It works like this; let’s say an insurance company wants to sell some insurance.  They could go to Commission Junction (or one of the other affiliate networks) and create an account.  They then upload their banner creative and set the amount the are willing to pay web site owners.  The beauty of affiliate marketing is that the insurance company only pays for performance — they can pay per click, per lead, or per sale. Usually they would pay per lead or sale.  So they only pay the web site owners when a sale is made.

Then a fellow with a web site logs onto Commission Junction and copies the insurance companies banner ad creative code to his web site.  If traffic to his web site converts into a sale he gets a check from Commission Junction.  Amounts vary from a couple pennies to a couple bucks per sale — depending on the product sold.

Affiliate marketing is great for products and services that are sold directly over the internet.  Or products and services that require a lot of inbound leads to generate a sale.  I like affiliate marketing because I only pay for a sale.  I get my ads all over the web and only pay when the ad generates a paying customer.

Downside of affiliate marketing is that you can’t control where you ads get displayed.  And there are a lot of unsavory characters out there doing very gray things to turn affiliate ads into sales.

• Type of display units. Standard banner ads will be less expensive than rich media ads.
• Quality of the content. The more targeted the audience of the web site the ads will be displayed on the higher the price.
• Placement of the ads on the site. If the ads are to be displayed on specific pages they will be more expensive then Run of Site (ROS) ad buys. ROS is where the ads will be displayed through out the entire site. Example: Ads on Yahoo’s home page cost hundreds of thousand of dollars per day. Whereas banners that run ROS throughout Yahoo can go for as low as a couple bucks per 1000 units (CPM)

For “junk” traffic (junk defined as not very targeted advertisements) you can pay between $0.25 to $1.00 CPM.

More targeted traffic will cost anywhere between $3 to $15 CPM (as of mid 2008 — prices are changing for the lower now due to the economy).

Current click through rates for display ads are about 0.3% at the time of this post.

The pricing here is for directional purposes only. The real test is to determine how valuable a media exposure is to you then back into the cost you’d pay for the impressions. For example, if a sale is worth $10 to you and you expect to close 1% of consumers exposed to your advertisements then:

100,000 Ads * 0.3% Click Through Rate (CTR) = 300 consumers to your web site * 1% conversion rate = 3 sales for each 100,000 banner impressions. Those 3 consumers made you $30. So your break-even CPM is $0.30.