Oct 1, 2010

Branding over internet: Affiliate marketing

Affiliate marketing is the use by a Web site that sells products of other Web sites, called affiliates, to help market the products. Amazon.com, the book seller, created the first large-scale affiliate program and hundreds of other companies have followed since. Affiliate programs offer affiliates referral fees in return for directing potential customers into a merchant’s Web site.

Many merchants pay affiliates a referral fee for every referral that is converted into a customer (pay-per conversion). For example, Amazon pays its affiliates up to 15% commission on sales made to a converted customer. Pay-per-conversion is sometimes considered a form of pay-for-performance because it reduces the merchant’s risk of paying for referrals that do not convert into buyers. Another commonly used method is pay-per-lead, whereby affiliates are paid for referrals regardless of whether their referrals are converted into buyers.
In common one thought probe in minds that is given the prevalence of both pay-per-conversion and pay-per-lead formats, two interesting questions are as follows: (1) why do both formats continue to exist? (2) Under what conditions is one format preferred over the other? The answer is as Pay-per-conversion leads to suboptimal pricing, and therefore pay-per-lead is more profitable and efficient than pay-per-conversion. In contrast, when the merchant works with a large number of affiliates and determines the referral fee collectively for all, pay-per-lead is no longer more profitable than pay-per-conversion.
The emergence of the Internet and sophisticated customer database management systems has made the tracking and rewarding of referrals easier. Indeed, in the business-to-consumer market, there is recent growth in the use of referral rewards programs. A second type of affiliate marketing programs is one-to-one arrangements. The merchant and the affiliate negotiate a specific contract that governs the referral of customers from the affiliate site to the merchant site. One-to-one contracts are typically signed with affiliates that have access to a large number of potential customers and usually involve large sums of money, some of which are paid up-front.How to Create a Profitable Website
Affiliates in one-to-one arrangements are powerful companies that have substantial negotiating power in determining the terms of affiliate arrangement. Free riding is less of a concern because of the adverse consequences of such behavior to reputation, fear of litigation, and the loss of future business.

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