Prologue

In the previous chapters we discussed what is affiliate marketing, we took a look at historical data and we gathered statistics to help us shape a winning strategy for the future. Additionally, we expanded on the key benefits of affiliate marketing to help realize its true potential and the countless advantages for all the parties involved

• The merchants (advertisers)
• The publishers (affiliates)
• The affiliate networks
• The customers

This article’s purpose is to distinguish each model’s features, advantages, and disadvantages so that publishers and advertisers can choose the most appropriate to their needs method(s).

With the Pay-Per-Performance pricing model, the advertisers compensate affiliates only for visitors that perform an action on their websites and properties.

There are many kinds of actions that generate commissions for the publishers, such as sales, subscriptions, downloads, digital form completions, and other.

This method of compensation almost ensures pure profit for the advertisers where they only pay for the desired results.

For the affiliates is the most rewarding model and the commissions vary depending on the product’s price and other factors. Now the Affiliates (publishers) need their visitors to convert otherwise they won’t get paid. That means publishers have to work harder, compared to other models, in order to send very targeted traffic to the advertisers’ properties that will result in conversions.

This model changes the traditional way of advertising where companies that want to get advertised have to hire advertising or marketing agencies and pay in advance for advertising campaigns without even knowing if these campaigns will bring any results. With the PPP advertising model, companies pay only for results and due to the internet and technology these ad campaigns can be tracked in real-time and ROI can be measured.

This method is also known as Cost-Per-Action or Cost-Per-Acquisition (CPA). This cost can be calculated dividing the total cost of a campaign with the number of acquisitions (or actions). The desired action (acquisition) is set by the merchant (advertiser).

The most popular of PPP models are the Pay-Per-Sale (PPS) and Pay-Per-Lead (PPL).

In a Pay-Per-Sale (PPS) compensation type, the merchants compensate affiliates a commission for product sales and purchases that take place on the advertisers’ properties. The majority of merchants compensate affiliates a predefined percentage (%) based on the product’s price. In other cases, some merchants may choose to pay a fixed amount, without taking into consideration the final price of the product or service that’s been sold.

In this model, the commissions are the most rewarding for the affiliates, in contrast to the Pay-Per-Click (PPC) model. For the merchants, this is the pricing model that has a lower cost and ensures pure profit as advertised companies payoff commissions only for sales and purchases.

There are commissions as low as 1% and as high as 50% or more depending on the product, the company, or the occasion. Digital products usually pay off higher commissions than physical products. The higher commission rate I’ve ever received was 70% (special commissions for specific digital products during a company’s anniversary).

This is the most common pricing model and Wikipedia mentions that around 80% of affiliate programs are using this method.

The Revenue Sharing model is, in essence, the same model with Cost-Per-Sale (CPS) with the only difference being in the way that advertisers payoff commissions. With this model advertisers do not compensate publishers based on the product’s price that’s been sold, instead, they share the revenue that’s generated from the ad campaigns.

This is often used when a customer spends money on a specific product or service multiple times.

The Value-Per-Action model is very similar to the Cost-Per-Action (CPA) model. CPA models involve very little risk for advertisers as they only pay for the desired actions.

The Value-Per-Action (VPA) model extends that model to add revenue sharing with the consumer.

Using the VPA model, advertisers don’t incur advertising/marketing costs until a sale takes place, and can increase the likelihood of a sale by increasing the advertising budget which is shared between the marketer and the consumer.

The amount of advertising budget becomes a direct incentive to the consumer. Two sellers may offer the same product at the same price, but provide different incentives to consumers through advertising expenditures.

With the addition of transparent revenue sharing to the CPA model, VPA becomes a consumer-friendly approach in which the seller’s ad spend provides a direct benefit to the consumer effectively driving down the net price. Placed in a comparison-shopping marketplace, the competition between sellers to provide better revenue provides additional downward pressure on the net price paid by consumers.

In the Pay-Per-Lead model, the advertisers compensate publishers for visitors that end up becoming leads. Leads are potential customers who share their email addresses or fill out forms or create accounts or subscribe to newsletters or become members of communities or other similar actions on the advertisers’ properties. In this case, the desired action (acquisition) is the lead.

The advertised companies need leads to expand their reach in order to communicate with their potential customers on an ongoing basis usually by sending out email campaigns or SMS messages or social media messages and campaigns or other ways, so that leads can finally become customers.

The advertiser sets the terms of the Pay-Per-Lead agreement. All leads need to meet the certain criteria of such an agreement.

