What is affiliate marketing? It’s when a merchant pays a Web site owner for generating sales from a button, banner or link placed on the owner's Web site. It’s the latest buzz in Internet retailing, accounting for 11 percent of customer transactions this year and a predicted $9 billion or 25% of online shopping revenue by 2002. Online bookseller Amazon.com blazed the trail and today has over 140,000 affiliates.

By some estimates, more than 40% of online retailers say they have or are going to build an affiliate network in the next six months. Those statistics were mirrored with enthusiasm by over 250 netpreneurs at the first “Coffee and DoughNets” session of 1999, sponsored by the Morino Institute's Netpreneur Program.

When asked whether they were looking to establish their own affiliate networks, almost half of those attending raised their hands.

The nuts and bolts of building an affiliate program were provided by Tom Gerace, co-founder and executive vice president of Be Free, Inc., a leading provider of online affiliate network technology.

He was joined by Brian Hecht, CEO of The Electronic Newsstand Inc., a homegrown media company whose Web site, is the top online source for magazine subscriptions. Enews.com has some 5,000 affiliates and Hecht told the gathering that number would soon double.

The two explained that a key to success is contextual selling -- integrating products or services into targeted Web sites where content and commerce are logical partners.

“Selling in context dramatically increases conversion to sale,” said Gerace. “If you just have a button on the page, a lot of people will ignore it. But if you have two or three products imbedded in or after an article that follows the same theme, you’re much more likely to drive a transaction.”

In other words, if you want to sell canoes, a good affiliate might be a site on wilderness treks. If your product is travel, try a weather-related site. And, if you’re selling expensive wine, look for gourmet food. Gerace said affiliate marketing is truly effective for moving customers off the dime, or as he put it: “transitioning a user from a having a thought to taking an action.”

Gerace had three pieces of advice for affiliate marketers. First, identify a strategy and decide whether your approach is reach or conversion. He described a “good & plenty” model, where you either go after a targeted number of affiliates with a high conversion rate, or seek a large volume of partners to spread your brand. He suggested that you need some combination of the two.

Second, he said, is to set up a tiered payment structure, or bounty, that rewards better selling affiliates with bigger commissions. Affiliates make commissions ranging from 3 to 25 percent of the sale, he said.

Finally, according to Gerace, you’ve got to market your affiliate program heavily.

Hecht also stressed the relationship between the merchant and the affiliate. He said enews.com came away with these five pointers after launching its affiliate program:

1) Keep in constant communication with your affiliates, via email and phone calls. Understand where they are in their program development cycle and help them through it.

2) “Encourage the noodges.” If someone makes the effort to call - no matter what the reason - that’s someone who cares enough to potentially be an active affiliate.

3) Say "Thank you" every step of the way, and be timely - recognize and acknowledge your affiliates’ successes when they happen. As they start to perform, even consider raising your affiliates' commission as a way to motivate them.

4) Know who the winners will be among your affiliates. It’s almost impossible to pick them at the outset, but keep your eye on your own radar screen and track your best performers.

5) Remember that affiliates are people not numbers. It’s about relationships more than anything else.

“The biggest thing that we have learned is don't do this alone,” said Hecht, who added. “Now there are resources, there are discussion groups, there are products that can help you get off the ground even if you are on a tight budget.”

Following the presentations, Hecht and Gerace responded to questions posed by the audience- even one from an Israeli marketer who emailed in his question. The discussion ranged from how much money affiliates are making to whether these programs actually lower acquisition costs for merchants. A question about how to structure a deal resulted in a dialogue about current payout plans, as well as details on how a merchant or affiliate can audit and evaluate a program. The role of content in an affiliate program was highlighted repeatedly as being as valuable as the payout itself - “stickiness” is why people come back to a site.

At the end of the session, it was clear that the opportunity in affiliate marketing is vast and in its infancy. Affiliate marketing is helping change the face of Internet advertising. The issues of site promotion, payouts, relationships, branding, tracking, content and context will continue to be discussed by these experts and others for some time to come.