If you recommend a restaurant to a friend, and that friend visits the restaurant because of your recommendation, the restaurant’s revenue will have increased because of your referral. This is “word-of-mouth” marketing. But you, as the referrer, do not see any of the cash benefit that the restaurant does!
Imagine that the restaurant gave you 10 percent of the bill for every person that you referred to the restaurant. They would be paying you a finder’s fee for new customers. There are a number of businesses that market this way offline. Brokers for insurance products are an example, but these referrals can be hard to track. Online, they are very easy to track. This system of reward where compensation is based on referrals is called affiliate marketing and is used to describe this type of marketing in an online environment.
Affiliate marketing is used widely to promote Web sites, and affiliates are rewarded for every visitor, subscriber, or customer provided through their efforts. Because of this, affiliates are sometimes viewed as an extended sales force for a Web site. Affiliates are paid for performance, so affiliate marketing is also referred to as performance marketing.
Like many eMarketing innovations, the beginnings of affiliate marketing are to be found in the adult industry. Cybererotica was probably the first to run an affiliate campaign with its CPC (cost-per-click) program, where it would reward referrers for each click-through to its Web site.
Affiliate marketing moved closer to the mainstream, with programs offered by companies such as CDNow (its BuyWeb program launched in 1994), PC Flowers & Gifts, AutoWeb.com, and a handful of others. But the story that is most well known, and that ensured that affiliate marketing hit mainstream press articles, is that of the Amazon.com Associates Program.
Legend has it that Jeff Bezos (the CEO and founder of Amazon.com) was at a cocktail party, where a woman told him that she wanted to sell books through her Web site. She did not have the infrastructure to sell the books, but Jeff Bezos realized that she could send her targeted traffic to Amazon.com where users could buy books, and she could get paid for each successful referral. From this meeting, Jeff Bezos launched Amazon Associates, the Amazon.com affiliate marketing program. Referrers are rewarded for successful sales that occur as a result of their marketing efforts. The growth experienced by Amazon.com as a result of its affiliate program is well documented and probably accounts for about 40 percent of its revenue. (“The Amazon Story,” Alibaba.com).
According to Econsultancy’s Affiliate Marketing Networks Buyer’s Guide (2006), total sales generated through affiliate networks in 2006 was £2.16 billion in the United Kingdom alone. (Econsultancy, Affiliate Marketing Networks Buyer’s Guide (2006), October 2006). And MarketingSherpa’s research estimates that in 2006, affiliates worldwide earned $6.5 billion in bounty and commissions! (Anne Holland, “Affiliate Summit 2006 Wrap-Up Report—Commissions to Reach $6.5 Billion in 2006,” MarketingSherpa, January 11, 2006).
Affiliate networks, which act as intermediaries between affiliates and merchants, came onto the scene in 1996, with the launch of LinkShare and Be Free. Commission Junction, another big player, was launched in 1998 and was bought by ValueClick in 2003 for about $58 million.
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