Monday, 06 January 2020

What are Affiliate Agreements?

Written by Daniel Fane

Reading Time: 4 minutesReading Time: 4 minutes

Affiliate agreements are, in their simplest form, an agreement for one online site to be advertised on another. As the internet continues to grow, so too does the popularity of these kinds of marketing strategies. To be able to traffic viewers from through one popular site to yours is a valuable way to increase your brand’s online presence. Here’s everything you need to know about these forms of agreements and how best to use them.

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How affiliate agreements work

An affiliate agreement involves three key figures:

  • The party wanting to advertise (‘advertiser’).
  • The party with the desired website (the ‘host’ site).
  • The person who visits the website (‘consumer’).

In these, the host site holds a lot of bargaining power. Often, the party looking to advertise will seek a website who receives a lot of traffic from potential consumers.

The advertiser will approach the host with an advertising agreement, negotiate its terms, and outline the nature of the advertising campaign. Specifically, they will consider:

  • The size or frequency of the advertisement’s appearance.
  • Whether there is a certain demographic being targeted.
  • How long the campaign will be run for.

All of these will then factor into the issue of payment (as we discuss below). All of these factors interact to increase or decrease the cost of the campaign.

What make affiliate agreements it different?

Unlike your normal advertising campaign, payment is largely reliant on consumer engagement with the ad. Where companies often pay for billboards or tv spots in the hope that there is an audience to witness it, in an affiliate agreement the advertiser will pay only for the amount of engagement received. Hence, as the advertiser, you are ideally not paying for wasted ad-space and only for consumers you actually engage with. While variations exist, the agreement takes four main forms.

1. Pay-per-click

The most basic and easily used of the four, pay-per-click is paid…per click. The consumer doesn’t even necessarily have to have done it on purpose even. As a result, the amount of money paid per click is generally much smaller than the other two. Or alternatively, payment is made at certain thresholds of traffic (say, every 1000 clicks).

2. Pay-per-sale

Here, the advertising business will pay the host site for the number of sales directly made by clicking the advertisement. As this requires more from the consumer, to both click and then purchase, the payout to the host is generally the highest of the four.

There is a variation on this form as well where the host receives actual revenue from each sale, rather than a set fee per sale. For example, if you have ever seen someone on YouTube read an ad and request you use their link or code for the site, they are likely in this type of agreement with the company they’re advertising. This agreement is a strong negotiating tactic from the advertising company to incentivise more extensive advertising from the host.

3. Pay-per-lead

Similar to pay-per-sale, this is for advertising companies who are seeking consumer information rather than direct sales. For example, an advertisement for individuals to signup to a newsletter may be used by a company to collect consumer information to sell on to other companies. This is where the term lead is, as it is not generating direct revenue for the advertising company, but rather leads to future funds.

4. Pay-per-view

Limited mostly to video platforms, like YouTube, this form is much more like regular tv-advertising. However, where tv advertising is paid for upfront, this remains on a per-view basis. Likewise, targeted advertising allows you to restrict your demographics as to avoid wasted views. This offers a great opportunity for direct advertising on a limited budget.

For example, on YouTube you can select the maximum amount of money you are willing to spend on running the ad before videos. Likewise, you may select how long to run the ad for. Whatever max is reached first between the two, either money or time, the ad will stop. So, if your campaign lasted for 5 days, but only used a 5th of the max money allocated you won’t waste money on lost views.

What to look out for when forming affiliate agreements

As with any contract, if you are looking to enter into one of these programs, or have already begun direct negotiations with a potential host site, we recommend having a lawyer review any contracts prior to completing the agreement.

The differences between the methods of payment can be subtle and it’s important you are aware of what you agreeing to pay for.

Likewise, ensuring your campaign is in line with Australian standards is important to avoid any legal backlash. Even if the host site says your campaign is legal, they may be hosting from abroad and exist under different standards of advertising. Having a commercial lawyer review the campaign will likely avoid any of these issues.

Final thoughts

Affiliate agreements offer a great way for anyone to advertise cost-effectively to a large audience. Regardless of what method of pay-per you decide on, it is easy to find one that best suits your needs and budget. Moreover, affiliate programs exist now to put you in touch with the best, suitable platforms to host your ads. However, take note that these programs require their own brokering fees. Always consider what option best suits you and your business.

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