When the Internet was young in 1995, early-adopter Internet merchants sought ways to get word out about their products and services. Their first stop was advertising on other sites. Back then advertising was typically sold on a CPM (Cost Per Thousand) basis, like TV, radio, newspaper, and magazine advertising had been sold for decades. It was great for website publishers, but it was expensive for merchants unless the advertising was efficient and produced sales.

When the very first affiliate program was invented, I'm not sure. But in 1996, Amazon.com rolled out the first widely-adopted affiliate program to sell books. They offered affiliates a 15% commission on any book sold as a result of an affiliate link so long as it was purchased during the same Internet session. Hundreds of thousands of affiliates signed up and began coding affiliate links to books on Amazon's site. I was one of them.

Look at it from Amazon's viewpoint. They attracted lots of interested buyers through the affiliate links but only paid for this advertising if a sale was made. What's more, once they had made a sale, they treated customers quite well so next time the customer wanted a book, he or she would come directly to Amazon and not through an affiliate link. A predictable 15% of their sales price was tied up in advertising costs. Sweet! Of course, Amazon quickly became more sophisticated and lowered the average commission paid.

But how to design and conduct an affiliate program isn't the focus of this report. My goal is to acquaint merchants and prospective merchants with the important features of affiliate management software so that you can be an informed shopper as you search among the dozens of program vendors for the right software for you. This report also includes detailed information on the features offered by each major (and most minor) programs, in most cases checked and verified by the program vendor. In true affiliate-savvy fashion, most of the links to vendors are affiliate links. But none of the information is slanted to induce you to buy a particular program. I call it as I see it.

How Affiliate Management Software Works

Basically, affiliate management software works like this -- simplified to make it easily understandable.

1. Affiliate sign-up and ad selection. A prospective affiliate signs up in a self-serve mode and (after optional verification and approval steps) is able to select the HTML code from either text or graphic ads that contain a unique affiliate ID.
2. Ad appears on affiliate's webpage. The affiliate pastes the HTML code into his webpage. This HTML causes a graphic to appear on the page. The graphic has a coded hyperlink to the merchant's site, which contains a unique affiliate ID.
3. Visitor clicks on ad. A site visitor is attracted by the graphic ad and clicks on it. The hyperlink takes the visitor to the merchant's site.
4. Cookie placed on visitor. When the visitor enters the merchant's site through the link, the unique affiliate ID is encoded into a cookie, which is attached to the visitor's web browser. All this is invisible; the visitor scarcely notices.
5. Cookie is read after sale. If the visitor makes a purchase on the merchant's site, on the "thank you page" after the sales transaction has been completed, the cookie is read, and a record is placed in the database containing (a) the unique affiliate ID, (b) the amount and date of the sales transaction, (c) and perhaps the product SKU.
6. Merchant approves transactions. Periodically, the merchant views the affiliate transactions to make sure none are fraudulent. If the transaction is legitimate, the merchant marks it for payment and an e-mail is sent to the affiliate reporting the sale and the pending commission.
7. Commissions due are reported. At the end of the payment cycle (typically monthly), the software will report which affiliates are due commissions (that is, the commission amount due is over the minimum set by the merchant).
8. Commissions paid to affiliates. The affiliate payment information is transferred to some manual or automatic system to pay affiliates by check, PayPal, or other means.

I've over-simplified this process so you can more easily envision how it actually works. Other elements in the process include redirects, fraud detection, and sometimes complex rules about which affiliate should be paid what amount for which transaction.