It’s no secret that the online customer journey is in the midst of a dramatic transformation. Rather than stumble aimlessly down traditional ad-click paths, savvy Internet shoppers are developing ‘discovery and recommendation’ relationships with trusted sources. These niche-market websites, bloggers and influencers (“Publishers”) create value by curating content around passionate, interest-based communities and spotlighting affinity products to their audiences.

This new customer-centric dynamic represents a radical shift, not only in consumer values but in the economics of consumption itself – from capital “M” Marketing that crams paid advertising through clogged Mass Media funnels, to personalized yet truly scalable “word-of-mouth” that has the added benefit of being good “marketing.” The Affiliate marketing model – a performance-based partnership between Merchants and Publishers – is the engine that’s powering this consumer revolution.

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Years ago I was hired to run e-commerce at a startup. A handful of online marketing campaigns were already underway – search, display, retargeting, and a program I’d heard about but not touched before, Affiliate marketing. The first accurate P&L we received revealed a painful truth. After figuring in the previously hidden costs of shipping, materials, manufacturing and a half-dozen other expenses – the campaigns were actually losing money. All except Affiliate.

During initial inquiries into the mechanics of Affiliate marketing, a number of colleagues dismissed the model as “a dim digital outpost of cheap deal-of-the-day sites.”

But how then to explain the significantly positive returns on our marketing investment? Or the double-digit percentages of monthly revenue delivered by these Affiliate ‘Dark Lords’?

To help unravel the mystery and separate fact from fiction, I spoke to Affiliate Traction CEO and founder, Greg Shepard. A thought leader who’s helped define the Affiliate space for more than 17 years, Greg built AT to help brands and Internet retailers manage their Affiliate programs.

“When I started, Affiliate was barely 1% of a company’s revenue,” he says from AT’s offices in Santa Cruz, California. “Now it’s not uncommon to see clients with 30-50% of their revenue coming from Affiliate programs. It’s dramatically changed.”

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Greg says that marketers who consider Affiliate an advertising “channel” – like search, display or shopping comparison engines – are missing the point.

“Affiliate is not a single channel; it encompasses all of them. Affiliate is simply a way of paying for advertising. At any given time an Affiliate might be doing search and display buying, or using retargeting software for cart abandonment. All of those channels can be powered by Affiliates. That’s the cool new part of this ever-evolving industry.”

The Affiliate marketing model is purely performance-based. Rather than paying for a click (or vaguely suspect KPIs like the retargeting “view through”), Merchants pay a commission only on conversions (i.e., a sale, a “like,” or an email sign up). This model incentivizes Affiliate marketers to put skin in the game, build authentic audiences and actively drive revenue for their Merchant partners. It’s notably different from Google Adwords (click me – I bought the top spot!) or display ads (Find me if you can… I’m below the fold!).

“Which online advertising models drive actually sales?” Greg asks, hypothetically. “And which are purely for branding and just cost money?’”

“For CPC and CPM campaigns, the marketer says, ‘I want to be on this page, across from this movie star’, and placement is chosen; that’s purely a branding exercise that will deliver little direct revenue.” Affiliates on the other hand attract shoppers who are more likely to have an affinity for the product and are ready to pull out their credit cards.

Greg addresses the question of ‘deal sites’ head on. “It’s true, discounts and rebates drive most of Affiliate revenue.” But he insists that the argument about discounts diminishing Brands “is totally wrong.”

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The proliferation (and overwhelming success) of rebate and loyalty programs, discount marketplaces and coupon sites (think Groupon, RetailMeNot and Savings.com) elicit concerns about Brand equity and pricing control. Does Affiliate discounting scrape the “premium” luster off of shiny new Brands?

“I actually took an economics class about this,” says Greg. “Studies show that the brain has this incredible emotional ‘light up’ when people get a deal. It makes them excited; they’re having fun. And that emotion gets attached to the Brand.”

Commissioned studies by Forrester Consulting report that active coupon users spend nearly two times more online, and are more likely to try or switch to a new brand. Coupons can also “close the deal” for undecided purchasers.

“There’s ten years of data on this. Offering deals to consumers actually builds brand equity, builds customer lifetime value, and builds loyalty to the Brand.”

But “deals” are not all there is to the Affiliate story. “While it’s true that a majority of Affiliate revenue comes from discounts,” says Greg, “the fact is that it’s not all price-driven.”

Here’s where the potential of Affiliate marketing gets interesting.

Remember our “trusted sources” from the top? Creating real value around passionate interests requires an investment in time and resources. Publishers can get a return on that investment by joining Affiliate networks, curating products that fit their audience, and collecting a commission from partner Merchants on each sale.

“Affiliates often take it upon themselves to promote a Merchant’s products at their own expense,” Greg says. “This model essentially front-loads e-commerce sales and back-loads costs. For the Merchant, it’s like free advertising. For the Publisher, it’s revenue.”

The Affiliate marketing model is powering the democratization of consumer economics in a way that could only happen in the era of the Internet.

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Looking to the future, Greg says he’ll continue to focus on big ideas that make the customer experience fun and exciting. One of those ideas involves a new credit card-linking program, revealed here for the fist time.

“So the customer says, ‘I’m going to go in-store before I buy because I want to listen to these headphones, try on these shoes, or smell this cologne.’ A rebate is offered for purchasing the product at a particular store. The customer registers their credit card with the program, swipes it at the physical store when checking out, and within 24 hours the Brand credits the rebate back directly to the customer’s card. There’s no systems integration, the store sales associate doesn’t know it’s happened, the consumer has no embarrassment, and the brand can track the transaction. It’s a real disrupter.”

Programs like these continue to grow and diversify what it means to be an “Affiliate.”

“For online shopping,” Greg concludes, “there’s search and Amazon at the head, and then everything else. And “everything else” is Affiliate – the specialty niches and creative Publishers that drive new products and real revenue towards the head.”

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