This is a guest post from Rae Hoffman of Sugarrae.com.

A recent new hire had a few questions about affiliate marketing after her first few weeks on the job and since they’re questions I hear frequently from new hires, I asked Linda if she might have a use for some FAQ’s aimed at new affiliates. Obviously, her answer was yes. Below is a listing of the most common questions I get with my answers to them. My goal is to explain things so they can be easily understood by someone not familiar with the ins and outs of affiliate marketing.

What is affiliate marketing?

Affiliate marketing boils down to one basic action – paying an online publisher (someone who owns and operates a website) a commission for referring traffic or customers or sales (which actions are paid for are determined by the merchant) to a participating merchant’s website. To put it even simpler terms, affiliate marketers are basically salespeople who don’t actually work for the company they make sales for and only get paid in commissions.

How much can someone make with affiliate marketing?

It all depends. The honest answer is, it depends on you. I read somewhere (sorry, can’t remember where) that something like 90% of affiliates will never make more than 500 dollars with affiliate programs. While I can’t say for sure if that’s true, I can tell you that the 80/20 rule, at minimum, definitely applies in affiliate marketing. That said, affiliate marketing can be extremely lucrative for those who do it well.

Earning at least an average income is very common for the “20″ that do well in AM. A six figure income per year for an affiliate marketer is not considered “all-star” and earning a high six figure income (aka, one that starts with a number higher than 1 or 2) is not unheard of. While earning a full time income is indeed the exception and not the rule, there is nothing preventing you from being an exception except for sheer drive, willingness to learn, hard work (and a bit of talent).

What are the most lucrative affiliate arenas?

Years ago, the affiliate industry had a “big three” that were considered the big daddy’s of affiliate revenue; porn, pills and casino (which some humorously referred to as “PPC”). Nowadays, the adult industry is saturated with free ways to “get the goods”, the pills industry is no longer a “gray area” in the eyes of the law and the casino industry took a big hit thanks to some U.S. Legislation.

That said, there are still industries known for providing big revenues if you can rank for the core keywords within them. Finance (credit cards, payday loans, insurance, etc.) and telecommunications (cell phones, VoIP, etc.) are two such industries. For me, “lucrative” is all about the ROI. For instance, a site making $2,000 a month would not be considered a “big revenue site” by any means.

However, if that site can earn $2,000 a month while requiring 20 hours to set it up and 4 hours a year to maintain it, it ends up earning about $1000 dollars an hour in its first year and $6000 dollars per hour in subsequent years. While the site’s earnings aren’t “lucrative” in a face value sense, they are in an ROI sense.

The best strategy in my eyes is to build sites in both lucrative arenas and lucrative ROI sectors.

What is the difference between CPA, CPS, CPL and CPC?

All of these terms refer to how the merchant runs their program. Merchants pay their affiliate marketers on either a CPA, CPS, CPL and CPC basis. CPA, CPS and CPL are very similar to one another, while CPC stands out a bit:

  • CPA stands for Cost Per Action (and depending on the program, might also be referred to as Cost Per Acquisition). CPA is all encompassing and it simply means the merchant pays you for what is pre-defines as a desired action. That action may be a lead, a sale, a click or whatever other action the merchant pre-defines.
  • CPS stands for Cost Per Sale. And that is exactly what it sounds like. With CPS programs the affiliate is only paid for the traffic that actually buys, regardless of how much traffic they actually send. If you send 100 people and five of them make a purchase, you will be paid on those five. If you send 100 people and none of them buy, then you won’t get paid any of them.
  • CPL stands for Cost Per Lead (PPL, or Pay Per Lead, is also used in this realm. It simply means the affiliate is paid per lead instead of referring to the merchant only having to pay a cost per lead). Basically, CPL is usually used in instances where the merchant may or may not turn down someone who wants their product (a credit card for instance) or where the merchant pays for a lead they then will attempt to turn into a customer themselves (a mailing list sign up for instance). CPL programs usually define a lead as someone who fills out their lead form with valid information and is a “qualified lead” (meaning they meet general buyer criteria as far as the merchant is concerned). Their payout is also typically less than CPS or CPA programs in the same space, but the conversions for the affiliate are also easier to get.
  • CPC can stand for two separate things. The first is Cost Per Conversion, which is simply another way of saying CPA. The second stands for Cost Per Click. Way back in the day, you could get paid for sending traffic, regardless of whether or not in converted, to some affiliate program merchants. Now a days though, being paid for clicks you send regardless of their conversion is usually only found in contextual advertising.

