“If you want to go fast, go alone. If you want to go far, go together.”
The old African proverb is often cited to underline the importance of collaboration in a team.
Viewed from a macroscopic perspective, it also explains why e-commerce affiliate marketing is important for growing your online business — with the help of affiliate partners, you can easily reach tens of thousands members in your audience that you can’t reach alone.
To get you started on marketing with affiliates, this article covers the basics of affiliate marketing for e-commerce, covering what it means, how it works and its benefits.
We’ll also explain the types of affiliate marketing and how to create an affiliate program for your online business. Read on to learn more!
- What is affiliate marketing?
- How does e-commerce affiliate marketing work?
- Benefits of affiliate marketing for e-commerce
- Types of affiliate marketing (with pros and cons)
- How to create an affiliate program for your business
What is affiliate marketing?
Affiliate marketing is the process in which a brand’s products or services are promoted in return for a commission fee. It typically involves an advertiser, affiliate partner(s) and sometimes an affiliate network:
- Advertiser: The brand whose products or services are being promoted.
- Affiliate partner: An advertiser can have more than one affiliate partner, each of which is a brand or individual who promotes the advertiser’s products or services.
- Affiliate network: An intermediary who connects affiliate partners with advertisers.
How does e-commerce affiliate marketing work?
As e-commerce affiliate marketing is a form of performance-based advertising, the affiliate partner is paid a commission fee upon meeting certain goals.
For example, affiliates may be rewarded for bringing traffic, leads or purchases to the advertiser.
Common methods to track affiliates’ performance include referral links and discount codes.
Below is an example of how affiliate marketing works in practice:
- A blogger joins the affiliate program of company ABC, which sells e-commerce inventory management software.
- The advertiser provides a unique referral link to the blogger.
- For each customer referred by the affiliate, the advertiser offers to pay him a 30% commission on the customer’s first month payment.
- The affiliate partner puts his referral link in blogs that talk about e-commerce inventory management, and promotes company ABC’s product in his content.
- A blog reader clicks on the referral link and subscribes to company ABC’s software. The first month’s subscription fee is $50.
- The blogger receives a commission of $15 (being 30% of $50) for this purchase.
Benefits of affiliate marketing for e-commerce
For e-commerce businesses hoping to amp up their online marketing efforts, pay-per-click (PPC) advertising, search engine optimization (SEO) and social media ads are popular choices.
Why should you invite affiliate partners to promote your brand’s products or services then? Is affiliate marketing worth it?
The three advantages of e-commerce affiliate marketing below will give you an answer.
1. Broaden your audience base
You can only reach a limited number of people through your brand’s owned channels or ad campaigns. With affiliate partners to help, you can tap into their vast networks of audience with ease.
Example: You run an e-commerce brand which sells cable organizers, the function of which is to help users keep their desks clean and tidy.
You can work with Wirecutter — an affiliate website owned by The New York Times — to feature your gadget in their online articles.
Leveraging their 10M+ monthly organic traffic, you can quickly reach a sizeable number of readers and build awareness for your brand and product.
2. Create social proof
Consumers’ craving for authenticity in the digital age is at an all-time high.
As a matter of fact, a whopping 92% of consumers now trust influencers more than traditional celebrity endorsements or advertisements, making affiliate marketing an increasingly popular method for promoting brands’ products to consumers.
Example: Ania Morton is an athlete-turned influencer with 100K+ Instagram followers and a mother of three. She loves Emergen C, a vitamin C supplement sold on iHerb and talks about it in one of her Instagram posts.
Even though her post is clearly a promotion of dietary supplements, it’s also original, authentic and honest. One Instagram user — a public figure named @strollerinthecity — even commented on the post saying she’d try out the flavor recommended by Ania!
3. Strong return on investment
Working with affiliate partners is like joining a pay-as-you-go mobile data plan. Instead of giving fixed-sum payouts, you’ll only pay for traffic, leads or purchases that your partners bring to you.
