Affiliate programs are commonly misunderstood, in order to understand affiliate programs lets start with terminology. For clarification purposes, an affiliate is defined as any "referrer" or website that promotes a product in an effort to earn revenue. A merchant is defined as someone who owns a product and is sharing revenues with an affiliate based on the affiliate's performance. Affiliate programs can drive targeted traffic to your website.

There are 3 basic affiliate programs, though only the first two are commonly used.

Pay Per Click - this is when an affiliate is compensated for sending traffic to the merchant. (AdSense is an example of PPC affiliate program)

Pay Per Sale - this is when the affiliate is compensated by the merchant if the referral generates a sale or purchase.

Pay Per Lead - this is when the merchant agrees to pay for a qualified (or sometimes unqualified lead), which is very uncommon because it is subjective and up to the merchant.

Affiliate websites tend to provide information, entertainment, and content services to their customers. The online merchants sell products, goods and services online. These are programs permitting affiliates to earn money based on the visitors to your site who click through to another's website. Some pay a token amount for the click through and others provide a percentage of sales when a visitor "clicks through" to your site and buys a product or service on the other party's site. This could represent a value added service to your visitors.

Affiliate programs allow you to pay and track incentives from other websites that send web surfers, leads or paying customers to your website. Commissions based on purchases made by traffic sent from the referring website can be paid. Besides a commission, an affiliate can receive a flat fee, or other incentives for all valid transactions it refers that generate a sale or lead.

Be careful that the affiliate's web page is not cluttered with banner ads that may crowd out your link, or that be annoying to customers. Affiliate programs enable affiliates to leverage their traffic and customer base in order to profit from e-commerce while merchants benefit from increased exposure and sales.

Commonly traffic to merchant sites is measured and affiliates can clearly see conversion rates. Meaning, they track the percentage of people they are referring, and how much of it results in earned revenue. If the affiliate finds a very low conversion, they will find a better way to monetize that traffic, quite possibly with a competing merchant product.

In order to be a successful affiliate, the affiliate site needs to either have tons of traffic or target a specific audience, frequently one untapped by the merchant. It has been my experience, the closer the affiliate site content resembles the merchant products, the higher the likelihood of a good conversion rate.

Once you are committed to the idea of affiliates, the next step is to determine the kind of tracking system you are going to use. Sales can be tracked by HTML code, which is placed in a shopping cart or on the 'order confirmation'/'thank you' page, and cookies, which are created after the customers click on a banner ad. Cookie killers have been a problem for the affiliate industry. Software vendors have an advantage over other merchants in that new technologies allow software developers to better control compensation. Vendors can 'wrap' their software insuring that their affiliates are compensated for referrals, even if the customer downloads a trial version prior to purchasing. Buy now buttons in the software have affiliate ids imbedded in the download. Combined tracking systems have more success than those that rely on a single tracking technology.

In order to develop a successful affiliate network, merchants must realize that affiliates spend ad dollars on site, and product promotion. If the affiliate is not compensated fairly they will not remain in the merchants network. The bottom line is that affiliate relationships are partnerships, when both sides feel the situation is fair and equitable the relationship will be a success.