The publishers may choose to acquire leads via phone calls, online traffic to websites/properties/landing pages, emails, SMS, or other methods. The potential customer will have to provide an email address or to create a profile by filling out data or by answering specific questions.

The commissions vary from company to company, from industry to industry, and according to the competition.

This model is used frequently by insurance companies, financial services, internet services, cell phone providers, banks, or subscription services.

This model involves risk for the advertiser and there are often times where publishers acquire leads in fraudulent ways tricking the advertised companies. Of course, legitimate publishers need to work hard again to target potential leads effectively.

In CPL and CPA environments, the publishers need to attract potential leads at various stages of their buying journey so that leads eventually share their contact information (CPL) or their credit card details or bank details (CPA).

That means publishers may have to create websites, blog departments to interact with visitors and respond to comments, community sites or forums, landing pages, rewarding programs, newsletters, email campaigns, series of phone calls, or member acquisition programs in order to engage with customers, communicate on an ongoing basis, and finally convert traffic into leads.

CPA and affiliate marketing campaigns are publisher-centric as the publishers will choose from a wide variety of merchants’ offers to work on, either through affiliate networks or independent affiliate programs. The advertisers might not know how exactly the publishers are promoting their products/services, or where these offers are being published.

In CPL campaigns the customers share some basic contact information, and a transaction might end up with the delivery of an email address, but in CPA campaigns customers have to submit detailed personal information or their credit card details.

With the Pay-Per-Click pricing model, the merchant compensates affiliates for referral traffic. The affiliates display the merchants’ banners, text ads, or other advertisements on their websites and when people click these ads and get redirected to the merchant’s online properties the affiliates receive commissions.

The desired action (acquisition) in this case is the click of the displayed advertisement.

The affiliates, in this case, don’t have to worry about conversions and sales. Even if the visitors don’t purchase anything on the merchants’ websites, the affiliates will get paid. But the fees are pretty small, usually, don’t exceed $1 per click.

A very popular pricing model that comes in handy for affiliates, they only need to generate traffic and of course, they need visitors to click on the displayed advertisements.

For the advertisers is a method that involves some risk, because the traffic might not convert into sales. Publishers don’t have to worry about attracting traffic that will convert, they only need as much traffic as possible and of course, clicks.

The popular Google advertising network is being used by thousands of companies/publishers/advertisers for Pay-Per-Click (PPC) campaigns.

The Google Adsense program lets publishers display ads on their properties to generate clicks and impressions. In this case, the publishers don’t have control over the displayed ads, the Google network is responsible for matching certain keywords and queries throughout a webpage’s content to deliver the most suitable ads to the right customers.

The Google Adwords and now known as Google Ads program (display advertising) lets publishers and advertisers display ads either on the search engines listings/pages or in the display network (sites that belong to publishers or other companies).

Google lets advertisers/publishers use a variety of ad formats and sizes such as text ads, static and animated image ads, rich media and video ads.

The Cost-Per-Click can be calculated by diving the total cost of a campaign with the number of clicks. The PPC cost can be determined either by a flat-rate model or a bid-based model.

The flat-rate model is being used to charge advertisers a fixed amount for each click. The price can be influenced by the content on a publisher’s site where advertisers may choose the most relevant and high-quality/content sites to display their ads. Advertisers may negotiate lower rates in cases they commit to long-term contracts.

This model is widely common to comparison shopping engines, where the content of these sites is almost exclusively paid ads.

The bid-based model allows advertisers to compete against other companies in private auctions hosted by publishers or advertising networks. Every advertiser provides the maximum amount they are willing to pay for a given ad spot based usually on keywords.

When the ads are displayed on the search engine results pages (SERPS) the auction begins automatically when a search for the keywords is being triggered. The network decides which advertiser to show based on the searcher’s location, date, and time.

Major advertising networks allow advertisers to display contextual ads on 3rd party properties. The publishers host ads on behalf of the network, and in return, they receive commissions, a portion of the network’s ad revenue. These properties are known as a content network, and the ads are called contextual because the ad spots are associated with certain keywords based on the content of the web pages. Usually, these ads have a lower click-through rate (CTR) and conversion rate than ads displayed on the SERPS.

In the Cost-Per-Impression model, advertisers pay to display their ads on other properties. In essence, the only difference between CPI and CPM is that the CPI model refers to the cost per one impression and the CPM model refers to the cost per one thousand impressions. CPM is also known as cost-per-mile with mille being the Latin/Roman definition of one thousand.

