6 Steps it Takes to Set Up Affiliate Commission Rates.
While a transparent commission structure can help ensure that you're making the most of your affiliate program, without one, you may be wasting money on payouts or losing potential partners altogether. Here are some steps to setting up a solid affiliate program:
1. Run a Competitive Analysis on Your Competitors’ Commission Rates.
A competitive analysis is one of the first things you should do when setting up your affiliate commission rates. Find out what other companies are paying for the same products and services that you offer and how much they pay their affiliates.
Here are a few tips for running an affiliate commission competitive analysis:
- Build out a list of your top 5 competitors who have active affiliate programs.
- Go to your competitor's website and look at their affiliate program descriptions to see if they have set any minimums, maximums, or sliding scales. You can usually find their affiliate program listing within their website's footer.
- You can also check out other industry-specific forums where people talk about how much they get paid by different companies about traffic volume or sales generated through their websites. This can give you an idea of how much certain types of products are worth depending on where they're sold and what kind of customers buy them (for example, if all your potential customers are online via search engines rather than being referred directly from another website).
2. Calculate Your Customer’s Average Lifetime Value.
The next step is to determine how much profit you want to make per customer. This is called a customer's average lifetime value (ALV). When you know a customer's ALV, you can calculate how much it will cost to acquire that customer and how much profit you need to make from that customer hto elp you decide whether or not it's worth selling your product on a particular platform.
The two most common ways to calculate a customer's ALV are:
1. Calculate the profit margin on each sale. This is often referred to as gross profit margin (GPM).
2. Calculate how much revenue you need to make per customer to be profitable—this is called contribution margin (CM).
A company's CM measures how much revenue it needs to generate from each customer to be profitable. It's calculated by subtracting the variable costs associated with providing the product or service from its selling price. The easiest way to find out your CM is to divide your total revenue by your average customer lifetime value.
Knowing your customer's average lifetime value enables you to make a more informed business decision on your affiliate commission payouts.
3. Build out Different Affiliate Commission Rate Models.
To begin, you need to choose what type of commission model will work best for your company. There are a few different models that you can choose from, but the most common ones include:
- Flat rate.
- Tiered rate.
Flat Rate Affiliate Commissions.
A flat rate means you’ll pay affiliates the same commission on every sale they make, regardless of what it costs you to provide the product or service. This is the simplest model to implement and can be good for new affiliates who don’t want to worry about calculating their ROI. However, it can also be the most limiting. If you have a product that’s expensive or has high profit margins, a flat rate may not give affiliates enough incentive to promote it.
Tiered Rates Affiliate Commissions.
With tiered rates, you set different commission levels based on how much revenue each sale generates for your business. For example, you might pay an affiliate a 10% commission on the first $100 of each sale and 15% on everything above that amount. This type of commission structure can be good for affiliates who have high-value products or services to sell because it gives them more incentive to promote them—especially if they’re able to get sales at the lower end of their commission scale. However, it can also be costly if your business has many different products or services with varying price points and profit margins.
Performance Based Affiliate Commissions.
A performance-based affiliate commission structure is based on sales activity rather than the actual sale price of a product or service. These commissions are usually paid out at a predetermined rate per action (such as a click, view or download) and vary by the affiliate. The advantage, of course, is that you can pay out your affiliates based on their own performance rather than the price of what they sell. This helps ensure that they’re incentivized to promote only the products and services that are most likely to convert into sales for your business.
4. Start Low, Then Adjust Your Commission Rates.
When setting up your affiliate commission rates, don't price out your program so high, just so that your affiliate payouts are higher than your competitors.
If it's not data-backed, you may be setting your program up for some hurdles if you find out your CAC with affiliate marketing is too high. Start with a low commission rate, then slowly increase it as your business matures and grows.
This will help you ensure that you're paying out affiliates based on the data they bring in and not just because you want to keep them happy. You don't want to create a program that is only designed to benefit your affiliates, but rather one that benefits both parties equally. Be sure to consider every customer's value and what they bring in for your company before making adjustments.
5. Remember to Consider Affiliate Bonuses.
Affiliate bonuses are a great way to incentivize affiliates. You can use them to reward your affiliates for hitting sales goals, or you can offer a bonus when they promote a product or service. In addition, you may even want to offer an affiliate bonus if they reach a certain number of sales. Sometimes, the affiliate bonus can be larger than the actual commission. This is a great way to incentivize your affiliates and keep them motivated. For example, if you offer an affiliate bonus of $100 when someone makes a sale over $500, then they are more likely to promote products that will generate higher sales.
You should think about how your affiliate bonuses fit within your chosen affiliate commission payout, as well as how you will determine if someone has reached the required criteria to receive an affiliate bonus. You can also use this time to explain what types of products and services are eligible for bonuses and which ones are not.
Here are a few different examples of affiliate bonuses:
- X revenue was driven within x days.
- X number of sales driven in x days.
- Wrote an article about your brand.
- Reached 100 affiliate link clicks.
- Promoted your new product to their audience.
6. Launch, Learn, and Optimize Your Affiliate Payouts.
However, if you’re like most people, this is not where the story ends. You didn’t just start an affiliate program and then sit back and wait for things to happen (although we know some brands who have been doing that very thing!).
You’re going to want to know how your affiliate program is doing, and you’ll want to optimize it as well. Here are a few things you can do: Use an analytics program like Google Analytics to track your affiliate links and conversions (of course, only if you have an ecommerce site). Check in with your affiliates regularly via email or a web-based interface for this purpose.
Ask your affiliates for feedback on improving the program and making it more appealing to them. This will help you stay in touch with what they need and may even help you find new ways of growing your business. Use this information to guide future decisions about your affiliate program.
For example, if you notice that your affiliates want more education and training materials, create a blog or newsletter specifically for them. This will help you build relationships with your affiliates while also providing valuable information to your customers.
If you run a large affiliate program, consider setting up an online forum and moderating it. This will allow you to engage with your affiliates on a deeper level and also provide them with a place to get answers from other members of their community.
Wrapping up Affiliate Commission Payouts.
A key to affiliate success is setting commission rates intelligently. It's not about how much you make off an affiliate but how well they convert their traffic into sales and keep coming back to your site. If you want to maximize your affiliate program, set commission rates that incentivize affiliates to promote your products and services while ensuring they are profitable for the long-term.
The most effective affiliate marketing programs are built around a mutually beneficial relationship. A program that strives for long-term success will benefit both you and your affiliates, and it can be done without sacrificing your profit margins. The most effective affiliate marketing programs are built around a mutually beneficial relationship.