Example: iHerb, an online retailer of nutritional and healthcare products, offers 5% of sales revenue as commission for its affiliate partners.
If a customer uses an affiliate partner’s referral code and makes a $100 purchase on iHerb’s website, that affiliate will be rewarded with $5.
From iHerb’s perspective, it’s guaranteed to pocket a revenue of $95 for every $5 paid to affiliate partners. The return on investment is HUGE.
Types of affiliate marketing (with pros and cons)
Who can be an affiliate partner of your e-commerce business? Virtually anyone with a following on his blog, podcast or social media can.
Nevertheless, the famous affiliate marketer Pat Flynn found that different types of affiliate marketing vary greatly in terms of their effectiveness in gaining consumer trust.
Below are three types of affiliate marketing explained with their pros and cons.
1. Unattached affiliate marketing
In unattached affiliate marketing, the affiliate partner has no authority in the niche of the product that he advertises. Affiliates of this type simply source and join a number of affiliate marketing programs, and promote the products or services without actually trying them.
Unlike influencers who promote products through social media channels, most unattached affiliate marketers have no connection with consumers.
Instead, they put their referral links in pay-per-click (PPC) ads, banners or display ads and earn commission fees when people click on them.
Pros and cons of unattached affiliate marketing
On the plus side, unattached affiliate marketing comes with little commitment for the affiliate. There’s no need to set up a blog, podcast or social media channel, or build a large following in order to promote the products to the target audience.
Given the low degree of commitment, it’d be easier for you (the advertiser) to seek affiliates to promote your product or services.
However, since the affiliates have little or no experience in the niche of the product that they advertise, marketing campaigns could go awry, in a very bad way.
Advertisers need to provide sufficient information for affiliates to understand what their products are, and affiliates must tread carefully.
You don’t want to see your brand in the news, headlined “Male Celebrity Sells Sanitary Pads On Live Stream, Says They Could Be Used As Eye Masks Too”, right?
2. Related affiliate marketing
This type of affiliate marketing involves promotion of products or services that are relevant to the affiliates’ experience or expertise.
Related affiliate marketing is usually done through blogs, podcasts or social media, where the affiliate has built an audience who trusts him or her.
An illustrative example is promotion of Choco Up’s revenue-based financing as an e-commerce funding option on a business finance blog. (This example is purely hypothetical — we don’t have any paid affiliate partners yet.)
Pros and cons of related affiliate marketing
With the affiliate partner being a brand or person with knowledge and influence in the niche, the good thing about related affiliate marketing is that it’s a relatively trusted source of promotion for e-commerce brands.
Yet, because you need someone with relevant experience to promote your products or services, the pool of brands or individuals that you can work with is much smaller than that in unattached affiliate marketing.
3. Involved affiliate marketing
Involved affiliate marketers not only have knowledge in the industry niche. They’ve actually tried and used the product themselves.
Pros and cons of involved affiliate marketing
“How can one honestly say that they support a product if they don’t know everything there is to know about it?” asks Pat Flynn, the millionaire marketer.
For its authenticity and trustworthiness, involved affiliate marketing is the type that Flynn personally recommends and uses.
There is, however, a downside to involved affiliate marketing. That is, you don’t get a lot of affiliate partners to choose from.
Sometimes you may even need to do a little outreach and invite affiliate partners (instead of them coming to you) to speak for your brand.
How to create an affiliate program for your business
Creating an affiliate program for your e-commerce business is no walk in the park.
There are many aspects to think through, especially on how to incentivize affiliate partners to promote your products or services.
Rounding up the many considerations in affiliate marketing, this section is a step-by-step guide on how to create a successful affiliate program for your business.
Step #1. Understand your customer lifetime value
Customer lifetime value (CLV) is an important e-commerce metric to track for anyone running an online business.
But why is it relevant to how you create an affiliate program?
That’s because CLV tells you about the total amount of money that a customer is expected to spend with your business during their lifespan.
This way, you’ll know whether the value brought by your customers will justify the cost of acquiring them.
