Inventory Financing: Everything You Need To Know
Inventory financing is a form of asset-based loan or line of credit (LOC) made available for businesses to purchase inventory. Learn more about it here.
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“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!
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:
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:
→ The takeaway: In e-commerce affiliate marketing, affiliate partners may be rewarded for helping the advertiser drive traffic, leads or purchases. Performance tracking is often done through unique referral links or discount codes.
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.
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.
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!
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.
→ The takeaway: There are several advantages with e-commerce affiliate marketing. As an online business working with affiliate partners, you can:
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.
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.
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?
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.)
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.
Involved affiliate marketers not only have knowledge in the industry niche. They’ve actually tried and used the product themselves.
“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.
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.
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.
You can compute the CLV for your business using the formula below:
Learn more: 13 Key E-commerce Metrics You Must Track: A Complete Checklist
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:
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.
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.
Put yourself in the shoes of an affiliate partner — of course cash is most desirable.
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).
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:
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.
When it comes to growing an e-commerce business, affiliate marketing is but one aspect that you need to take care of.
From e-commerce funding to increasing conversion rate and expanding across borders, each is a pain point that could lead to countless sleepless nights.
As the funding and growth partner of digital merchants, our team at Choco Up understands your problems and we’re here to help.
Ready to grow and scale your business? Learn more about our client success stories or apply for funding now!
Grow your business with Choco Up
Inventory financing is a form of asset-based loan or line of credit (LOC) made available for businesses to purchase inventory. Learn more about it here.
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