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The history of affiliate marketing online is shrouded in mystery, but there is a rumour in industry circles that it was first used by internet guru Jeff Bezos, founder of Amazon. It is said that following a conversation with a woman who was looking to sell divorce books online, he suggested she set up a link to Amazon, where they could be bought, and that she could get a cut of the sales. Since then, affiliate marketing has developed into a major industry.

Wikipedia, the online dictionary, describes affiliate marketing as a popular method of promoting web businesses, in which an affiliate is rewarded for every visitor, subscriber or customer it has generated. At its most basic, it is a modern variation of paying finder's fees for the introduction of new clients to a business.

The affiliates are rewarded for their efforts according to a pre-determined cost model. The three usual methods are pay per click, pay per lead and pay per sale.

The basic concept is that the advertiser can use thousands of websites as an extension of its own salesforce, giving instant reach across a wide area online. Marketers can either set up an affiliate network themselves, which is only really practicable for big brands or, as is more common, go to a middleman who operates a network that they can use.

Most networks take a consultancy-led approach in this relatively unknown territory. One such firm, DGM, is an online marketing company that operates its own affiliate network, called dgmPerformance. Christian Panayi, head of marketing at DGM, says that one of the main reasons brands need to work with networks is to take advantage of their relationships with website publishers. 'Most clients haven't built up a relationship with a network of publishers, and there is also an administrative issue if you want to take affiliate marketing in-house,' he says.

Third-party help

Online betting exchange Betfair manages its own network in-house and uses third-party affiliate network operator Commission Junction (CJ) to deal with a wider group of affiliates. Matt Howe, head of online acquisition at Betfair, says that using a third party gives Betfair a wider reach, without having to use all the internal resources associated with it.

'CJ's one-to-many capability means we don't have to have lots of people here to manage affiliate recruitment and make affiliate payments. Its independence means that affiliates implicitly trust CJ to demand the best tracking of new customers so that they receive reliable and prompt payment,' he says.

Some advertisers relying heavily on affiliate marketing have created a dedicated internal resource to manage the process. Travel giant TUI uses networks and has its own in-house team, although Pete Norwood, its new media affiliate manager, says it is crucial that affiliate marketing is managed with a hands-on approach. 'Affiliate marketing is great for brand distribution and low-cost, low-risk marketing, but you can't just set it up, leave it and expect sales to roll in. You have to let your affiliates know what you are doing,' he says.

As well as general affiliate networks, there are sector specialists. For example, price comparison engines such as Kelkoo, Shopping.com and Cheapflights.co.uk are all big affiliate players. Betfair's Howe suggests that brands try to pick a network that has proved itself, so they can be sure that it gets them in front of the right demographic from the start. He also says that agreeing set prices with affiliates is an important factor. 'Pricing matters. Set the price too high and you could end up paying well over the odds. Set the price too low and you won't be competitive in the marketplace, and affiliates will push your competitors instead,' he says.

Oli Matthews, client services director at affiliate network operator OMG, says that the best way to pick which network operator is best for your company is to analyse what the competition is doing and work out how it compares.

'Business-to-consumer affiliate marketing is generally more successful than business-to-business, because affiliate marketing is a numbers game. If you are a big name that wants brand control and messaging to be a priority, you need to work with a network which can deliver that. If the brand is less important, you can go for a much broader, scattergun approach,' he says.

ROI implicit

Tina Judic, client services director at Commission Junction, says the attraction of affiliate marketing is that it is the one marketing channel where you can have pure return on investment, because clients can set the cost model on sales, a factor that has benefited sectors such as travel enormously.

'TUI, Expedia, lastminute.com and Thomas Cook are all Commission Junction clients, and their use of affiliate marketing has really taken off in the past few years. But there is still room for growth in the market; FMCG is one market that is tough, for instance, and retailers are doing OK, but could do a lot better,' she says.

Generally speaking, affiliate marketing works particularly well for sectors with e-commerce capabilities.

Despite the obvious returns, there are inherent dangers that brands need to be wise to. Uncontrolled affiliates can wreak havoc by not adhering to set brand guidelines for marketing, for example. While a lack of brand consistency is one problem, the potential for distorted messaging is also very real.

For financial services companies, the numerous rules and regulations concerning what can and can't be said in advertising is a potential minefield, so affiliates need to be well briefed and work closely with legal teams at financial firms.

CJ's Judic says this is now less of a problem, however, with most networks ensuring that compliance is a priority. 'In the past couple of years, we have significantly increased our network quality division. We monitor the network to ensure that all rules are adhered to,' she adds. Networks will also offer advertisers and publishers toolkits to help avoid such mistakes.

Keyword bidding

Another common problem is in the brands' use of search marketing. Affiliates can be used to bid on keyword terms that are not directly linked to the brand but are still relevant. This will ensure that competitors are kept out of the market and that a company gets all relevant leads when customers are searching for its products and services.

But if affiliates are not strictly controlled, their bidding can impinge on a brand's own search marketing efforts. This can result in the brand bidding against its own affiliates, which means that any traffic delivered to the company's website will be at a higher cost than if affiliates had not been involved.

As well as constantly monitoring their own affiliate programme, brands have to ensure they are in for the long haul. Just as affiliates will get frustrated if brands do not convert leads into sales, maximising their revenue, they will also be aggrieved if the company prematurely ends an affiliate programme. These sorts of problems have clouded people's views of affiliate marketing, so the industry is introducing best-practice guidelines. Earlier this year, it took a step toward becoming more regulated and transparent by forming its own trade association, which will tackle issues such as pay-per-click best practice, anti-spyware and how to increase the sector's profile.

Despite the pitfalls, affiliate marketing can still be a highly effective medium. Betfair's Howe says that following the basic guidelines is key to getting it right: agree numbers, define targets and make sure tracking is in place. 'First, if you don't know what a fair price is - find out. Second, choose your network carefully and design some great creative that you constantly refresh. Finally, get the tracking right.'

CASE STUDY - FIRST DIRECT

Background: First Direct appointed OMG as its second affiliate network last January.

Strategy: First Direct launched a programme through OMG on a no charges or management fees basis, therefore minimising any risk.

The aim of the campaign, which was to generate applications for the bank, was to be met by identifying and recruiting reliable affiliates to the programme.

As an existing network, OMG already had close relationships with UK finance affiliates and was able to demonstrate the network's volume potential in a short space of time.

The initial success of the OMG network programme led to First Direct consolidating all of its affiliate marketing into OMG. By having its programme handled by a third party, First Direct was also able to draw on the benefit of its experience in brand protection.

Results: First Direct's sales volumes grew significantly month on month from the start of the OMG programme. By the end of July 2005, when OMG became First Direct's sole affiliate network, sales volumes had increased to approximately 50% up on multi-network figures.

First Direct also benefited in terms of time and costs savings by consolidating its affiliate marketing into one network, freeing up resources for other parts of the business.

AFFILIATE MARKETING

Pros

- It offers the advertiser a wider audience

- It offers great ROI, as you control how much and what you pay for in terms of leads or sales

- For a site publisher, it can be a valuable source of extra income

- The advertiser can gain customers without paying for acquisition campaigns

- Data from affiliate marketing tells advertisers the source of customers

Cons

- There are dangers over the control of affiliates with regards to brand guidelines and regulations

- There are bad practices, including click fraud

- Advertisers have closed programmes without telling the affiliates and without paying commission

- Badly managed affiliate programmes can create bad relationships between site owners and advertisers

- Get informed, otherwise it can be confusing.