AFFILIATE MARKETING THE PROS AND CONS

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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:

• A customer
• A merchant, such as Amazon or Shopify
• A publisher—who is known as the merchant’s affiliate marketer—who connects the customer with the merchant.

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.

• Passive income opportunity: As we discussed above, this is probably the top reason to set up an affiliate marketing business.
• Lucrative financial incentives: Affiliate marketing entrepreneurs with talent matched to the unique challenges involved with this kind of business and an obsessive, relentless drive to succeed can earn well over $500,000 a year.
• Few educational barriers to entry: Although university education can be useful, there are many reports of individuals with lucrative affiliate marketing careers who dropped out of college or never enrolled in the first place.
• Freedom: So long as one has an Internet connection, one can work at any time and, as one of the growing cadre of “internet nomads,” from anywhere. One can also work independently, without clients or a traditional employer’s boss. However, collaboration and support from one or more business partners can be helpful, especially in the beginning.
• No entrepreneurial creativity necessary: Because there’s no need to create a new product or service, one hardly needs the kind of vision possessed by great entrepreneurs like Apple’s Steve Jobs or Tesla’s Elon Musk.
• No need to stock or ship goods: Inventory and logistics are typically managed by merchants like Amazon.
• E-commerce continues unprecedented growth: In 2017, e-commerce—now termed “ecom” by some—grew by 16 percent. By contrast, brick-and-mortar retailing grew by only 4.5 percent during one of the hottest expansions in United States economic history. The “retail apocalypse,” resulting in the closing of thousands of retail stores across America, shows no signs of abating and is driven largely by online merchants like Amazon, Shopify, and their legions of affiliates. At the time of this writing, the trendy Los Angeles-based fashion retailer Forever 21 became the latest bankruptcy casualty, announcing plans to shutter 200 stores in shopping malls worldwide.

• Long ramp-up interval: It isn’t possible to start earning an income from affiliate marketing overnight. Affiliate marketing can be intellectually demanding in the beginning, because there’s a steep learning curve and controversy over some of the best practices for new affiliate marketing entrepreneurs. Some affiliate marketing professionals who now annually earn millions in passive income invested many months full-time before they recouped their initial investment in terms of startup capital, the value of the time that they invested, and opportunity costs. That said, in some circumstances it may take less time to successfully launch a Shopify business than an Amazon FBA store. People who thoroughly understand the Shopify platform and market the right products can theoretically start producing sales within only two or three days.
• Startup capital requirements: These aren’t businesses that one can start without capital. According to industry experts, starting a successful Amazon FBA business requires a minimum of $3,000 to pay for the costs of sales, including the costs of the inventory, shipping, product photos, and image editing. It may be true that a successful Shopify store may require substantially less capital than an Amazon FBA business. However, unless the new affiliate marketer had previously built a large audience, they will nevertheless need to buy advertising that generates a traffic volume sufficient to sell the products.
• Fierce competition and saturated markets: Highly competitive markets for certain products or services can attract torrents of affiliates and result in diluted earnings. This is known in the industry as “saturation” and appears more frequently with Shopify stores because Amazon’s FBA program has significantly higher barriers to entry.
• Lack of control over products: Affiliate marketers can’t control the products or services merchants sell, nor the merchant’s business practices.
• They’re not your customer: In affiliate marketing, the customer belongs to the merchant, not the affiliate. Affiliates develop relationships with the merchants, and in some cases may interact with customers, but have no direct relationship with customers per se.
• Not for everybody: Many individuals aren’t cut out for affiliate marketing careers. Some need a boss because they aren’t good at skills like independent decision-making or business research, or because they aren’t willing to take financial risks. People who experience difficulty motivating themselves and accepting responsibility for their actions may be better off working within corporations because these qualities render them especially poor candidates for affiliate marketing careers.

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:

• Scenario One: An affiliate promotes inexpensive headphones retailing for $10 that only pay a 10 percent commission.
• Scenario Two: An affiliate promotes a $3,000 online training course that pays a 40 percent commission.

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.

AFFILIATE MARKETING THE PROS AND CONS