For example, here's how the compensation would work in two tier affiliate programs:
First Tier: John signs up for your affiliate referral program. He places your link on his site. A new customer comes to John's site, clicks on your link, comes to your site and purchases your product. John earns a direct commission, otherwise known as a 'first tier' affiliate referral commission.
Second Tier: Now, let's say that Jane comes to John's site, clicks on your link and comes through to your site. Jane does NOT purchase your product, but instead, she signs up to become an affiliate with your Affiliate Program. Since she clicked on John's Affiliate link to get to your site, John will be credited for referring her into your affiliate program.
So, when a new prospect visits Jane's site, clicks on your link and comes through to your site and purchases your product, Jane will earn a direct commission (a first tier commission) and John will earn a second tier commission. "
Mutap.com comment: Another really good explanation about two tier affiliate program functionality. Add on or challange at will.