include social media influencers, bloggers, publishers, and entrepreneurs.

Examples of brands with a good affiliate marketing program are lululemon and TOMS, which offer commissions to their affiliates with each sale, along with exclusive gifts. These affiliate marketers promote the brand’s products and services on their website, blog, email newsletter, podcast, and social media platforms.

In this guide, we explain the benefits and drawbacks of affiliate marketing, offer tips for getting started with affiliate marketing as a beginner, and finish up with some real-world affiliate marketing examples.

How Does Affiliate Marketing Work?

If your small business has never participated in an affiliate marketing program before, then you probably have questions about how affiliate marketing works. Here are the basic steps that explain how to do affiliate marketing:

1. Businesses create products or services. These merchants can run the gamut from a one-person small business to a global enterprise. Merchants may be called by many different names, such as brand, seller, creator, retailer, or vendor.
2. Businesses connect with affiliate marketers. You could either reach out to them directly or use an affiliate marketing program as a go-between.
3. Affiliate marketers receive trackable links. Each affiliate gets their own unique URLs with tracking codes so that merchants can monitor their sales and commissions. The affiliate marketer then promotes the product or service on their platform(s) of choice using these links.
4. Links log customer interactions and conversions. Whenever a customer clicks on a unique affiliate link, a cookie is stored on their device, which tracks their activity on the vendor website for a certain period. Even if the customer doesn’t buy right away, this cookie will log their activity and make sure the affiliate gets paid a commission if the customer eventually makes a purchase.
5. Businesses pay affiliate marketers. Whenever a sale is completed, the merchant pays the affiliate marketing the agreed-upon flat fee or commission rate. A monthly payout schedule is the most common, but payouts may be more or less frequent than net 30 days.

How Does Affiliate Marketing Make Money?

Affiliate marketing programs help small businesses make more money through making more sales overall, while affiliate marketers make money through commissions from completed sales. Some companies offer a flat fee per sale, while others set commission percentage rates. Commission rates for affiliate marketing vary widely, from 1% to 30% (or even higher for certain industries).

Depending on what type of small business you run and your sales funnel, it might make sense to offer commissions for different actions besides (or in addition to) completed sales. Here are some of the most common affiliate marketing payout structures that all small business owners should know:

• Pay per sale (PPS): Affiliate marketers earn a commission whenever a customer makes a purchase after clicking on their unique affiliate link(s).
• Pay per click (PPC): Affiliate marketers earn a commission whenever a customer clicks on their affiliate links, regardless of whether or not the customer makes a purchase or completes another action.
• Pay per lead (PPL): Affiliate marketers earn a commission whenever a customer completes a lead generation activity, such as signing up for a free trial or filling out an email newsletter form.
• Cost per action (CPA): Affiliate marketers earn a commission whenever a customer completes an activity that doesn’t fit into any other category, such as downloading an app.
• Revenue sharing: Affiliate marketers earn a percentage of the overall revenue they generate for the merchant (as opposed to a percentage commission on each sale).
• Tiered commission: Different affiliate marketers earn different commission rates depending on how long they have worked with the merchant and how much sales or revenue they have generated.

Types of Affiliate Marketing

There are three types of affiliate marketing: unattached affiliate marketing, involved affiliate marketing, and related affiliate marketing.

• Unattached affiliate marketing: The affiliate promotes a product or service that is completely unrelated (unattached) to their online presence—for example, an online plant store advertising hair products.
• Involved affiliate marketing: The affiliate promotes a product or service that is related to their online presence—for instance, a fashion blogger promoting a clothing brand.
• Related affiliate marketing: The affiliate has used the product or service before and personally recommends it based on their experience.

Benefits and Drawbacks of Affiliate Marketing

Affiliate marketing is a steadily growing option among small businesses, as it’s simple and cost-effective. However, it also has some notable drawbacks, such as limited control over your affiliates. Here are some of the biggest benefits and drawbacks to consider if you’re going into affiliate marketing.

Benefits of Affiliate Marketing

• Cost-effective: If your small business is part of an industry where low commissions are the norm, affiliate marketing can be extremely cost-effective. Paying commissions only after a sale has been completed also helps keep marketing costs low since you don’t have to spend money upfront, such as with advertising campaigns.
• Low risk: Affiliate marketing is also low risk for merchants and small business owners since you only have to pay a commission after a sale. This contrasts with other marketing campaigns, where you may have to spend a lot of money right out of the gate without any sales guarantee.
• Improved customer targeting: Affiliate marketing can help you reach specific audiences, especially if you work with niche influencers whose content is already targeted to a certain demographic. This also increases your chances of success since you will be marketing your product or service to people who are already more likely to be interested.
• Increased brand awareness: Affiliate marketing campaigns increase your brand presence overall by exposing your products and services to more potential customers. Affiliate marketing can also improve your small business’ reputation if you partner with high-quality influencers trusted by their followers.
• Flexibility and scalability: Affiliate marketing is highly flexible, allowing you to set your commission rates and deadlines and choose which influencers you want to work with. Affiliate marketing is also very scalable, allowing you to grow your program alongside your company or downscale if you need to save on marketing costs.
• Real-time performance tracking: Because all clicks and sales are tracked in real-time thanks to the custom URLs, affiliate marketing offers up-to-the-minute data collection. This means that you can monitor the success of your affiliate marketing campaign and quickly pivot on the fly if you identify an area for improvement.
• Low barrier to entry: Affiliate marketing is especially beneficial for small business owners who don’t have a dedicated marketing expert since it doesn’t require specialized expertise. Once you set up the program, your affiliate marketers will do most of the legwork, allowing you to spend your time on more valuable business tasks.

