These days, many pursuing work from home (WFH) careers choose affiliate marketing, an online business model whose popularity has skyrocketed ever since Amazon invented the world’s first affiliate program in 1996. What’s driven affiliate marketing (AM) to such prominence in only 23 years has been the opportunity to earn passive income: regular earnings requiring little or no effort.
This article explains affiliate marketing, the model’s pros and cons, and the steps to launch an affiliate business from home. But to understand affiliate marketing, one first needs to understand the critical nature of passive income and how the affiliate model generates that income.
Most of us earn active income derived from sacrificing time and effort to perform services for an employer or client. By contrast, one earns passive income from ventures requiring no participation during a given time interval.
For much of history, before Amazon introduced affiliate marketing, passive income mostly accrued to wealthy investors who outsourced all the management of their investments. A good example of this strategy is apartment complex owners who pay vendors for all of a property’s management and maintenance instead of doing the work themselves. The owner earns income, but does no work to produce those earnings.
Active income has severe limitations. During any given year, a doctor can only treat a finite number of patients, a lawyer can only work on a finite number of cases, and an author can only write a finite number of books and articles. Salaried employees find themselves limited by the agreements they’ve negotiated and hourly workers can only earn more through overtime.
In short, to earn more money, most of us either need to work longer hours or work more efficiently. Either way, the added earnings require more productivity.
But with online methods that generate passive income, like affiliate marketing, constraints like these no longer apply. Theoretically, once one completes the initial work to build automated systems based on these techniques, some passive-income producing approaches may even be infinitely scalable.
One of the most compelling explanations of this distinction appears in this viral video with almost a quarter of a million views. It’s by affiliate marketing industry expert and 30-year-old multimillionaire Kevin David.
Any affiliate marketing transaction involves three parties:
When an affiliate publisher promotes a product through an article, podcast, or video, and a customer buys the product, the publisher earns a percentage of the sale. So essentially, these transactions involve performance marketing through referrals.
A customer is any entity, whether business or consumer, that buys from a merchant through an affiliate relationship. It’s likely that many readers of this Busted Cubicle article are customers that have purchased products online through affiliates but never before heard of affiliate marketing as a business model. That’s because potential customers often don’t know that the site on which they’re listening to, watching, or reading content is actually an affiliate marketing website.
Amazon, for example, only requires publishers to disclose brief “fine print” language about their affiliate relationship, and in other industries, the disclosure standards are even more lax. For example, it’s not unusual to observe online publications that review the “top ten” software applications for a particular purpose. Typically, each of the ten reviews contains an affiliate link to a merchant that pays the publication a commission for any sale that might result—even though such publications often don’t disclose their financial relationship with the merchant to readers.
The merchant, such as Amazon, provides the digital marketplace platform. Merchants like Amazon also store inventory, process payments, pack the products, and provide the shipping logistics that deliver packages to customers.
In some cases, merchants host third-party sellers as well. Amazon brands their hosting service as Amazon FBA, which encompasses all the products on their website marked “Fulfilled by Amazon.”
Amazon also operates its own affiliate network called Amazon Associates, which delivers payments for sales commissions. But merchants don’t always operate their own networks. Thousands of affiliate networks exist that are managed by third-party companies, such as ClickBank and Rakuten Marketing.
Affiliates publish content—audio and video programs, images, and articles—that drive potential customers to merchants through the networks that reward the affiliates with commissions from their sales. Indeed, the affiliate’s primary objective is to promote sales through their affiliate links.
Most of these affiliates operate blogs that review products like the software applications in the example above. However, anyone that’s built a large enough audience in any online venue can monetize their content through affiliate links. They can place these links on social media sites like Facebook and Twitter. Amateur models known as “influencers” are particularly fond of displaying commission-paying affiliate links along with their photos and videos on Instagram and Snapchat. And YouTube might be one of the most influential venues for affiliate links in the “low bar” descriptions below videos.
But just because affiliate marketing offers so much potential, is jumping into a new affiliate marketing business a savvy business decision? After all, what good does it do one to spend time and effort “climbing a ladder up the wrong building?”
Here’s a summary of the pros and cons to launching an affiliate marketing business.
We disagree with a few authorities who curiously assert that no product niche selection is necessary for success as an affiliate marketer. That assertion doesn’t fit the reality of today’s competitive online marketplaces. On the contrary, effective niche and product selections amount to the greatest determinants of affiliate marketing success. And ideally, a reasonable product niche would be one that the entrepreneur has some knowledge of and interest in.
In general, other things equal, high-priced, high value services that pay large commissions are better candidates for affiliate promotion than low-priced products that pay small commissions. Consider two scenarios:
In Scenario Two, the affiliate will earn $1,200 from just the very first sale. But by contrast, to earn an equivalent amount, the affiliate in Scenario One will have to win 1,200 sales!
Moreover, for many products, affiliates like those in the first scenario will need to pay for inventory, photography, and image editing. They will also need to write sales copy and produce compelling promotional content such as reviews—either written or on video—that are effective at driving the sales of all these products.
Readers should recognize from this example that vast differences exist in the potential economic viability of products and services for successful affiliate promotion. Overall, a sales price of about $20 provides a minimum threshold below which it’s rarely worthwhile to promote a product as an affiliate.
Other things being equal, high-value, high-ticket products and services work best in an affiliate marketing framework. These tend to be the kinds of purchases for which buyers seek the most presale information online. Also, production and shipping costs tend to account for lower percentages of the total costs of these items, and items given as gifts tend to be returned less frequently.