This cost measures the effectiveness and profitability of these ad campaigns. This model is very similar to models being used in television, print, and radio stations where advertisers pay based on estimated desired actions.

One impression occurs when an online visitor views the content of a webpage that contains advertisements. A webpage might contain more than one ad. The impressions are calculated from ad servers and there are actions on these web pages that exclude certain non-qualifying activities, such as web pages refreshes to prevent unnecessary calculations that increase the cost for the advertised companies and to prevent fraudulent activities such as fake impressions.

The CPI is the total ad spend divided by the number of impressions.

The CPM is the total ad spend divided by one thousand impressions.

This model involves risk for the advertisers as visitors might not click the ads and no conversions will be generated. For the affiliates is a handy model because they don’t care about conversions, they only need as much traffic as possible.

This is the case where two or multiple advertisers share the same ad space for ad impressions or page views in order to save CPM costs. Usually, the publishers offering shared CPM offer discounts to the advertised merchants.

This model is being inspired by the rotating billboards of outdoor advertising and can be implemented with refresh scripts or specialized rich media ad units.

The publishers that offer shared CPM should apply additional tracking methods for accurate impression calculations and separate click-through tracking for each advertiser that’s being advertised.

This pricing model came up as a response to the ineffectiveness of banner ads. Sometimes ads are located in lower parts of websites, so if a user is only interested in what’s at the top, they won’t be able to see those ads or only see a small piece of them, even though, they technically count as impressions. In this case, rewarding the publisher doesn’t seem fair. vCPM lets advertisers pay only for those ads which really appear on the recipients’ screens.

The CPV model is quite unique. Unlike the CPM, it’s a cost for just a single view, and hence, it’s not used for traditional banner ads. You can encounter the CPV model when setting up a campaign utilizing alternative forms of advertising, such as video ads or pop ads. Beware that CPV rates are usually small fractions of a dollar, so mistaking the CPV for CPM can drain your budget in no time.

Even though it seems similar to the CPC model, engagement doesn’t always end up being a click. The CPE model is used for specific formats, like expandable hover ads. The engagement is complete when a user hovers over an ad, so it expands to a larger size of a banner. Since this can be done accidentally, usually the pointer has to be held on an ad like that for at least two seconds for the engagement to count.

Pay-Per-Call campaigns are in essence Pay-Per-Lead campaigns where the publishers use phone calls as the medium to reach potential leads.

The advertiser that sets the PPCall campaigns will pay for the number of phone calls generated. The PPCall providers may charge their services per call, per duration, per impression, or per conversion.

This certain type of ad campaign is popular for local companies trying to reach local customers although it can be used to reach leads all over the globe depending on the certain needs of the advertised company.

The customers benefit because they discuss with the seller (advertiser) before having to buy the product or service.

The growth of the smartphones market may be responsible for the growth and popularity of this model in the near future.

The advertisers tend to prefer this model where fraud is significantly reduced (such in cases of online fraudulent or fake clicks). PPCall campaigns usually cost a lot more to advertisers but are more effective and convert at higher rates.

Merchants define relevant keywords, categories and/or geographic locations for the displayed ads. The ads usually contain the company’s name, address, a short description and a trackable toll-free phone number of the PPCall provider, which eventually redirects potential customers to the advertisers’ actual phone numbers.

Yellow Pages companies use this model extensively.

The providers use call-tracking software to analyze the results. This way they can track, record, forward, and measure the calls. The calls will be forwarded to the advertised companies’ phone numbers or to the providers’ call centers before they are being forwarded to the companies. This procedure disqualifies non-interested customers so that advertisers can experience higher conversion rates.

This model is being used in offline campaigns as well, such as printed material, TV, and outdoor ads that display the toll-free-numbers. This way companies that do not own a website can benefit from the model.

The PPCall campaign numbers can be displayed on mobile phones and smartphones where customers have only to click a link in their browser without having to type the phone call number.

In the Pay-Per-Install model, advertisers will pay publishers commissions based on software or application installs by referred visitors. The visitors are being asked if they want to download and install the software on their computers. Usually, the advertisers offer free applications that come with adware apps.

Adware is a software that generates online ads automatically in a visitor’s interface or screen during the software’s installation. The adware software may generate revenue for the advertiser either for the display of the ads or on a Pay-Per-Click basis, ad clicks.

Many advertisers (software developers) offer the software free of charge relying on the adware ads to generate revenue and cover their expenses. Usually, such a software tracks the visitor’s location, internet preferences, visited sites, to determine which ads to display.

