What is an Affiliate?

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Definition:

An affiliate is a company or business entity that has an official relationship with another company or is minority-owned by a larger parent company.

🤔 Understanding affiliates

An affiliation is a business relationship between two companies, and is often used to describe when one company owns a minority stake in another company. That means a parent company owns less than 50% of stock shares in a smaller company, which is known as an “affiliate.” An affiliate is different from a subsidiary, because parent companies own a majority stake (more than 50% of shares) of subsidiaries. Affiliates are also commonly associated with marketing. Affiliate marketing is when one company generates sales for another company in exchange for a payment of commission.

Example

Let’s say you own a small online business selling ceramic mugs. To increase your business income, you might strike an affiliate marketing agreement with an independent coffee company. That would mean as an affiliate, you could actively promote the coffee brand’s products on your own mug website. The coffee company would then pay you a small commission every time it landed a sale that was directed from your website. Likewise, the coffee company might link its web pages to your coffee mug website.

Takeaway

An affiliate is like a superhero’s trusty sidekick…

Every superhero needs a sidekick. After all, sidekicks are responsible for helping to promote the superhero, support them wherever possible, and help them save the day. Affiliates are pretty much the same thing. They aren’t 100% owned by parent companies, but affiliates are typically smaller and follow the lead of bigger parent companies. In terms of affiliate marketing, an affiliate would tee up a sale so the superhero could knock it out of the park.

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What is an Affiliate?

An affiliate is a company or entity that has an official business relationship with another company.

In corporate terms, an affiliated relationship typically describes when one company owns a minority stake in another company. That means a larger parent company owns less than 50% of the smaller affiliate company. As a result, a parent company is able to influence how other shareholders manage or operate that affiliate company. But the parent company cannot completely control the affiliate because it is a minority shareholder.

An affiliate is different from a subsidiary because a subsidiary is majority-owned by its parent company.

One real-life example of an affiliate relationship is the corporate relationship between South Korean carmakers Kia and Hyundai. Hyundai is one of Kia’s largest shareholders, owning 33.8% of the company’s shares. That will inevitably mean Hyundai is a major influencer at Kia. But because Hyundai owns less than 50% stake, Kia is an affiliate company rather than a subsidiary company.

What are the types of affiliates?

There are a few different types of affiliate companies. In corporate terms, an affiliate relationship typically involves a parent entity and an affiliate company. The parent entity is the company that owns a minority stake in the affiliate company. An affiliate company is the entity that's part-owned by the larger company or corporation.

Two companies can be affiliated with one another if a separate, third-party parent company owns both companies. You could say Lucasfilm and ESPN are affiliated companies because they’re both controlled by the Walt Disney Company. This type of affiliation between multiple businesses is sometimes described as sister companies.

The term affiliate is also commonly associated with affiliate marketing.

Affiliate marketing is when a company earns a commission or reward in exchange for promoting the goods or services of another company. In ecommerce, this often involves using another website to advertise or sell your products. A common example might be Amazon, Etsy, or eBay.

Companies like Amazon also have affiliate programs that enable website owners to earn a commission on clicks or sales. All they have to do is advertise Amazon listings on their own websites.

What is the difference between affiliates and subsidiaries?

It’s easy to confuse affiliates with subsidiaries, but there's a key difference between the two business types: ownership.

A subsidiary is a company or business entity majority owned by a larger parent company. That means the parent company owns more than 50% of the subsidiary’s share capital. Share capital is the part of company equity given out by issuing shares.

When a parent company owns a majority of shares in a subsidiary, it has a final say in shareholder decisions. Those decisions might include appointing company officers, inspecting or approving company documents, and receiving financial gains through payment of dividends.

Parent companies often acquire subsidiaries to expand their brand offerings. For example, a multinational confectionery company might purchase a majority stake in a small, boutique chocolatier. This would broaden the parent company’s portfolio, which is a collection of assets owned by the company. By expanding its assets to include a controlling stake in a smaller, artisan brand, customers might then associate the group with added luxury.

Unlike a merger (which is when two companies are combined into one company), shareholders don't need to approve it when a parent company buys a subsidiary.

An affiliate is different from a subsidiary because an affiliate company isn't majority owned by a parent company. That means the parent company owns less than 50% of the affiliates shares. As a result, the parent company may have a major influence over how the affiliate runs, but it’s possible another shareholder or a group of shareholders have more influence.

What is affiliate marketing?

Affiliate marketing is when one company promotes the goods or services of other companies in exchange for a commission.

Companies typically go after an affiliate marketing strategy by striking an agreement with non-competitors that promote their own products to a similar audience. For example, two independent soft drink companies probably wouldn’t want to be marketing affiliates. That's because if their products are very similar, they’ll eat into each other’s sales. Instead, a soft drink company might enter into an affiliate marketing arrangement with a pizzeria or a drinking glass manufacturer.

Although affiliate marketing has been around for a long time, it’s most commonly associated with ecommerce. That’s because it’s so easy for website owners to advertise and link to other websites. Thanks to online analytics tools, companies can also tell where web traffic originates from and track user journeys. As a result, it’s possible for companies to tell if web traffic comes from an online affiliate. Both companies can then directly attribute one or more sales to that traffic.

