Affiliate marketing; boiled down to its essence is the process of trading eyeballs for sales on other people’s sites. It’s not always sales – sometimes you get paid for an action (signing up to a newsletter, visiting a certain page, etc.) but it’s mostly about sales. It’s also one of the more popular revenue streams available, so let’s do the Pros and Cons.
- Low cost of entry. All you need is a website to start. Once you generate the traffic, you can get the links for the various affiliate sites to develop your sales.
- No inventory or customer service hassles
- Can be an extremely passive form of income – once the website is up, the processing of sales/etc is left up to the affiliated company, not yours
- Easy to enter / work with multiple websites with multiple industries, allowing you to experiment with profitability
- Can be mixed with other revenue streams like advertising very easily
- Extremely competitive marketplace partly due to the low cost of entry
- Can take a long time to develop sufficient traffic to generate decent revenue. As you are sending traffic away, you get approximately 50% of all visitors at best to the affiliated site. Those then convert at between 1-3%; so traffic must be significant.
- You are dependent on 3rd party sites, for both payments as well as the processing of the orders and overall conversion rates / usability of other sites
- As majority traffic is often generated directly from search engines / referrals (especially for smaller sized sites); you are most liable to Google algorithm changes
Let’s talk about the various ways you can generate revenue online when you have a website. I’m just going to do a comparison between eCommerce vs Affiliate Marketing vs Advertising vs Subscription revenue streams and we’ll start with eCommerce.
For those of you who don’t know, it’s where you sell a product on your site and send it to them. Generally, a physical product but it can be digital and you can drop-ship (have someone else carry the product for you).
Profit margin breakdown using ‘normal’ retail markup for holding stock on your own compared to drop-shipping is 50% to 20-30%. That is, for every $1 you either get $0.50 or $0.20-30 back.
With digital products of course, if you own the copyright the markup is enormous since your cost of good sold is insignificant (marginal cost that is, not upfront).
- Easier to build a brand, especially if you have products or a product mix that is unique
- Conversion rates can be significantly better as you are not sending traffic away first – that is you get 1-3% conversion from all your traffic, not just the one’s that travel to the affiliate marketer
- More control – you can adjust your site to better convert your traffic and have a much better understanding of the needs of that traffic than an external site
- Lifetime customer value – you are drawing the full lifetime value of each customer especially in a business of repeat purchases. Unlike affiliate sites where you generally only receive the revenue for a fixed amount of time.
- Inventory can be extremely expensive (requiring tens of thousands of dollars)
- Building the website is often much more complicated than an affiliate site
- Developing the brand can be a much longer process
- A more complicated business model as more ‘moving parts’ from inventory, site updates, design, customer service and more.
- Generally not a passive income stream as orders must be fulfilled, customer service completed, etc.
- Ongoing customer service issues compared to affiliate sites (e.g. questions, returns, exchanges, etc.)