Predominant compensation methods in affiliate marketing
80% of affiliate programs today use revenue share (Cost per sale) as compensation method. The remaining 19% use Cost Per Action.
Diminished compensation methods
The use of pay per click and pay per impression (CPM) in traditional affiliate marketing is far less than 1% today and negligible.
CPM requires from the publisher only to load the advertising on his website and show it to his visitors in order to get paid commission, while CPC requires one additional step in the conversion process to generate revenue for the publisher. Visitors must not only made aware of the ad, but also pursue them to click on it and visit the advertisers website.
CPC used to be more common in the early days of affiliate marketing, but diminished over time due to click fraud issues that are very similar to the click fraud issues modern search engines are facing today. Contextual advertising, such as Google AdSense are not considered in this statistic. It is not specified yet, if contextual advertising can be considered affiliate marketing or not.
Compensation methods for other online marketing channels
Pay per click is predominant as compensation model for pay per click search engines and their contextual advertising platforms, while pay per impression is the predominant compensation model for display advertising. CPM is used as compensation method by Google for their AdSense/AdWords feature “Advertise on this website”, but an exception in search engine marketing.
While search engines only recently started experimenting with compensation structures of traditional affiliate marketing, such as pay per action/CPA,[3] they did display advertising, offering CPA as early as 1998.[4] By the end of 2006 did the share of the CPA/performance pricing mode (47%) catch up with the CPM pricing mode (48%) and will become the dominant pricing mode for display advertising, if the trend of the last 9 years will continue in 2007.
CPM/CPC versus CPA/CPS (performance marketing)
In the case of CPM or CPC, the publisher does not care if the visitor is the type of audience that the advertiser tries to attract and is able to convert, because the publisher already earned his commission at this point. This leaves the greater, and, in case of CPM, the full risk and loss (if the visitor can not be converted) to the advertiser.
CPA and CPS require that referred visitors do more than visiting the advertisers website in order for the affiliate to get paid commission. The advertiser must convert that visitor first. It is in the best interest for the affiliate to send the best targeted traffic to the advertiser as possible to increase the chance of a conversion. The risk and loss is shared between the affiliate and the advertiser.
For this reason affiliate marketing is also called “performance marketing”, in reference to how employees that work in sales are typically being compensated. Employees in sales are usually getting paid sales commission for every sale they close and sometimes a performance incentives for exceeding targeted baselines.[7] Affiliates are not employed by the advertiser whose products or services they promote, but the compensation models applied to affiliate marketing are very similar to the ones used for people in the advertisers’ internal sales department.
The phrase, “Affiliates are an extended sales force for your business”, which is often used to explain affiliate marketing, is not 100% accurate. The main difference between the two is that affiliate marketers cannot, or not much influence a possible prospect in the conversion process, once the prospect was sent away to the advertisers website. The sales team of the advertiser on the other hand does have the control and influence, up to the point where the prospect signs the contract or completes the purchase.
Multi tier programs
Some advertisers offer multi-tier programs that distribute commission into a hierarchical referral network of sign-ups and sub-partners. In practical terms: publisher “A” signs up to the program with an advertiser and gets rewarded for the agreed activity conducted by a referred visitor. If publisher “A” attracts other publishers (“B”, “C”, etc.) to sign up for the same program using her sign-up code all future activities by the joining publishers “B” and “C” will result in additional, lower commission for publisher “A”.
Snowballing, this system rewards a chain of hierarchical publishers who may or may not know of each others’ existence, yet generate income for the higher level signup. This sort of structure has been successfully implemented by a company called Quixtar.com, a division of Alticor, the parent company of Amway. Quixtar has implemented a network marketing structure to implement its marketing program for major corporations such as Barnes & Noble, Office Depot, Sony Music and hundreds more.
This is not considered affiliate marketing. Two-tier programs exist in the minority of affiliate programs; most are simply one-tier. Programs beyond 2-tier are not considered affiliate programs, but rather multi-level marketing (MLM) or network marketing.
Even though Quixtar compensation plan is network marketing & wouldn’t be considered ‘affiliate marketing’, the big company partners are considered and call themselves affiliates. Therefore, you may argue that the Quixtar company is the affiliate marketer for its partner corporation.