Affiliate marketing is common between two retailers or businesses, but it’s also common on digital media sites. A popular example might be a site like BuzzFeed, which is an online news and entertainment company. BuzzFeed often promotes affiliate content in which the company earns a commission every time a reader clicks a link through to another website. This is known as pay-per-click (PPC), because the affiliate partner is paid every time a new person clicks.

Large ecommerce companies like Amazon and Google also have their own affiliate marketing communities.

These programs typically enable site owners to pick the types of products they’re willing to promote. They can also choose the style of web ads to place on their websites. From there, all a site owner needs to do is register with the program and add some lines of code onto their webpages. Alternatively, you might simply be asked to hyperlink a couple of keywords of text on a webpage.

The affiliate then pays them a small amount based on how users engage with that affiliate link. For example, some networks will pay a nominal fee every time a visitor on their website clicks the ad and ends up on the promoted website. Other affiliate networks might only agree to pay a commission if a confirmed purchase can be traced back to the promotion.

Affiliate marketing is typically a source of passive income. Passive income is a source of revenue that needs little-to-no effort to maintain because it requires little upkeep. Although companies might initially need to invest time or resources to set up a passive income stream, it’s then possible for the business to continue generating revenue without spending much time working on it.

How do you make money as an affiliate marketer?

Affiliate marketers make money by promoting the products or services of other merchants or companies. An affiliate agreement ordinarily outlines the amount of commission an affiliate earns and what they’ve got to do to gain that affiliate income.

In the context of ecommerce, affiliate marketers typically generate cash by driving web traffic to the site of another merchant. For example, you might earn a commission of 50 cents every time somebody on your website clicks on an ad. If it points to one of your affiliates and they can confirm the activity, you'll get paid.

Companies normally track this activity using HTTP cookies. Cookies are tiny pieces of data sent to your web browser to help websites remember information or record browsing activity. Analytics tools like Google Analytics then reads those cookies to figure out the website you were looking at before you clicked through to a different site. That’s often how website owners are able to confirm generated sales leads happened thanks to an affiliate.

Companies then pay affiliate marketers as outlined by the affiliate agreement. Those payments could make a payment either directly or indirectly, meaning payments are made either manually or automatically.

How do you become an affiliate marketer?

It’s possible to become an affiliate marketer independently. This would mean you’d have to get in touch with merchants you believe you could provide successful affiliate services for. From there, you could then propose your services and arrange an affiliate agreement.

Another common avenue businesses explore is to become part of an existing affiliate program or network. An affiliate network is a group or community of businesses that agree to promote each other’s services.

Some affiliate networks are open to all website owners, while others screen membership based on the volume of web traffic. They might also look at the products you sell or type of content you host if you're a blogger. After applying and gaining membership to an affiliate network, you’ll then often be able to pick which affiliate product types you’d be willing to promote.

Some programs also let you pick the style of content marketing promotions you’re going to share or the marketing channels you're going to use. For example, you might agree to hyperlink certain keywords that appear on your company blog. Alternatively, you could choose to display ad banners on your web pages. The network will then normally give you a piece of code to add to a given landing page.

You could also agree to share social media posts or simply add in text references to certain brands in your product descriptions. After successfully promoting the agreed product, service, webinar, or event, you’ll then gain a commission. The affiliate agreement should specify the size and type of commission.

Depending on the affiliate program you’ve joined, the network may claim a part of your commission in exchange for operating as your intermediary. An intermediary is simply a middle man that connects businesses to clients.

What are the highest paying affiliate programs?

There are a wide range of affiliate marketing programs online, and the commissions you can earn vary from network to network. Some of the web’s biggest affiliate programs are run by companies. The Amazon Associates program by ecommerce giant Amazon is a good example. The program offers a commission of up to 10% of the sale price of items if your promotion leads to a direct sale.

That means you won’t make any money if somebody clicks on an Amazon promotion you’re hosting but doesn’t buy anything. It’s also worth pointing out the commission levels offered on Amazon follow a tiered system. You can earn a 10% commission on affiliate sales of beauty products, but only a 3% commission on toys, and less for other physical products like games.

Other large ecommerce sites like Shopify and HubSpot operate their own affiliate programs, but many big merchants simply subscribe to third party programs. For example, Google’s G Suite affiliate program runs through CJ Affiliate by Conversant.

Even with large and consolidated networks, the amount of money you earn will vary. Networks might offer different membership levels. Payments made could depend on how long you've been a member. Alternatively, membership might include different commissions based on different affiliate products.

What should an affiliate agreement include?

Before entering into a business affiliation, you should arrange an affiliate agreement. Affiliate agreements are legal documents outlining the business relationship.

No two affiliate relationships are 100% alike and different affiliate networks and companies offer different types of agreements. Many agreements do share a few commonalities.

A typical affiliate agreement should outline the terms of the agreement and define the roles and responsibilities of each member. An affiliate agreement might also outline the types of promotional materials shared between groups. It should also outline any restrictions, and define ownership of any intellectual property.

Finally, an affiliate agreement details terms of payment. This might include payment methods, frequency, and guidance on re-negotiating commission levels. It is best to have legal representation when entering into this type of agreement.

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