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You’re starting to build something. From scratch. With limited access to capital or a small budget for marketing…
…and you feel anxious about spending money on marketing, given that there are no guarantees for a positive return on your expenditure. You might feel a tight knot in your stomach at the idea of spending money, given that there’s so little of it available to invest in growing your business.
This mindset—and this challenge—happens to more new entrepreneurs than you might think. Some established, experienced builders are habitual resource-hoarders and have a tough time writing cheques… even after years of observing positive outcomes from smart investments.
Subconsciously, we deal with this by thinking about business growth through the lens of risk mitigation. Minimizing and eliminating risk in how we spend those dollars. It’s a natural, very human response.
This is why one of my go-to mechanisms for marketing investment in the earliest days of bootstrapping a new venture is affiliate marketing. Though it costs more in absolute terms than other fully-scaled, well-operated tactics… the mitigation of risk is nearly absolute.
What is it?
Affiliate marketing is a form of performance-based marketing, and an evolution of the “travelling salesman” commission sales model employed by tangible product companies extensively in the mid-20th century.
In an affiliate marketing model, you compensate third parties with a fixed or variable fee on each closed sale that they refer to you. The model is used extensively across both B2C and B2B markets, and can be particularly powerful when used as a channel to power eCommerce-enabled product or service sales.
How Does it Work?
As with everything related to building something, there’s nuance worth understanding. Here we go—
The Affiliate Marketing Model
The model itself is very straightforward—you make an offer to an affiliate partner (or network) for X if they sell Y for you. The people (or organizations) selling for you aren’t employees, and are compensated with commissions as independent agents.
In essence, you’re buying access to an audience in exchange for a portion of the revenue generated from that audience.
For example :
You offer affiliates a 10% commission on product sales.
An affiliate generates a sale valued at $500.
You compensate the affiliate $50 for that sale.
There are no other fees that you pay to the affiliate, and you don’t have any obligation beyond paying that $50 after you’ve been paid the $500. This is the mechanism that aggressively mitigates your risk—no sale for $500, no payment out for $50.
Processes, Platforms, and Systems
There are three main layers to consider when integrating an affiliate marketing model into what you’re building—
Partner Recruitment : how are you going to attract affiliate partners?
Partner Support : how are you going to support their efforts to sell your products? What content do you need to provide to partners?
Attribution & Compensation : how will the validity of a sale be mutually-assured, and how will you attribute the sale to a given partner? What’s the compensation structure that’s mutually-agreeable? How will you pay them?
Thankfully, there are a number of high-quality affiliate networks and technology platforms available that cover the broad strokes and operational details of working with affiliate partners. We’ll list off a few at the end of the post.
Here’s an example :
Let’s say that you own an eCommerce brand which sells skincare products on its website. You sign up for an affiliate network, which integrates with your eCommerce platform and handles the partner attribution—automatically attributing sales to affiliate partners based on attribution data carried through to your cart and checkout page. The network also handles payouts—billing you for commissions and transferring funds to the affiliate partners who earned them. With the operational details of administering your program managed by the network, you can focus your time and energy on recruiting affiliates to join the program and creating marketing content and offers for them to use.
Affiliate marketing isn’t solely for eCommerce brands (though that’s the space where it’s facilitated the most smoothly at scale). Anyone can use the affiliate marketing model to generate revenue for their organization, and it isn’t necessary to deploy technology tools to support the model at the beginning. In fact, I use an affiliate model for my Trade Readiness Scorecard service, and compensate referrals based on a partner code entered by the buyer during checkout (or prepopulated with a unique link).
Pros and Cons
As with all marketing tactics, there are pros and cons to balance out when deciding how to build affiliate marketing into your overall marketing system (especially if you want that system to be self-reinforcing, as I wrote about in a recent post).
Some of the pros for affiliate marketing :
Low startup costs : especially if you sign up for an affiliate platform that already integrates with your other systems.
Low ongoing fees : most technology platforms for affiliate marketing have a low monthly subscription.
Time investments are highly leveraged : once you set up your program, recruit partners, and create supporting content, there’s very little time involved in managing the program.
Low risk : unlike traditional digital advertising, you only pay out commissions when sales are closed (most platforms will allow you to delay payment beyond a returns & exchange period to prevent fraud).
Some of the cons of affiliate marketing :
Partner recruitment can be difficult and time-consuming : you essentially need to attract and onboard an audience of partners.
Established networks often levy additional fees on top of commissions : for instance, you may opt to pay a 10% commission to the affiliate, and the network levies a 5% placement fee as well as your monthly subscription fee—always model the cost structure and make sure your margin supports it!
Higher costs over time : in many cases, paying commissions on sales will be more expensive than running paid media campaigns as you scale. The risk mitigation is often worth that premium in the beginning, but doesn’t always stay that way.
Here’s the Google Sheet that I use to model out costs and revenue of different channels within a marketing system :
Self-Reinforcing Activities
I’m a big believer in finding efficiencies by eroding silos (or preventing them from forming). Especially in marketing. Recently, I wrote :
Though marketing activities are separate, they’re all a part of the same system.
And that system needs to be self-reinforcing to operate at peak effectiveness. The different buckets within the marketing mix need to, well, mix together to create something greater than the sum of the parts.
Any effective marketing system is an optimized balance of different parts of the marketing mix (product, price, placement, promotion, people).
So, for any marketing activity (especially affiliate marketing), you should look for opportunities to build value and integrate with other marketing activities. Integrate as many marketing components as possible, and the system reinforces itself and gains strength over time.
For example :
If you’re creating content for social media marketing, actively seek to re-purpose and package it for use in affiliate marketing at the same time. Treat the creation of content like it’s the production of a product.
Create pricing structures that offer value for your affiliate partners and your customers—like a “bonus 5”, where an affiliate partner’s audience might get an exclusive offer for an extra 5% discount on a Black Friday / Cyber Monday sale item.
Customize landing pages for affiliate marketing that place special emphasis on email or SMS capture (this helps to lower the cost of marketing to that customer over time, by bumping that customer from a high-cost affiliate channel to a low-cost email channel)
Ultimately the more that your marketing activities work together in harmony, the more productive they are. In other words, you earn more revenue for each dollar invested in marketing when your marketing mix self-reinforces.
Summing Up
Affiliate marketing is a great entry point for building scale in your marketing activities and mitigating risk while you figure out what works and what doesn’t. Having an army of sales agents out working on your behalf is often preferable to hiring an army of sales reps in the early days.
But the costs add up over time. As your other marketing activities mature and begin delivering value more efficiently, affiliate marketing may lose its appeal. That doesn’t mean giving up on affiliate marketing at a certain point in your growth though.
Early on, think of affiliate marketing as revenue acquisition—it generates sales for you. As time progresses though, start thinking of affiliate marketing as a form of customer acquisition.
That $50 that you spent in affiliate commissions to acquire a single $500 sale is a bit meh (10% cost of sales). But if you bump that customer relationship to your direct marketing activities and over time they spend a total of $5,000 without additional commissions, the cost of that revenue acquisition is a much more attractive 1%.
Affiliate Marketing Platforms I’ve Used
I’ve used all of these platforms for various marketing programs at different organizations over the years. I’m not saying that all (or any) are perfect for you, but I’ve generally been content with what I’ve gotten from the experience.
As with everything, do your due diligence. Model your cost structure, and read the fine print. Most importantly, be open to experimentation and adaptation.
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