Affiliate marketing
According to Gallaugher et al., affiliate marketing is classified as a type of online advertising, where merchants share percentage of sales revenue generated by each customer, who arrived to the company's website via a content provider. Content provider, also referred to as affiliate, usually places an online ad (for example a banner or a text link) at its website. When visitors click at the ad, they are redirected to merchant's website and affiliation is tracked by a cookie stored on visitors' computers. (Gallaugher, Auger, Barnir, 2001)
Merchants, within online marketing called advertisers, pay for the content providers' services only when a visitor coming from their website executes a specified action. Such action can be a purchase of a product, filling in a form with personal data, subscription to a newsletter etc. (ibid.).
Duffy points out, that affiliates take the whole risk connected with marketing merchant's products. The concept is simple. If affiliate's marketing efforts work, affiliate makes money. If they don't, affiliate does not make money and pays opportunity costs. There are no limitations for an affiliate how much money it can spend or earn (Duffy, 2005).
An agreement between the content provider and merchant is referred to as affiliate program. Chatterjee (Chatterjee, 2002) defines affiliate program as an arrangement between a company and many affiliate firms characterized by unidirectional linking with the purpose of generating traffic and transactions similar to 'instant access to salesforce of thousands.'
Chatterjee describes affiliate marketing as transaction oriented, without any commitment to joint future success or exclusivity restrictions. Affiliate programs require minimal effort and investment and may be terminated easily. (Chatterjee, 2002).
Employing affiliate marketing is advantageous for merchants from many perspectives. Hoffman and Novak claim that by employing affiliate marketing, merchants can let thousands of independent websites, called also content providers, to display ads for its products and only pay them when the ad would actually lead to a sale. Advertising costs move from fixed to variable costs, which can facilitate allocating money to advertising (Hoffman & Novak, 2000):
In the revenue-sharing mode, the price of advertising is a function of the desired response by the market. Measurable market responses include key marketing objectives like unit sales, software downloads, qualified leads, product inquiries, and so on. Thus, the results-oriented model is the answer for marketing managers who are being asked to justify the sums earmarked in their budgets for Internet advertising.
As Hoffman and Novak demonstrated, affiliate marketing enables better targeting of online advertising which improve their effectiveness. Content providers have to choose affiliate programs very carefully, because of the opportunity cost connected with not employing competing programs. Therefore, they target the advertising even more precisely than merchants themselves, as otherwise they would not get optimal income. (Hoffman & Novak, 2000).
Recommendation of a product or service on a partner website can create halo effect and thus encourage the customers to purchase (Gallaugher et al., 2001). Apart from increasing the sales, employing the content providers for online promotion is also beneficial for enhancing the reach and creating broader exposure (Chatterjee, 2002). Moreover, through content providers, companies can gain customers that are usually very difficult to reach and save on online campaigns planning (Hoffman & Novak, 2000).
Gallaugher et al. add that using affiliate marketing is more cost-effective to the merchants than other forms of online advertising, because it diminishes the administrative costs connected with buying advertising. If the program is managed well, it can enable advertising on such a great amount of websites that would be otherwise impossible to acquire (Gallaugher et al., 2001).
Nevertheless, in order to get the exposure of merchants' ads at high number of websites, it is crucial to persuade content providers to join the affiliate program and to offer them sufficient incentives to remain using it (Chaffey, 2003). However, the literature does not provide answers for further questions about this topic - such as what are the appropriate incentives or why should content providers prefer affiliate marketing to other forms of revenue sources.
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