How do you find affiliate programs?

Every marketer is going to have a different method. For newer affiliates, I’d recommend staying within the bigger affiliate networks (Commission Junction, Linkshare, Shareasale, Pepperjam Network, etc) at first. The bigger networks will make sure the proper tax forms are filed and that checks are issued on a regular basis.

A lot of seasoned affiliate marketers like what are commonly referred to as “indie programs” (which stands for independent, meaning it is run by the merchant themselves). You can use a search engine to run searches for “[brand or store you like here] affiliate program” or “[brand or store you like here] affiliate” or “[generic item here] affiliate program” or “[generic item here] affiliate” to find indie programs in your arena.

The problem with indie programs for new affiliate marketers is that unless you know what to look for (and what should throw up red flags) in an affiliate program’s offerings, you could get taken for a ride. Additionally, unless you know another affiliate utilizing the indie program, it means possibly taking chances on actually receiving a check. Neither of these are chances most brand new affiliates want to take.

The advantage to using an indie program and assuming the above risks (and why a lot of seasoned affiliates prefer them) is that it cuts out the “middle man” (which is essentially what the big networks are) and means that the commission a merchant using a network has to pay to the network can instead be passed on to you.

Is a multi-tier program like a pyramid scheme?

No. Typically in a pyramid scheme, you make your money primarily from the cost someone pays to sign up or join the program. So, the scheme will charge 500 dollars to join the business and the person who signs them up gets a commission from their sign up fee. The new sign up will then need to do the same to recoup their money. There may be an actual “product” but those in the “know” don’t sell the product and simply sell folks on the “opportunity” to get the commissions from sign ups.

In a multi-tier affiliate program, you make money whenever an affiliate you referred to the program (who is then placed one level (aka tier) under you) makes a sale. Since there is no cost to sign up with (legit) affiliate programs, the only way you can make money from sub affiliates (what affiliates under you are called) is if they actually make money first.

How do you choose which affiliate program to work with?

Let’s assume that you’ve found a few affiliate programs offering products that would work with your audience. How do you decide which one to use? Whichever one offers the most commission right? Wrong.

Just because an affiliate program offers the highest commissions doesn’t mean that they are definitely the merchant you make the most money with. For example:

  • Merchant A pays $20 per sale
  • Merchant B pays $30 per sale

At face value, merchant B looks like the clear winner. But then you contact both merchants and find out that Merchant A has a 4 percent conversion rate on their main site while Merchant B has a 1 percent conversion rate. Let’s say you send 3000 people to both websites. Assuming the typical conversions:

  • Merchant A converts 4% of those 3000 visitors, or 120 of them, into sales. At $20 commission per sale, your check will be for $2400.
  • Merchant B converts 1% of those 3000 visitors, or 30 of them, into sales. At $30 dollars commission per sale, your check will be for $900.

So, in the above example, even though Merchant B pays $10 more per sale, you made $1500 dollars more with Merchant A because they had a better conversion rate.

When comparing merchants to decide which affiliate program to use, I usually look at base commissions combined with conversion rates of their main website (some affiliate programs won’t give out this info, some will – if they won’t give it to you, you’ll have to test it yourself) as well as linking options (if one merchant allows you to create links to specific products and another only has links to main category pages, the first makes it much easier to pre-sell leads).

Rae Hoffman is a veteran affiliate marketer, online marketing consultant, industry speaker and the owner of the often controversial Sugarrae Marketing blog.

For more affiliate marketing insight you can subscribe to her mailing list, see her speak at Affiliate Summit West or follow her on Twitter (warning: contains very colorful language).

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