Chapter 2

Affiliation

Your success is my success

The pattern

In the Affiliation business model, the company’s focus lies in supporting other parties to market products in order to benefit from successful transactions. With this, the company gains access to a diversified customer base without additional sales and marketing efforts. Affiliates usually operate on the basis of some form of pay-per-sale or pay-per-display system, and generally online. A website publisher may, for instance, act as an affiliate by including another company’s banner ads on its website in return for commission on ‘clicks’ or ‘impressions’. In other cases, affiliates are able to market their own products on larger networks and pay commissions on sales to the hosting website.

The Internet has enabled and facilitated the large-scale and open affiliate programmes with which we are familiar today. A vendor of products or services can set up his or her own affiliate programme or draw on the expertise of professional affiliate network providers. Resellers are generally given a lot of leeway to position the original vendors’ offerings, as long as they respect certain basic guidelines.

It is crucial that the customer ultimately ends up on the original vendor’s website by fulfilling this condition; the customer receives an identifier that allows the vendor to recognise the referring reseller (HOW?). There are various models for commissions. Most frequently, resellers receive some fraction of the revenue or a fixed sum based on the performance by customers of a predetermined action, for example completing a purchase or submitting a request for more information.

While Affiliation greatly influences the sales channels and revenue generation of vendors, it can also serve as a business model for resellers too, for whom Affiliation is now an important element of the revenue model (VALUE?). A large number of popular blogs, forums, price comparison sites, as well as product and service directories are heavily dependent on commissions, or even wholly financed by them.

The origins

The roots of modern Affiliation can be traced back to the genesis of the Internet. One of the first-ever companies to create an affiliate programme was PC Flowers & Gifts, which started selling its products on the Prodigy Network at the end of the 1980s. A year after PC Flowers & Gifts had moved to the Internet proper in 1995, the company already boasted an affiliate programme with 2,600 partners. Its founder, William J. Tobin, holds several patents related to affiliate marketing and is considered one of the forefathers of the Affiliation business model. According to web marketing experts at ClickZ, it is highly likely that adult sites such as Cybererotica in fact pioneered the concept in the early 1990s. In the extremely competitive adult entertainment industry, commissions of up to 50 per cent of turnover per customer are not unheard of. The business model spread to other industries like wildfire, and refer-it.com was founded in 1997 to keep track of the ever-growing number of affiliate programmes. Not surprisingly, until its sale in 1999, the company financed itself largely from commissions earned from connecting businesses with distribution partners.

The innovators

Affiliate marketing really took off when Amazon introduced its Amazon.com Associates Program in 1996. Amazon, at the time still an online bookstore, obtained US patent number 6029141 for an ‘Internet-based customer referral system’, despite the fact that several other companies had previously employed such systems. With this system, owners across the world could recommend books to their readers and participate in Amazon’s success by collecting commissions on sales. Consequently, Amazon’s affiliate marketing scheme spread rapidly throughout the Internet, not only contributing greatly to Amazon’s success but at the same time also profiting from Amazon’s rapidly expanding product range. Online discussions and reviews of music or films rarely appeared without an obligatory ‘Buy from Amazon.com’ button, nor tests of electronics and household goods. Amazon generally distributes 4–10 per cent of turnover per customer to the affiliate partner, at the same time assisting its partners to optimise their sales activities.

A good number of websites and their parent companies would not exist without such affiliate marketing programmes. For them, Affiliation is the central revenue generator in their business model. A prime example of this process is the social network Pinterest, which became successful not only through its buzz-worthy design, but especially on the clever use of commissions. This two-pronged approach allowed Pinterest to become one of the most popular Silicon Valley start-ups within an exceptionally short time. According to the Internet analytics company comScore, Pinterest is the first website to have managed to secure 10 million unique visitors per month within less than two years of existence. The concept behind Pinterest is as simple as it is brilliant: users create theme-based virtual pinboards of their favourite pictures and links, which they share with friends and other interested parties. Often, users pin pictures of beautiful items on sale elsewhere on the Internet. Pinterest cleverly links these entries to the original vendor’s website and includes its own affiliate identifier. Pinterest has managed to drive even more referral traffic to retailers than Google, Twitter and YouTube. The company does not publish its financials, but we can probably safely assume that they must be quite impressive.

Affiliation: the business model of Google Affiliate Network

More recently, Wirecutter is a product recommendation website that aims to save people time and stress by providing a list of the best products across all categories. Various items, ranging from tableware to televisions to air purifiers, are featured on the website – whatever sort of thing one may need. Wirecutter was initially launched in 2011 and was acquired by The New York Times in 2016 as part of its digital transformation. Wirecutter’s business model generates non-ad-related revenue streams due to an affiliate ads business: the website charges a commission for every recommended product someone clicks through to buy.

When and how to apply Affiliation

A strong ecosystem and passionate customers are a prerequisite for this pattern. The importance of ecosystems along certain customer journeys will increase within the next years. McKinsey forecasts that 30 per cent of the world’s turnover will be reallocated across today’s industry borders along the customer journey in 2025. Affiliation with partners enables companies to offer superior joint-value propositions.

Affiliation works well because it generally leads to a win–win situation for all the parties involved. Merchants can drive traffic to their business and only incur costs once these efforts translate into actual sales. At the same time, the customers or other merchants who are funnelling the traffic are enticed by financial rewards. Choose Affiliation if you know what kinds of customers you want to attract. This pattern can be an excellent option if you cannot afford a direct sales force.