Thanks to Carsten Cumbrowski for offering this very detailed overview (and evolution) of the affiliate marketing options available.

The Pay-Per-Impression / Cost-Per-Mil* (CPM) Model (*Mil = 1000)

The merchant site pays the affiliate $x.xx amount of money for every 1000 impressions. An “impression” is NOT a click; it is a page view or display of the ad. The ad can be a text ad, a banner image or rich media.

The CPM compensation model was, for a while, abandoned due to fraud and lack of results. Then, in 2005, Google revived the CPM model with its Google AdWords “site-targeting” feature. This new approach allows an Advertiser to display AdSense ads on websites that run AdSense ads. AdSense publisher websites that allow Advertisers to target their site directly show a small link labeled “Advertise on this site” in the AdSense ad which redirects to a page at Google AdWords that explains the feature.

The The Pay-Per-Click (PPC) / Cost-Per-Click (CPC) Model

In this model, the Advertiser pays an affiliate $x.xx amount of money every time a visitor (potential customer) clicks on the Advertiser’s ad. It is irrelevant (in terms of compensation) how often an ad is displayed. Commission is due only when the ad is clicked.

Like the Pay-Per-Impression (CPM) model, the Pay-Per-Click (PPC) model was popular during the dot com boom at the end of the 1990s, but – due to rampant problems with click fraud – was mostly abandoned by merchants for advertisements on other websites.

The PPC model was kept alive by the PPC search engine Goto.com, which became Overture.com and is now owned by Yahoo! and renamed from “Yahoo! Sponsored Search” to “Yahoo! Search Marketing.”

Google launched its PPC service AdWords in 2000. Ask Jeeves, now simply Ask.com, followed with its PPC service in 2005 called Ask Sponsored Listings, and MSN.com followed in 2006 with AdCenter. Other PPC services are Miva/findwhat.com, ah-ha (now Enhance Interactive) and 7Search.com

Contextual Advertising

The big comeback of PPC came when Google launched AdSense in 2003, the birth of contextual advertising. “Contextual Advertising” means that a search engine scans pages to match ads with the context of a page. Google AdWords Advertisers have the choice whether or not they want their ads being displayed on AdSense publisher websites, what Google calls their “Content Network”.

To best explain Google AdSense, here is a quote from Google’s History at Google’s corporate Website. Google AdSense:

… Offering web sites of all sizes a way to easily generate revenue through placement of highly targeted ads adjacent to their content. Google AdSense technology analyzes the text on any given page and delivers ads that are appropriate and relevant, increasing the usefulness of the page and the likelihood that those viewing it will actually click on the advertising presented there.”

Yahoo!’s version of AdSense called Yahoo! Publisher Network (YPN) was launched (beta) in 2005. Microsoft launched adCenter (beta) in 2006.

Search Engine Marketing (SEM)

Classic PPC search engine marketing is not affiliate marketing. It is an entirely different type of Internet marketing and has only some technical details in common with old PPC/CPC affiliate marketing. Ads are primarily displayed at the search engine search results pages (SERPs) next to organic, free search results.

Contextual advertising introduced with Google AdSense is also not affiliate marketing since there is no direct partnership between the advertiser, who creates and pays for the ad, and the publisher who displays the ads on his website.

PPC and Contextual advertising are generally referred to as search engine marketing (SEM) and is often wrongly confused with search engine optimization (SEO). SEO is about improving the ranking of a site in the organic, free SERPs at major search engines via technical means and deep understanding of the complicated ranking algorithms used by modern search engines.

The Pay-Per-Lead / Cost-Per-Action (CPA), Cost-Per-Lead (CPL) Model

CPA can also stand for Cost-Per-Acquisition rather than Cost-Per-Action.

The Advertiser pays the affiliate a flat $x.xx amount in commission if a referred visitor performs a specific action on the Advertiser’s site. This could be an action like filling out a form, signing up for a newsletter or creating an account. The CPA model is very popular with online services like credit card providers, insurance services, DVD and video game rental services and loans and mortgages.

Due to the typically high flat commission amount, CPA is very attractive for PPC affiliates who do not have a permanent website or an established user base. Some affiliates have only a single landing page optimized for specific PPC campaigns with specific offers from individual Advertisers. These affiliates are, in effect, doing what an in-house search engine marketing team would do for the Advertiser.

Some Advertisers love PPC affiliates, while others hate them. It happens quite frequently that affiliate ads actually outrank the Advertiser’s own ads for the same keywords or phrases! For an Advertiser, the positive thing about having and supporting PPC affiliates is that many keywords and phrases can be covered. Having numerous PPC affiliates who are working hard can be like having ten or more in-house teams of search engine marketers.

If you run a commercial site that sells products or services: before you consider the CPA model, make sure to have mechanisms in place to validate the quality of referred leads. Your program will be vulnerable to fraud – that is, affiliates who generate tons of “fake” leads – unless you have a system in place to verify the quality of the leads.

The Pay-Per-Sale / Cost-Per-Sale (CPS) Model

In this case, the Advertiser pays the affiliate a percentage (%) of the order amount (sale) that occurred when the affiliate referred a customer (usually via a link) to the Advertiser’s site.

This model is used by most online retailers today.

Here are some basic tips for advertisers (merchants) who are considering starting an affiliate program with the CPS compensation model:

You should not pay commissions that result in your losing money on an order. You will gain new customers because of the affiliate program, but you will also pay commissions for returning customers. For example, let’s say that you are a merchant who sells apples. Mary Smith bought 100 apples from your site a year ago. Now, she searches for “apples” on a search engine, and finds a site that lists all types of produce.

Mary recognizes the name of your site (she’s a return customer, after all), clicks on the link to your site, and buys another 100 apples from you. In this case, you will have to pay a commission to the affiliate that referred Mary back to your site.

Today’s Internet shoppers are very bargain-conscious. Comparison shopping sites, coupon sites, cash-back shopping and charity sites make up a large percentage of successful affiliates, and are often visited by shoppers before they make a purchase. Because of this, it pays to look at your affiliate program as a customer retention tool.

Customer loyalty is not as easy online as it is in “brick and mortar” stores, because your competition is not down the street or in another town, it is always just a click away. Let’s go back to the example of Mary and the apples. If Mary goes to a page that lists 10 apple merchants, but you are not listed, then you are likely to lose her business as Mary clicks on one of the merchants listed right in front of her. If you are there, however, in the list, Mary is likely to return to your online business if she had a great previous experience with you (even if your prices are a little higher than your competitors’ prices!).

(Note: Some comparison shopping sites use affiliate programs to generate revenue; the largest ones are usually charging inclusion fees or charging per click.)

Affiliate Networks

Operating an affiliate program to drive traffic to your website has never been easier. Most sites utilize third party services (so-called affiliate networks). Those services provide the infrastructure for you, the merchant, to track all traffic and referrals to your website.

Networks also work as a recruiting platform to find websites willing to promote your products or services. The integration of their services usually takes just a few days or sometimes just a few hours.

Some affiliate networks also help you to keep overhead low (such as dispensing payment to affiliates).

Networks usually charge a fee of 20%-30% of the commission you pay to affiliates. For example, if an affiliate refers a customer who makes a $100 purchase and you pay the affiliate a commission of 10% (or $10), then you would pay an additional fee to the network: 20%-30% of the $10 commission, or $2-$3 to the network. Therefore, your total cost for the referral is $12 – $13.