Invented by CDNow.com at the end of 1994 and pioneered by Amazon.com in 1996, "affiliate programs", also known as Associate Programs or Partner Programs, are a simple way for Web sites to generate revenue by directing traffic toward other sites and a great way for the operating site to increase its traffic and revenue.

Because affiliate programs are so convenient and work so well, they have become the industry's dominant method of online Marketing.

There are 4 different kinds of affiliate programs to compensate "Affiliates" (or referring sites) for generating traffic to the Affiliate Program operating Website: Pay-Per-Impression, Pay-Per-Click, Pay-Per-Lead and Pay-Per-Sale.

Pay-Per-Impression (CPM)
The Pay-Per-Impression and Pay-Per-Click Model are not common to be used in Affiliate Marketing anymore. They were used in the Past, but were mostly abandoned due to Fraud and lack of Results.

The CPM (cost-per-impression) compensation Model was revived by Google for Google AdWords in summer 2005. The feature is called "Site-Targeting" in AdWords and allows you to display your Adsense Ad on a specific Website that runs AdSense Ads.

Pay-Per-Click (CPC) Model
Like the Pay-per-Impression model was the Pay-Per-Click (PPC) Model popular during the dot com boom at the end of the 1990th but was mostly abandoned by Advertisers for Advertisements on other Websites due to rampart problems with click fraud.

The PPC Model was kept alive by the PPC Search Engine GoTo.com which became later Overture.com and is now owned by Yahoo! and renamed from "Yahoo Sponsored Search" to Yahoo Search Marketing.

Google launched their PPC Service AdWords in 2000. Ask Jeeves, now simply Ask.com followed with their PPC Service in 2005 called Ask Sponsored Listings and MSN.com in 2006 with AdCenter. Other PPC Services are Miva/FindWhat.com and 7Search.com.

Contextual Advertising
The big come-back of PPC came when Google launched AdSense in 2003, the birth of contextual Advertising. What is Google AdSense? Here is a quote from Google's History at Google's corporate Website.
Google AdSense: "... offering web sites of all sizes a way to easily generate revenue through placement of highly targeted ads adjacent to their content. Google AdSense technology analyzes the text on any given page and delivers ads that are appropriate and relevant, increasing the usefulness of the page and the likelihood that those viewing it will actually click on the advertising presented there."

Yahoo's Version of AdSense called Yahoo! Publisher Network was launched (beta) in 2005. Microsoft is also working on their own Version of AdSense which is expected to be launched (beta) in 2006.

Search Engine Marketing (SEM)
Classic PPC Search Engine Marketing (Cost-Per-Click (CPC) advertising) is not Affiliate Marketing. It is an entirely different type of Internet Marketing and only has some technical details in common with old PPC/CPC Affiliate Marketing.

Ads are primarily displayed at the Search Engine Search Results Pages (SERPs) next to organic, free, Search Results. Contextual Advertising introduced with Google AdSense is also not Affiliate Marketing since no direct Partnership between the Advertiser who creates and pays for the Ads and the Publisher who displays the Ads on his Website.

This type of Marketing is generally referred to as Search Engine Marketing (SEM) and is often and wrongly mixed up and confused with Search Engine Optimization (SEO) which is about improving the ranking of a Site in the organic, free, SERPs at major Search Engines via technical means and deep understanding of the complicated ranking algorithms used by modern Search Engines.

Pay-Per-Call
Advertising is neither Search Engine Marketing (SEM) nor Affiliate Marketing. Recently developed call-tracking technology allows to create a bridge between online and offline Advertising. Pay-Per-Call Advertising is still new and in it's infancy. It is expected to become the 4th major type of Internet Marketing next to Affiliate Marketing, Search Engine Marketing and Search Engine Optimization within the next years.

The Affiliate Marketing shifted almost entirely to the Pay-Per-Lead (CPA or CPL) and Pay-Per-Sale Model (CPS) which is also known as Performance Marketing. The paid commission is usually a percentage of the referred sales or a flat dollar amount.

The Pay-Per-Lead (CPA or CPL) Model
The Advertiser pays Affiliates a Flat Amount Commission if a referred visitor performs a specific action on the Advertisers Site. It could be Actions like filling out a Form, Signing up for a Newsletter or Creating an Account.

The CPA Model is very popular with Online Services like Credit Card Providers, Insurance Services, DVD and Video Game Rental Services and Loans and Mortgages. Due to the usual high flat commission amount is the CPA very attractive for PPC Affiliates that do not have a permanent Website and an established User Base.

Before you consider the CPA Model for you problem, make sure to have mechanisms in place to validate the quality of referred leads. Your program will be vulnerable to become a victim of fraud, affiliates that generate tons of "fake" leads if you do not have anything in place to verify the quality of the produced leads.

The Pay-Per-Sale (CPS) Model
This Model is used by most Online Merchants today. The Merchant pays a percentage of the Order Amount that was created by a customer who was referred by an Affiliate.
Do not pay commissions that you end up loosing money on an order. You will gain new customers because of the Affiliate Program, but you will also pay commissions for returning customers.