There are many cases, where adware software is being used to bombard visitors with irrelevant, unwanted, and fraudulent ads called malware. And there are cases where botnets operate PPI scams for their operators where the visitor’s computer is being compromised with repeated software installations or other fraudulent actions.

This model is becoming popular due to the rise of the mobile market.

In the Pay-Per-Download model, advertisers will pay publishers commissions based on referred users downloads (files, software, e-books, applications, images, videos, digital media, PDFs), in essence, anything that can be downloaded in digital format.

There are PPD networks that offer downloads and publishers upload their digital media on these networks and each time a visitor downloads material publishers are getting paid. This way publishers have the chance to offer online visitors their downloads for free and earn money by taking advantage of this model.

Beware though, because there are many fraudulent PPD networks that don’t compensate their affiliates.

This model is becoming very popular due to the rise in mobile advertising and applications.

This model is used in online games. A publisher gets paid a reward each time a user signs up for a game. An active player is a qualified player: the advertiser monitors how often the user enters the game after installation and what they do.

The Tenancy model sees merchants pay a flat, fixed fee per month regardless of the number of impressions, clicks or leads. Although the results are very hard to measure, and there are no guarantees, the tenancy model can offer large exposure for big companies and brands.

The Hybrid pricing model is a combination of 2 or more models. It’s used when merchants want to track and focus on the whole purchase or funnel of the offer. Offering different models across one process can benefit publishers and merchants.

On every CPA campaign, there are desired actions that should be tracked and calculated accurately.

Cookie tracking: when online visitors click ads on the publishers’ websites or when they’re getting redirected to the merchants’ (advertisers) properties a cookie is being placed on their computers to that the advertiser or the affiliate network knows which publisher is responsible for the referred traffic. The cookie is unique for every publisher, and every publisher has their own unique affiliate links.

Telephone tracking: advertised companies are being assigned with unique telephone numbers and when these numbers are being called by prospects the action is allocated to the corresponding advertiser.

Promotional codes: promotional or voucher codes are commonly used for tracking retail campaigns. The prospect is asked to use a code at the checkout to qualify for an offer. The code can then be matched back to the media owner who drove the sale.

What the little ‘e’ preceding the pricing model brings in the metric of the effectiveness of the campaign. These metrics have been invented with unification in mind. Thanks to them, you can calculate your true CPM, CPA, CPL and so on, regardless of the pricing model you’re operating on. For example, you can find out your rate for 1000 impressions, even if you only pay per install.

To calculate the eCPM you divide the total costs of your ad by the total number of impressions and multiply it by a thousand. To calculate the eCPA, you shall divide the total advertising costs by the total number of actions. To calculate the eCPC, divide the advertising costs by the total number of clicks. Other eXXX’s calculations are analogical.

This term is being used to determine the effectiveness of ad campaigns purchased by advertisers via the Cost-Per-Click (CPC), Cost-Per-Impression (CPI), Cost-Per-Mille (CPM), or Cost-Per-Sale (CPS) models.

In other words, the eCPA tells the advertiser what they would have paid if they had purchased the advertising inventory on a cost per action basis.

If the advertiser is purchasing inventory with a CPA target, instead of paying per action at a fixed rate, the goal of the effective CPA (eCPA) should always be below the maximum CPA. As described by Yang’s Law, eCPA<CPA. This fundamental view of what the performance of a conversion-based campaign should be is served as the baseline for many buy-side platform optimization algorithms.

The Search Engine Marketing Professionals Organization (SEMPO) defines eCPM as:

A hybrid Cost-per-Click (CPC) auction calculated by multiplying the CPC times the click-through rate (CTR), and multiplying that by one thousand. (Represented by: (CPC x CTR) x 1000 = eCPM.) This monetization model is used by Google to rank site-targeted CPM ads (in the Google content network) against keyword-targeted CPC ads (Google AdWords PPC) in their hybrid auction.

In internet marketing, effective cost per mille is used to measure the effectiveness of a publisher’s inventory being sold (by the publisher) via a CPA, CPC, or Cost per time basis. In other words, the eCPM tells the publisher what they would have received if they sold the advertising inventory on a CPM basis (instead of a CPA, CPC, or Cost per time). This information can be used to compare revenue across channels that may have widely varying traffic—by figuring the earnings per thousand impressions.

