Affiliate marketing should never be confused with referral marketing as is often the case because the two are very different.
The main motivation behind affiliate programs is financial gain as a way of driving sales while referral marketing uses personal relationships and trust to increase the amount of sales. By relying on loyal existing customers and business connections, a business can use referrals to increase revenue generation. In affiliate marketing, you only get paid commissions when you bring in customers and they actually make purchases.
This marketing program requires the affiliate or publisher to use an affiliate link anytime that they mention the advertiser or merchant on their website. When a potential customer visits the affiliate’s website and clicks on the link, he or she is taken to the merchant’s website. At the same time, a cookie gets dropped on the customer’s computer. The customer then makes a purchase from the merchant’s website. As he logs out, the merchant finds a cookie that belongs to a specific affiliate and thereafter makes a credit for the sale in accordance with the initial agreement.
For transparency purposes, the merchant avails reports showing breakdowns of the amount of traffic from the affiliate’s link and the sales made. This ensures that the publisher is paid his rightful dues without being taken advantage of by the merchant. The commission payments are usually made after certain durations, on most occasions on a monthly basis. At least that allows the merchant to receive a reasonable amount as opposed to the payments coming in small bits.
The most common compensation method is the one described above where the affiliate is only paid commissions for actual sales made. The cost per click method of compensation is not favored by many merchants because there is always the danger of the marketing program not resulting into reasonable sales numbers. An affiliate can also just sit around and earn money for actually doing nothing.
Affiliate marketing is sometimes referred to as performance marketing because of the compensation method.