Drawbacks of affiliate marketing

• Dependency on affiliates: When it comes to affiliate marketing, your small business partly depends on the affiliates to sell your products or services. If the affiliates don’t post the links frequently enough, or their followers simply aren’t buying your products, there’s not much you can do except look for new affiliates to work with.
• Limited control: Affiliate marketers are in charge of a majority of the process, leaving your business with limited control. If you prefer to approve every social media post and email newsletter yourself, you might not like giving affiliate marketers too much freedom.
• Branding impact: Any time you work with a third party, there’s a chance they could become a part of some kind of controversy that reflects badly on your small business. That’s why it’s crucial to carefully vet each affiliate before you start working with them, and check in regularly to see if they’ve gotten into any hot water.
• High commission rates: Sometimes affiliate marketers expect high commission rates, especially if they have a huge following or your small business is part of an industry where large commissions are the norm. High commission rates cut into your profits and may cancel out any profits you would have made from the sale.
• Hands-on management: While affiliate marketing is less hands-on than many other marketing strategies, you can’t completely ignore it if you want the best results. You will need to spend at least some time educating yourself about affiliate marketing, checking your sales, and adjusting your affiliate marketing program.

Tips for Getting Started With Affiliate Marketing

• See what your competitors are doing. Not sure where to get started with affiliate marketing? Check out the affiliate programs run by other small businesses in your industry or whose marketing strategies you admire. Click on their affiliate links and see what websites they take you to and what tracking codes they use.
• Optimize your landing pages. Whenever customers click on an affiliate link, they should land on a website page designed specifically to get them to convert, whether that’s making a purchase or signing up for a free trial. Follow our guide on how to create a landing page to start making powerful landing pages that close more sales.
• Choose commission rates and structure. First, determine the standard commission fees and rates in your industry. Then, create your commission structure. Keep the future in mind when setting your initial rates. For instance, you might start with a lower commission rate to later introduce a tiered system with higher rates and entice your most productive affiliates to make even more sales.
• Have a screening process for affiliates. Affiliates are like influencers—they need to be in line with your overall brand identity. Therefore, you’ll need to have a screening process of some kind for affiliate applications. You want affiliates who represent and communicate with your target audience, most of all.
• Leverage coupons and discounts. As you contemplate your commission rates, consider offering a discount or coupon to entice customers to buy. In fact, 71% of shoppers report they are more likely to hit the “buy” button when they have a promo code. You can ask your affiliate marketers to promote the discount code alongside the link to encourage people to click.
• Select products or services to promote. When creating an affiliate marketing program for your small business, think about what products you want to promote and how many. While you may be tempted to only promote one thing at a time, it’s usually a good idea to offer at least several links so your affiliates and customers will have multiple options to choose from.
• Diversify your affiliate program. As you get more comfortable with your affiliate program, you should seek to diversify the affiliates you work with while still keeping your standards high and vetting potential partners. The more affiliates you have in your network, the more opportunities your small business will have to make a sale.
• Use affiliate marketing software. Running an affiliate program manually will create lots of extra work and hassle that small business owners don’t need. Take advantage of affiliate marketing software platforms such as PartnerStack and Referral Factory, which are designed to help you manage an affiliate program on a single platform.
• Track results and keep evolving. Affiliate marketing software will also make it easy to automatically track your program’s success. Look at metrics such as overall sales, sales per affiliate, revenue per sale, profit per sale, and so on. Make adjustments as necessary to keep optimizing your affiliate marketing program and make more sales.

Affiliate Marketing Examples That Work

Wondering what affiliate marketing looks like in practice? We’ve rounded up three affiliate marketing examples from online websites that you have mostly likely shopped at before to show you how these links work in action.

Amazon

Amazon runs one of the most well-known affiliate marketing programs for beginners, currently called the Amazon Associate program. A higher tier, the Amazon Influencer Program, is available to high-profile affiliate partners who drive many sales. Affiliates earn a commission on the customer’s whole cart, not just the affiliate item they buy. Commission rates vary by category and can reach as high as 10%.

Wirecutter

You probably know Wirecutter for its in-depth product reviews and recommendations, but what you might not know is that the site earns affiliate commission every time someone clicks on a link and buys their highly recommended products. Because Wirecutter staff test each product for weeks or months before recommending it, readers trust their suggestions even though they are tied to affiliate links.

Rakuten

Rakuten is currently the number one affiliate marketing network in the world, and it gives shoppers cash back for making purchases through its platform. Rakuten acts as a go-between for merchants, affiliate marketers, and consumers. Individual advertisers can set their commission rates, giving them control over the Rakuten affiliate program.

Frequently Asked Questions (FAQs)

What’s the difference between digital marketing vs affiliate marketing?

What exactly does an affiliate marketer do?

How can I start as an affiliate marketer?

Bottom Line

Affiliate marketing through third-party promoters can help your business grow with minimal costs and risks. Working with the right affiliate marketers who have already reached your target audience can help you quickly expand brand recognition and make more sales.