Affiliate Marketing: How It Works, Costs and Rules
Affiliate marketing is a partnership model where a business pays other people or companies (affiliates) a commission when a customer they referred buys or signs up. Each affiliate gets a tracked link or code. When someone uses it and converts, the affiliate earns a fixed fee or a percentage of the sale. For the business, it’s marketing you pay for only after it works. For affiliates, such as publishers, creators, consultants and software partners, it’s a way to earn from an audience they already have.
Key takeaways
- You pay for outcomes, not clicks, so affiliate marketing is low-risk to test if your margins allow it.
- Set commissions from your numbers: customer value, margin and what you already pay to acquire a customer.
- Affiliates must clearly disclose that they earn a commission. Make that part of your program terms.
How affiliate marketing works
- You set up a program with terms: commission, cookie or attribution window, approved promotion methods.
- Affiliates join and get unique links or codes.
- They promote you through reviews, comparisons, newsletters, videos or client recommendations.
- Tracking software records clicks and conversions.
- You approve valid conversions and pay commissions on a set schedule.
Tracking usually runs through an affiliate platform or your own system with UTM-tagged links. Our UTM generator helps keep partner links clean in analytics.
Why affiliate marketing matters
It extends your reach into audiences that already trust someone else. A software tool recommended by a respected consultant or a niche newsletter often converts better than an ad. It’s especially common in SaaS, ecommerce, fintech products and online courses.
How to set a commission: a worked example
Base the commission on what a customer is worth and what you already pay to win one.
| Input | Example |
|---|---|
| Average first-year revenue per customer | $1,200 |
| Gross margin | 70%, so $840 gross profit |
| Your current customer acquisition cost from ads | $400 |
| Commission you could offer | 25% of first-year revenue = $300 |
At $300, an affiliate customer costs you less than an ad-driven one, leaves $540 of first-year gross profit, and still gives partners a reason to promote you. Adjust the numbers to your own data before you launch.
Myth vs fact
- MythAffiliate marketing is free marketing because you only pay on results.
- FactYou also pay for the platform, partner recruitment, creative assets, fraud checks and someone's time to manage it. Budget for those costs too.
An example from our work
Affiliate programs work best when you already know who your best customers are and who they listen to. I'd start with ten partners you'd happily introduce to a client, not an open marketplace where anyone can sign up. Set clear rules on brand bidding and disclosure from day one. It's much harder to tighten terms after partners have built their promotion around loose ones.
Disclosure rules affiliates must follow
In the US, the FTC’s Endorsement Guides (revised in 2023) say affiliates must disclose their financial connection “clearly and conspicuously,” close to the recommendation. The FTC’s own example wording is: “I get commissions for purchases made through links in this post.” It notes that labels like “affiliate link” alone may not be clear to readers (FTC). The UK and EU have similar rules. Put disclosure requirements in your program terms and check partners follow them. Also mark affiliate links on your own site with rel="sponsored".
How to start an affiliate program
Launch checklist
- Confirm the math: commission below your target customer acquisition cost
- Choose tracking: an affiliate platform or tagged links into your CRM
- Write terms: commission, attribution window, banned tactics such as bidding on your brand name
- Prepare assets: copy, images, a landing page and product facts partners can use
- Recruit 10 to 20 relevant partners rather than hundreds of random ones
- Review conversions monthly for quality and fraud
Affiliate marketing is close to referral marketing, where existing customers, rather than outside partners, recommend you.
Frequently asked questions
How do affiliate marketers get paid?
Usually per sale (a percentage or fixed fee) or per qualified lead. Payment typically runs monthly after a return or refund window has passed.
Is affiliate marketing legit?
Yes, when it's transparent. Reputable programs use clear tracking, pay on verified conversions and require affiliates to disclose their commission.
Can B2B companies use affiliate marketing?
Yes. Software companies often pay consultants and agencies a share of revenue for referred clients. Commissions tend to be higher and sales cycles longer than in consumer products.
What's the difference between affiliate and referral marketing?
Affiliates are outside partners promoting you as a business activity. Referral programs reward existing customers for recommending you to people they know.