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The Internet phone service business is fiercely competitive, with players like Vonage, eBay-Skype, Yahoo! and Microsoft. So, how can upstart company SunRocket stand out?

With an affiliate marketing campaign. Within one year of starting its campaign, SunRocket is the second-fastest-growing independent provider of residential Internet phone service in the United States, behind Vonage.

"Affiliate programs are one of the most powerful marketing tools available," said Steven Rothberg, CEO and founder of CollegeRecruiter.com. "Basically, it moves advertising from being an expense to being more akin to a cost of goods sold. In other words, rather than paying out a lot of money and hoping that it works, you're only paying out money when you know that it has worked.”

The key to understanding affiliate marketing is learning the lingo. First, there is a "publisher" (also known as an affiliate), a Web site that promotes the products or services of an "advertiser" (also known as a merchant). The advertiser develops "offers," such the ads, text links, e-mail campaigns and search listings that appear on the affiliate. The advertiser pays the publisher a commission if there is a certain event, such as filling out a form or making a purchase.

The temptation is to focus on major publishers. But this can be a big mistake. "It is not an 80-20 rule," said Delly Tamer, CEO and founder of LetsTalk.com, an online provider of wireless products and services. "Several smaller-volume affiliates are smart, creative and contribute great ideas. We leverage the best ideas into our own marketing mix and let a lot of the more resource-intensive trial and error go on with our affiliates."

An affiliate marketing program involves such tasks as contracting with affiliates, tracking performance, paying commissions and even dealing with online fraud.

"As a small business, you may not have the resources to run a strong campaign that also focuses on good customer service to affiliates," said Danay Escanaverino, marketing manager for Global Resource Systems. "If this is the case, outsourcing your program is always an advisable option."

The largest third-party affiliate network is Commission Junction, which is part of online marketing company ValueClick (nasdaq: VCLK - news - people ). Not only small publishers use third-party affiliate networks. EBay (nasdaq: EBAY - news - people ) uses Commission Junction for most of its affiliate marketing programs.

"Don't expect to set up an affiliate program, sit back and rake in the dough," said Miki Dzugan, CEO of online marketing firm Rapport Online. "It takes at least six months of hard work to recruit the affiliate who will effectively sell your product."

After all, you are competing against offers from major companies. Thus, you need to craft a strong commission structure, compelling ad copy and support tools (such as FAQs on the product or service).

Phyllis Brasch Librach, president and founder of SydneysCloset.com, an e-tailer that sells special-occasion dresses to plus-size teens and women, has these suggestions"

--Create custom banners and text links just for the affiliate site.

--Extend special offers to the affiliate's visitors (e.g., free shipping).

--Cultivate one-on-one relationships through personal e-mails and phone calls.

--Reward top performers. (For example, on Valentine's Day, SydneysCloset.com sent its top affiliates baskets of chocolates.)

Another idea comes from Theo Ivanov, marketing director at Aplus.Net, a Web-hosting and information technology firm focused on small businesses. "Companies should use volume incentives," he said. "For example, if a company pays a $30 affiliate fee for every gadget sold, it is a good idea to increase that fee to $35 if a certain volume is met. It is amazing how many companies do not use this simple, yet powerful, incentive."

E-tailer SmartBargains.com also has realized the impact of affiliate marketing. "In affiliate marketing," said Dan Beder, vice president of marketing for SmartBargains.com, "consumers win because they are receiving a great offer from SmartBargains, the affiliate sites win because they are getting commissions from SmartBargains, and SmartBargains wins because we are gaining a new customer."

Tom Taulli is an adviser to early-stage companies and is an adjunct professor at the University of Southern California, teaching corporate finance and corporate law. He has written several books, including The Complete M&A; Handbook (Random House) and Tapping Into Wireless (McGraw-Hill). He can be reached at tom@taulli.com and has a blog at Taulli.com .

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