The online marketing space has experienced massive growth over the past two decades and has become a very important part of our lives. There are various facets to online marketing, including social media marketing, search engine optimization, affiliate marketing and more.

What we cannot deny is that there are a lot of theories thrown around each subject. Affiliate marketing is not left out. Due to the nature of its operation and the fact that many people still don’t understand how it works, there are theories that affiliate marketing is a pyramid scheme. This assumption is far from the truth.

But if it is not a pyramid scheme, what does affiliate mean exactly in the context of online marketing? This article will address this question and also point out the differences between affiliate marketing and pyramid schemes.

What is affiliate marketing?

Affiliate marketing is an advertising model where a seller or a company (merchant) endorses a third-party entity (affiliate marketer) to generate traffic or leads to their products and services. The affiliate is then compensated for their efforts via commissions.

It is a model where you as an affiliate agree to promote or endorse a product or a service and receive a percentage of any sale you generate. According to Mhojhos Research, the global market size of affiliate marketing amounted to over $17 billion as of 2020. A market this big shows how important affiliate marketing is to the business world in general.

How does affiliate marketing work?

As explained above, affiliate marketing is a marketing model where you agree to market or endorse a product or service and receive compensation for your efforts. You can refer people to a product or service by sharing it on a blog, social media platform, podcast, website, and other channels.

To ensure that your referrals are tracked easily, the affiliate program i.e. the company that manages the affiliates and merchants, issues each affiliate unique referral links or a unique identifier. This enables the company, and the affiliate to track their traffic and how many sales were generated.

Affiliate marketing can be easily described as follows:

  • As an affiliate, you show an ad or a link for a product or service on your website, blog, or social media handles.
  • A customer clicks your unique link and purchases from the store.
  • The affiliate network records the transaction.
  • The store confirms the purchase, and you get paid the agreed commission.

The commission rates vary depending on the product you are marketing and what the company offers. Some companies use percentages, and affiliates can earn as high as 50% revenue share on each sale. However, some companies offer a flat rate per sale instead of a percentage. There are other models too, such as CPL, which pays for every lead generated.

Advantages of affiliate marketing

  • Passive income: Affiliate marketing is one of the numerous models that allow you to make money even while you sleep. By putting in the initial work, you can make money whenever anyone uses your link to purchase a product or a service.
  • Work from home: Working from home is all the rave right now, and affiliate marketing offers that option to you. You can launch campaigns and earn money from products that sellers create while working from the comfort of your own home.
  • Performance-based rewards: You get paid based on your performance. The higher your traffic, leads and sales, the more you stand to earn.
  • Cost-effective: Affiliate marketing is a cost-effective business as you can get started with minimal cash flow. You don’t need to put any complex structures or platforms in place to get started. You can get started quickly with just a computer and internet access.

Now that we have a better understanding of what affiliate marketing is and how it works, let us delve into pyramid schemes.

What is a pyramid scheme?

A pyramid scheme is a scam where a marketing company promises to help you earn big profits when you recruit new members into the scheme that commit to buying and or selling a minimum amount of the merchant’s products. Often, the new members must “invest” a certain amount to join. Unlike affiliate marketing explained above, pyramid schemes compensate you for bringing new members into the scheme. Joining an affiliate network does not require the affiliate to pay anything to the merchant in order to join.

On the surface, most pyramid schemes appear to be legitimate companies selling products or services. However, the main objective of these companies is to grow the number of participants in their scheme rather than increase the revenue generated via sales of products or services. In pyramid schemes, new participants are given certain titles such as investors, distributors, agents, salespeople, and more.

How pyramid schemes work

The operational models of pyramid schemes resemble a pyramid, hence the name. The scheme starts with a single person at the top, which is the original member. Say the founder recruits ten people to the scheme with the promise of earning big profits for their investment.

Each of the ten people pays the founder a certain fee to enjoy the opportunities the scheme has to offer. The ten people are now tasked with bringing another ten people each for a total of 100 members. The 100 people recruited now pay fees to the ten who brought them in, and they, in turn, pay a certain fee to the founder.

This recruitment and payment cycle continues this way for as long as possible. As the cycle grows bigger, money continues to flow upward to those in the levels above. The cycle continues until there are no new members to compensate the old ones and the entire scheme comes crashing.

Differences between affiliate marketing and pyramid schemes

Now that we know what the two terms are and how they operate let us look at the distinguishing features between them.

Affiliate marketing focuses on products and services while pyramid schemes don’t

The major difference between affiliate marketing and pyramid schemes is the objective of the businesses. With affiliate marketing, the objective is to increase the sales of a company and generate more revenue. The affiliate is compensated based on performance for bringing more customers to a company or a store.

However, with pyramid schemes, the focus is on bringing new recruits to the schemes rather than boosting sales. The members may make a commission for sales but they make money by introducing new people to the scheme.

Pyramid schemes are illegal, affiliate marketing isn’t

Due to the nature of pyramid schemes, they are illegal in most countries globally. People tend to lose money, sometimes to the tune of millions of dollars, in pyramid schemes. However, affiliate marketing is not illegal. Affiliate marketing is a legal means of generating revenue for companies and an excellent way for affiliates to use their social power to earn money.

Pyramid schemes promise unrealistic earnings

You can easily spot a pyramid scheme by how they are presented. “When it is too good to be true, then it is too good to be true.” This is a mantra you should hold when looking at online opportunities. Pyramid schemes usually start by claiming you can earn thousands of dollars weekly and enjoy a lot of free time to travel the world.

They don’t describe the work involved or the products and services you will sell to start earning your dream income. An affiliate marketing program won’t make these sorts of claims since it is false advertising.

According to research by Forrester, affiliate marketing is the most important customer acquisition channel for 20% of brand marketers. This is how important affiliate marketing has become.

The nature of the opportunity is hidden in pyramid schemes

Have you noticed that you don’t usually know the opportunity being discussed when it comes to pyramid schemes? The members usually use ambiguous descriptions like “a revolutionary business model bankers don’t want you to know about.” The details of such models are never revealed.

When you desire to become an affiliate marketer, the exact steps, products and services, how to market them, and the potential commissions are not hidden. You can find the necessary information online, and you can even purchase courses to help you become a better affiliate.

Final thoughts

Affiliate marketing is one of the best ways for companies to increase sales and generate more revenue. For the affiliates, it is a legit way to make money using various legitimate marketing channels. The bottom line is affiliate marketing differs drastically from pyramid schemes. Affiliate marketing is legit; pyramid schemes aren’t.

Join the biggest affiliate network today, promote offers and start earning.