Shoppers on the internet are more savvy today. Comparison Shopping Sites, Coupon Sites, Cash-Back Shopping and Charity Sites, that make up a large percentage of successful affiliates, are often visited by Shoppers first. See the Affiliate Program also as a Customer Retention Tool.

CPA or CPS?
If your competitors have affiliate programs and you don't, chances are good, that you are loosing a considerable amount of business to them, because the lag of an affiliate program for your site.

If you want to use an Affiliate Program as an Online Merchant for the whole purpose of customer acquisition, consider the CPA Model and pay a flat commission for new customers referrer by affiliates. Do the math to come up with a Flat Commission that makes it worthwhile for affiliates to promote you. Affiliates are not waiting for you, the next Merchant that has a Program is only one click away.

What you do and what commission you pay is up to you. You can also mix compensation models. The best thing to do is always to check first what your competitors are doing and use their compensation model as reference.

Pay-Per-Sale is by far the most common compensation model. 2/3 to 3/4 of all Affiliate Programs today are Pay-per-Sale Programs. The operating Site only pays "Commission" to their Affiliates for actual Results (a Sale, Sign-up etc.) and not just for promises (Clickthroughs, Banner Impressions).

Affiliate Networks
Operating an affiliate program to drive traffic to your website has never been easier. Most Sites utilize 3rd Party Services (so called Affiliate Networks). Those Services provide the infrastructure for you to track all the traffic and referrals to your Website.

Networks also work as a Recruiting Platform to find Websites willing to promote your Products or Services. The Integration of their Service usually takes just a few days or sometimes just a few hours.

Some of the Networks also help you to keep the generated overhead low (such as Payment of the Affiliates).

Networks usually charge 20-30% of the commission you pay to Affiliates as Fee to you. If the Fee is 25% for example and you pay 10% commission per Sale to you Affiliate, you must pay $12.5 in commission and fee for a $100 Sale.

In-House Affiliate Program Solutions and Software
You might want to have more control over your Affiliate Program and avoid the Network fees by running the program In-House.

You can, of course, develop all the necessary tools and technology by yourself, but that is may be not very cost effective and not as easy as it seems.

The technology has already been developed by various Affiliate Tracking Solution Providers and Software Packages.

They are most of the time easy to plug into your existing Sites and have already proven themselves. Be carefull with too small or too new Solution and Software Provoiders.

Check the Background of the Company you consider first. Do your diligence!

Outsourcing - Outsourced Program Management (OPM)
When you have your Program up and running, the first and important step was done. Now begins the complicated part starts.

The Wild West of Affiliate Marketing when quick and easy money was made and having an Affiliate Program running on "Auto Drive" generated a huge increase in sales by affiliates that seeked out programs and did everything themselves without the need of support and guidance is over. Business on the internet matured and Affiliate Marketing as well.

An Affiliate Program requires attention. To get active and quality affiliates requires active recruitment efforts. Support of existing affiliates also became vital. A clear set of Rules, the Affiliate Agreement, must be worked out and be enforced.

Allocate Resources to the program and don't do it on the side.
Your program is destined to fail if you don't spend the required resources and time for your program.

If you don't have the resources in-house, consider outsourcing of your program management (OPM). There are today a number of quality service companies available that are specialized in this.

Conclusion
Thousands of Websites operating their Affiliate Program successfully today, prove, that Affiliate Marketing is the most cost effective and efficient way to promote your products and services on the World Wide Web.

Affiliate Marketing guarantees a fast ROI (Return of Investment) and for some Online Merchants and Services are the Sales generated through the Affiliate Channel making up a considerable percentage of their total online Revenue.

Important Abbreviations
CPA - Cost per Action
CPC - Cost per Click
CPL - Cost per Lead
CPM - Cost per (Mil) Impression (1000 Impressions)
CPS - Cost per Sale
CR - Conversion Rate
CTR - Click through rate
DRM - Dynamic Rich Media (type of Ad, technology). It has nothing to do with DRM as in Digital Rights Management
EPC - Earnings per Click / Earnings per 100 Clicks
OPM - Outsourced (Affiliate) Program Management
PPC - Pay per Click
ROI - Return of Investment
SE - Search Engines
SEM - Search Engine Marketing
SEO - Search Engine Optimization
SERP - Search Engine Result Page
SID - URL Parameter the Affiliate can pass to get tracked with Sales and Leads

Abbreviations of Websites you will come across
ABW - ABestWeb - Affiliate Marketing Forum
CJ - Commission Junction - Affiliate Network
LS - Linkshare - Affiliate Network
MyAP - My Affiliate Program - In-House Program Solution
PF - Performics - Affiliate Netwok
SAS - ShareASale - Affiliate Network
SEW - Search Engine Watch - News and Resources
SR - Share Results - Affiliate Network
TW - Thread Watch - Internet Marketing News Discussions
WW - Webmaster World Forums

To learn more how affiliate marketing is affected most in wake of Google BigDaddy update, check the links below:

Why does Goodle hate affiliates
Organic Spam and Revenues
Verification of Pharmacies