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Tips & Guides — 22 Jul 2021
As soon as you choose to launch a partner program as part of your marketing strategy, you want to make sure you've got the right plan in place. That means an affiliate commission rate that is both competitive and motivating for your partners.
An affiliate marketing commission is the amount that an affiliate is paid for acquiring a new customer.
How much should you pay affiliates? One thing is certain: too high or too low commissions are bad. Calculating a highly efficient affiliate commission rate is often dependent on the industry you operate in and your conversion rates. However, there are some general step-by-step guidelines as to what constitutes an effective commission rate.
To start with, it will be a good idea to decide on the basic type of affiliate commission. The commission rate can either be determined as a percentage or a fixed amount of money for each affiliate sale.
The most common choice for an affiliate program is a certain percentage from the sale. Typically, such a commission rate varies around 5-25%, depending on the affiliate products.
Affiliate commissions with a fixed amount are best suited for businesses with one or a few products. For example, if you represent a SaaS product, fixed affiliate payments can be very beneficial for you.
Either way, affiliate commissions are always better in cash. Unless you are some big eCommerce brand, you are very unlikely to succeed with affiliate payments in some sort of vouchers or store credits.
The next step, to calculate how much you can afford to pay affiliate partners, you can look at your average customer lifetime value (CLV). СLV shows how much profit the average customer brings to your company during the entire time as your client.
To calculate customer lifetime value, you need to determine the average cost of attracting one customer, figure out the average order value for a certain period, and customers’ repeat purchase rate during this period.
You can estimate the average order value by dividing your company’s total revenue by the number of purchases made within, for example, a year. After that, you calculate the repeat purchase rate of your customers by dividing the total number of purchases by the number of unique clients you have during the same period. All that is left to do is multiply an average order value with customers’ repeat purchase rate and subtract customer acquisition cost from the result.
So, here is a simplified formula to calculate CLV:
(Average Order Value * Customers Repeat Purchase Rate) – Customer Acquisition Cost
The main idea is to come out with your affiliate commission much lower than the average customer lifetime value. Thus, you will know your ceiling in calculating the payouts to set with your affiliate partners.
One of the components for the success of your affiliate commission is its competitiveness. You should analyze the affiliate programs of your competitors to rival them. As a last resort, you can also look into affiliate programs of companies that sell their products to your target audience.
You shouldn’t dismiss even creating an account and joining competitors’ affiliate programs for in-depth study of commission rates. Of course, it’s best not to use your real name and company profile when doing this.
During the analysis, you should pay attention to the same commission conditions as affiliate marketers do. Important metrics when assessing a competitor’s affiliate commission rate will be:
Along with the info from relevant affiliate programs, you can also refer to one of the resources that collect rankings with average affiliate commission rates for various industries and niches.
Rely on the received data from popular affiliate programs to make your commissions competitive and attractive to affiliate marketers.
Now it’s time to set your first affiliate commission rate.
As soon as you determine what kind of affiliate commission your business can afford, you may want to set the highest rate. In theory, this can bring many affiliates at first, but how will this work in the long run?
In this scenario, the wisest decision would probably be to set the lowest commission, which still remains competitive in your niche. This way, you leave room not just for a higher commission rate in the future but also for other opportunities.
With more space between your competitive affiliate commission and what you can afford to pay given the customer’s lifetime value, you can develop and use your affiliate incentive system. For example, it can be a system of commission tiers, or it can also be cash rewards for the most productive affiliates, and so on.
As you can see, starting with a lower affiliate commission rate can be more wise long term. However, let’s take a closer look at how affiliate incentives can better drive the success of your affiliate program.
Let’s say you’ve already done the calculations and determined the highest commission for your product, but it is still not competitive enough. In this case, the ideal way out for you is to motivate top affiliates with the help of bonuses.
Let’s assume that the affiliate commission rate of 25% isn’t lucrative for you at this stage. Think about a creative proposal you can make to your partners to keep them engaged. For example, it could be a monthly performance competition for which the most productive affiliates receive valuable prizes.
Another way to motivate partners that we’ve already mentioned earlier is commission tiers. Affiliates who achieved good results over a specific time receive commissions of the next level.
Also, don’t forget about the festive periods and temporary increases in affiliate payments. You can take any period you wish to raise affiliate payouts temporarily.
Overall, a bonuses and rewards system is a great way to keep your affiliate marketing program competitive and cost-effective at the same time.
Once the final commission rate is set, the work doesn’t end there. A competitive and high commission still doesn’t guarantee a crowd of new affiliates at your door. Several other factors define the success of your affiliate program.
First of all, affiliates will be interested in under what conditions and when they will receive a payout. Obviously, you only want to pay for the completed target action. After all, this is one of the main reasons you choose affiliate marketing for your marketing mix, right?
Today, you rarely find someone willing to pay affiliates for clicks or impressions. The best way to avoid ad fraud is to reward with commissions only for qualified leads or completed purchases.
You should decide on your payment terms based on your business type. For instance, if you are a SaaS company, you should consider how long it takes for the customer to complete a single transaction. eCommerce business often chooses periodic commission payouts, for example, once a month.
One more important part of the affiliate commissions structure also influenced by your business’s type is a cookie’s lifetime. Cookie lifetime is when the user who follows the referral link can perform a targeted action so that the partner can receive a reward for that.
A cookie’s lifetime is crucial since, in the B2B segment, the user often visits the site several times and can hesitate for a long time before converting. It’s one of the many reasons why your potential partners will focus on your affiliate payments conditions above anything else.
Finally, you have established the affiliate commission rate, thought out the payouts structure, and established a motivating bonus system. However, the work with affiliate commissions never stops. Continuously evolve and improve your affiliate commissions.
Throughout your partner program’s entire course, you should ensure that payouts to your partners are made accurately and on time. The more your army of affiliates grows, the more complex it becomes for affiliate managers to regulate all financial transactions.
In any case, to avoid a drop in the efficiency of affiliates, it’s advisable to raise your commissions slightly every six months at least. Always track and analyze affiliates’ performance to assess the effectiveness of your affiliate commission rate. Good management of the partner program and prompt payouts adjustments will help increase the ROI of your affiliate marketing.
What tools can help you effectively manage your affiliate commissions as well as your affiliate marketing program as a whole?
Fortunately for you, a partner marketing software will streamline and automate the management of any affiliate program and help set up and structure all affiliates’ payouts. Precise tracking and robust fraud protection ensure you will considerably improve the performance of your affiliate marketing campaign with the affiliate marketing management solution.
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