Shawn Collins just addressed one of the sticky questions in our business over on his blog at AffiliateTip.com - He handles the question of what a merchant should do when they are successful with paid search and are launching an affiliate program. Should affiliates be allowed to bid on search terms? Which ones whould they be allowed to bid on if at all? How can you address this issue in your program’s affiliate agreement? What should you do if you catch affiliates violating the policy? It’s all in this video.

How you go about this really depends a lot on what your budget is and how well you have branded your site. The breakdown I generally see is this. Big companies who have been around for years and spent a ton of cash to build a brand generally want affiliates to keep away from their trademarked terms (company name, product names) and keep their bidding on more general terms and long tail terms. Merchants with less legacy and budget invested in Paid Search need the help getting coverage verses their competitors. So in this case, the strategy may be more along the lines of - go ahead and bid on my terms, but don’t run my cost up - let’s keep some of my competitors out of the top 10 listings.

I’ve even seen merchants with no budget or experience in PPC give free reign to affiliates and even suggest the terms to bid on.

The bottom line is that in many cases, the affiliates doing PPC arbitrage may be a lot smarter when it comes to working Paid Search for dollars than the merchant. They are good at knowing what words and terms generate revenue as opposed to just traffic and are great at optimizing their spend accordingly.

Give it some thought and come up with the solution that is right for your business.