The most accurate view of ad space of the three, this provides the “real” worth because it takes into account the total imps that occurred, not just the ones that paid, which is important when determining the value of a space. The formula to determine this amount is: rCPM = Revenue/(Total Impressions/1000)

Click-through rate (CTR) is the ratio of users who click on a specific link to the number of total users who view a page, email, or advertisement. It is commonly used to measure the success of an online ad campaign for a particular website as well as the effectiveness of email campaigns.

A view-through rate (VTR), measures the number of post-impression response or view through from display media impressions viewed during and following an online ad campaign. Such post-exposure behavior can be expressed in site visits, on-site events, conversions occurring at one or more Web sites or potentially offline

VTR is related to the popular click-through rate (CTR) measurement, but differs in that it is not an immediate measure of response – it is instead time-shifted and passive, i.e. no click is required.

Also, view-throughs lack a specific predetermined landing page since the visit can come through a direct type-in or via another click-based digital marketing channel, e.g. search, email or social media.

TRR is the sum of both view-through and clickthrough response that resulted from the display media campaign.

The conversion rate is the proportion of visitors to a website who take action to go beyond a casual content view or website visit, as a result of subtle or direct requests from marketers, advertisers, and content creators.

Conversion rate = Number of goal achievements/visitors

Successful conversions are defined differently by individual marketers, advertisers, and content creators. To online retailers, for example, a successful conversion may be defined as the sale of a product to a consumer whose interest in the item was initially sparked by clicking a banner advertisement. To content creators, a successful conversion may refer to a membership registration, newsletter subscription, software download, or other activity.

For websites that seek to generate offline responses, for example, telephone calls or foot traffic to a store, measuring conversion rates can be difficult because a phone call or personal visit is not automatically traced to its sources, such as the Yellow Pages, website, or referral. Possible solutions include asking each caller or shopper how they heard about the business and using a toll-free number on the website that forwards to the existing line.

For websites where the response occurs on the site itself, a conversion funnel can be set up in a site’s analytics package to track user behavior.

CPO is the cost that you had to spend on each sale. This can be one action that you defined at the CPA. In this model, you understand how much money you spend to make a lead (the person that clicked on the ad) and purchased the product. That means CPO basically describes how much money you spent to generate a single sale.

You can calculate the same way you did for the CPA: divide the costs by results.

CPO = The amount spent on a campaign/total number of sales

This is a measure of direct yield on advertising. It refers to the total revenue less cost of audience acquisition directly related to the revenue.

One of the simplest, and at the same time the key, metrics for any business. The Return On Investment is the relation of your profits to the capital you’ve invested. The ROI is calculated by subtracting the investment from the income and then dividing this amount by the amount of investment. If your ROI is at 0%, it means that you didn’t make or didn’t lose, any money on your activity. A negative ROI means a loss, while a positive ROI equals profit.

The LTV metric is extremely meaningful for advertisers. Imagine that you’re running a mobile app campaign based on the CPI model. Your conversion rate may be high, you might be getting a lot of installs, but it can be all in vain if users never open and use your app. This is when the LTV comes into play. It measures an average profit made off one user, which is much more important than the number of downloads.

The general formula for calculating LTV is Average Revenue Per User (ARPU) divided by churn rate. In order to stay profitable, advertisers need to keep the CPA or CPI rate lower than the LTV.

Single-tier – In a single-tier affiliate marketing program, publishers are getting paid based on their direct referral sales or direct referral traffic to the merchants.

Two-tier – In two-tier affiliate marketing programs, affiliates are getting paid not only for the sales occurred by their referrals on the merchants’ websites but for sales made by the referrals of their referrals who signed up and became affiliates of the merchants under their links

Multi-tier – In this type of affiliate marketing affiliates are getting paid commissions for affiliates and referrals in various tiers in the affiliate network. Multi-level marketing (MLM) is used for the sale of products or services where the revenue of the MLM company is derived from a non-salaried workforce (also called partners, salespeople, distributors, independent business owners…) selling the company’s products/services, while the earnings of the participants is derived from a pyramid-shaped commission system.

Although each MLM company dictates its own specific “compensation plan” for the payout of any earnings to their respective participants, the common feature which is found across all MLMs is that the compensation plans theoretically pay out to participants only from two potential revenue streams.

The first stream of compensation can be paid out from commissions of sales made by the participants directly to their own retail customers. The second stream of compensation can be paid out from commissions based on the sales made by other distributors referred by the participant, who had recruited other participants into the MLM company; in the organizational hierarchy of MLMs, these participants are referred to as one’s “downline” distributors