Working on Commission: The Pros and Cons of Affiliate Programs

When I first started doing business online in 1999, there was a huge selection of affiliate programs that paid great commissions. I was regularly raking in big bucks, so I felt no need to strike out on my own and develop a product or service. Why bother? It would take a lot of time and effort to do so, and collecting my commission cheques was a lot easier.

Then it happened.

The "dot-bomb" crash happened, that is. Businesses closed. Many others struggled. Affiliate programs closed, or cut commissions. One of the affiliate programs I was promoting heavily closed up shop -- leaving me with nothing to show for my many months of hard work. Within the next few months, another program dropped it's commission rates by 65%, and two more cut their commissions in half.

When all was said and done, my affiliate income was dramatically lower than just a few months prior -- so much lower, in fact, that it forced me into product and service development.

And that's the thing. Affiliate programs, while they offer some great advantages, they also come saddled with a bunch of disadvantages too.

Disadvantages to Affiliate Programs

You're at the mercy of the company. You rely on them to pay you on time - or at all. If they decide to change commission rates (usually to lower them!), you typically have no say, except to cancel your affiliate contract. And finally, if the affiliate program decides to close shop - well, you're simply out of luck.
Tracking problems. How do you know that you're being properly credited for a sale? It's really hard to tell, and most people just end up having to blindly trust the tracking system.
Quality problems. What happens if the company whose products you're promoting ships out a crappy product? Or ignores support requests? Or refuses to honour a refund?
Sure, you hope that the customer goes directly to the company... but depending on how you promote affiliate programs, the customer might come to you instead.
You pay all marketing costs. The company is providing you with a product or service to sell; it's your job to actually make the sales. This is no easy task, unless you're a natural-born marketer! You can choose to use only free methods of advertising... but these methods aren't necessarily the most effective. Marketing can get expensive -- and you pay your own costs, regardless of whether or not it results in any sales.
You have to share the profits. You earn a commission, which typically ranges from a measly 5% to a generous 50%. From that you deduct whatever marketing costs you have. The rest of the money goes into the affiliate company's pockets.
Market saturation. There may be hundreds, even thousands, of other affiliates all promoting to the same or similar audiences and struggling for their share of sales.

Affiliate programs do have their advantages as well:

You're free to concentrate on just one thing: marketing. The affiliate company handles everything else - billing, inventory, delivery, customer service, and all the other stuff that goes with the territory. This is one reason why affiliate programs are so popular; they give you the opportunity learn how to market online without being overwhelmed by everything else.
Startup costs are lower than if you had your own product. There are numerous costs associated with the research, development, and delivery of your own product. When you run an affiliate business, the only thing you're responsible for is marketing - and you have the option to use free methods only.
You get a 'head-start' while researching product ideas. Affiliate programs allow you to sell a product or service while you're still trying to come up with a product of your own. That's not to say that they're an 'easy' way to riches - they're not - but you can learn how to market while earning an income.
Initial time and effort can pay off in "automated" earnings. For instance, some affiliates use pay-per-click advertising to promote affiliate products. They find a search term that's in-demand, a product that's in-demand, a successful ad, and a price-per-click that allows them to make a decent profit. Once their PPC campaign is set up they can let it run with minimal effort and continue to collect their commissions.
Another way to keep earning off an initial effort is to join affiliate programs that continue to credit you, the affiliate, with future sales to the customer you originally referred. It's always nice to get a 'surprise' commission when customers return to make another purchase. The same thing applies to affiliate programs that pay for subscription services - for as long as the customer continues to subscribe, you get a percentage of the subscription fee.

There's no denying that there are a few "super-affiliates" that do extremely well on affiliate programs alone. Rosalind Gardner is one of them. She concentrates on a specific niche and excels at what she does.

It bears stating that you should try to stay away from the generic "how to make money" affiliate programs. I know it's popular. That's why so many people do it, and that's why the market is so saturated. Most of the people who sell this type of product or service sell to one another -- which means they're often familiar with the product from some other affiliate hawking the same thing.

Finding a high-demand niche is a better way to go. For one thing, you won't suffer from the credibility issues that surround the "how to make money" products. It's well-known that the majority of people who attempt to penetrate this market have never made any significant amount of money themselves (if any at all). That's just one reason why a different niche market is preferable. "Be a big fish in a little pond," the saying goes.

Generally speaking, with affiliate sales, you help to build another company's success and are compensated with commissions. When you sell your own product or service, you work towards your own success.

Every business has to make a choice about which risks are most acceptable to them - those associated with promoting affiliate programs (or being a reseller), or those associated with developing and selling their own product or service. You can always try to come up with a "happy medium"; sell your own stuff, plus complement those sales with affiliate income.

Whatever you choose, it's a good idea to ensure that you have more than one income stream (a combination of your own products, services, businesses, and/or various affiliate programs). That way you won't be left out in the cold if one source of income disappears.

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ABOUT THE AUTHOR:

The Online Business Basics website offers free marketing tips and articles for beginners to the 'net. Visit www.onlinebusinessbasics.com for more tips on how to effectively market your business on a limited budget.

Originally published February, 2002