How to calculate customer lifetime value?
You can compute the CLV for your business using the formula below:
Customer lifetime value (CLV) = Customer value x Average customer lifespan, where Customer value = Average purchase value x Average number of purchases
Step #2. Select a performance metric
To create an affiliate program, it’s essential to settle on a metric with which affiliate partners’ performance are measured. Below are some metrics commonly used in affiliate marketing:
- Traffic-based: The affiliate partner is paid based on the number of visitors brought to your e-commerce store.
- Customer acquisition-based: The affiliate is rewarded for helping you generate leads. Affiliates’ performance is measured by the number of free trial sign-ups, creation of new accounts, etc.
- Purchase-based: Every time the affiliate refers a customer to buy at your website, a commission fee is paid to him.
Which performance metric should you use?
It depends largely on your product or service type.
For example, customer acquisition-related metrics are popular among companies that provide software or services.
Online sellers of tangible products, on the other hand, tend to gauge affiliates’ performance with the number of referred purchases.
Step #3. Work out a commission structure
Next, you should work out a commission structure that will incentivize affiliates without harming your business’s profitability in the long run.
No idea how to pay your affiliates? Here are three questions to guide you in the right direction.
Q1. Cash, store credits or gifts?
Put yourself in the shoes of an affiliate partner — of course cash is most desirable.
Although some e-commerce sellers may be able to get away with store credits or free gifts, you’d want to choose a reward type that motivates affiliates the most.
Q2. Flat rate or percentage?
You can pay affiliates a flat rate or a percentage commission.
Flat rate commission example: Sendinblue offers €5 to those who refer a new user to create a free account, and an additional €100 if that user buys a subscription.
Percentage commission example: Target pays its affiliates up to 8% on the order value of a referred buyer.
In e-commerce affiliate marketing, percentage commission is more common as it allows sellers to safely keep a portion of sales revenue as profits.
The flat rate approach may be used if you sell only a few products in a similar price range (so that you can reliably estimate how much profits you retain).
Q3. One-off or recurring?
One-off commission involves a one-time payment to the affiliate for referring a new user to you.
On the other hand, providing recurring commission means you’ll be paying the affiliate as long as the referred user is using your software or services. You may also set a time cap to the payout period (like ConvertKit and HubSpot below).
Here are some examples of companies that offer recurring commission to affiliates:
- AWeber: 30% recurring commission on paid accounts.
- ConvertKit: 30% recurring commission on paid accounts for up to 1 year.
- GetResponse: 33% recurring commission per month or $100 flat rate per sale.
- HubSpot: 15% recurring commission for up to 1 year or 100% flat rate on first month’s revenue.
Step #4. Determine your commission rate
While there’s no lower or upper limit on the flat rate offered to affiliates, the best practice is to keep it below your average customer lifetime value (computed in step #1 above).
This is to ensure that your customer acquisition cost (CAC) doesn’t exceed the value brought by customers — it doesn’t make sense to pay more to your affiliates than what your customers pay you.
As for percentage commission, it usually ranges between 5% to 30%.
The chart below shows the range of percentage commission commonly offered to affiliates:
Pro tip: When creating an affiliate program for your business, look for programs created by your competitors too. They’ve set examples for how you can structure your affiliate program, and yours can follow a similar approach.
Competitor research also helps you stay consistent with, and competitive against commission rates in your niche.
Some last words
When it comes to growing an e-commerce business, affiliate marketing is but one aspect that you need to take care of.
As the funding and growth partner of digital merchants, our team at Choco Up understands your problems and we’re here to help.
About Choco Up
Choco Up is a global technology and financial services platform, offering revenue-based financing and business growth solutions for digital merchants and startups.
With data analytics and machine learning at its core, Choco Up employs vast integrations to automate fund deployment, providing fast-growing companies with zero-equity funding in a quick and seamless manner.
We currently have offices in Singapore and Hong Kong and serve clients worldwide, providing smart-growth analytics and global payment solutions to fuel their growth.