According to statistics, about 81% of brands use affiliate marketing, and its popularity is due to its effectiveness, as well as the opportunity to evaluate the success of the campaign and to pay for actual results.
However, if you think about starting an affiliate program, calculating the commission rate can be a challenging task.
Nobody will promote your brand if the commission rate is too low, while a rate that’s too high can make you lose money.
Unfortunately, there is no simple, universal, rule that will enable you to find the perfect commission rate for your affiliate program.
According to the affiliate marketing experts at DMi Partners, every business is unique and there are many different factors to consider when you’re working out your affiliate commission rates, and what will work best for your budget, your industry niche and your specific program.
You should also keep in mind that the affiliate commission rate only reflects a portion of the costs you will need to spend on your affiliate program. Given that the main goal is to get as much profit as possible, you need to track all the costs.
We hope that this guide will help you set the right commission rate, which will attract and retain the best affiliates to make your campaign successful.
First, let’s figure out what affiliate marketing is and how it works.
Simply put, this is a method of marketing that enables affiliates, or publishers, to earn a certain commission for promoting another company’s products or services.
Affiliates often choose products they use and enjoy, or they may also promote products related to their niche.
Every time the company makes a sale thanks to a link from an affiliate, the affiliate receives a commission.
However, brands may also pay a commission for clicks on a link that leads to the website, for a certain number of impressions, and for new leads. Given that affiliates have their unique affiliate links, the company can easily track the performance.
Affiliate marketing assigns the responsibilities of product creation and marketing to different parties so it enables businesses to use different professionals’ skills to constantly improve their marketing strategies, while also rewarding the contributors with a certain part of the profit.
The whole process involves three parties: the product creator and seller, the advertiser (affiliate), and the consumer. To make sure that your affiliate program will work effectively, you should understand the relationships between these parties:
Managing the relationships between these three parties can be a complex operation, with many moving parts. Finding and recruiting great new publishers, maintaining and strengthening relationships with all your affiliates, while driving your program strategy and evolving your commission structure can be highly challenging.
If you don’t have the bandwidth to do this in-house, or you don’t have the skills to grow your program, it might be wise to consider using an Affiliate Management Agency to manage your program for you. An agency can help you run your program and also provide useful insight into the best commission rates and structures to use for your specific business.
TLDR: Affiliate Marketing Definition:
Affiliate Marketing is a marketing arrangement where an affiliate publisher earns commissions for the sales or traffic they drive to an online seller. Affiliate marketing involves the merchant/seller, the affiliate/publisher, and the consumer. The affiliate acts as the link that connects consumers to the merchant, for which they’re paid a commission, by promoting the merchant’s products or services to their network of connections or online audience.
To calculate the commission rate for your affiliate program, you should know how affiliates get paid:
There are many online apps that enable affiliates to calculate their monthly income based on an average monthly revenue, affiliate period, commission rate, and the number of referred customers. For example, you can use an affiliate commission calculator like this one.
This way, you will attract more affiliates because they’ll be able to quickly determine their potential revenue.
It’s important to offer a competitive commission but you should also be realistic about your company’s capabilities.
For instance, Skyscanner offers a commission rate of up to 50%, but not all businesses can afford it. We also recommend that you just make sure that your closest competitors don’t offer a better commission than you.
“People often choose affiliate marketing as an additional source of income, and they may get paid in different ways. Everything depends on the goals of your affiliate program” explains Joanna Foster, a digital marketer at an essay writing services review website Pick The Writer.
“People often choose affiliate marketing as an additional source of income, and they may get paid in different ways. Everything depends on the goals of your affiliate program”
For instance, you may pay not only for direct sales but also for different kinds of contribution to your sales. Here are the most common approaches to measuring the effect of a program and payments:
Some companies combine different approaches and provide additional bonuses. For example, Fiverr offers $159 for first-time buyers and also uses a hybrid cost per action model, combining a fixed $10 commission with an additional 10% of revenue.
If you want to come up with an effective program, you need to do some research and consider various factors. When planning your affiliate budget, take into account the following:
As you can see, there are many factors that you should keep in mind when calculating your affiliate commission.
Here is a step-by-step guide to will help you plan your budget and evaluate all the costs associated with your affiliate campaign:
Production costs include all the costs you should spend on manufacturing products, providing services, and reselling products. When calculating the production costs, take into account the cost of labor, raw materials, storage, supplies, packaging, utilities, delivery, income tax, etc.
The difference between your selling price and production costs should bring profit to both you and the affiliate.
Given that affiliate programs are very popular, you need to monitor your competitors, making sure that your program is as much or more attractive for affiliates than that of your competitors’.
You should try to come up with the best offers, and you won’t be able to do it if you don’t know what your competitors offer. One of the tricks that can help you learn the necessary information is creating affiliate profiles and joining their affiliate programs.
Of course, you don’t need to create an affiliate account with your real name and real website. An affiliate profile should be attractive for merchants, this is its only distinctive feature.
When researching your competitors’ programs, pay your attention to their standard commission, first sale bonus, performance tiers, and other factors that we mentioned above when considering a commission rate.
Unfortunately, not all merchants are transparent and clear about these details. To get reliable information, check the merchant’s 7 days and 30 days stats, like an average commission, conversion rates, an average order value, and earnings per 100 clicks (EPC).
Affiliates take into account these details when choosing affiliate programs.
You can also get a general understanding of the commission rates in your industry if you do some research. For example, these are the average e-commerce commission rates in different industries:
Companies like Walmart and Amazon run their own affiliate programs, and you must make sure that your commission rate is higher. The chances are that many of your target affiliates already participate in wholesalers’ affiliate programs, and you should give them a solid reason to focus on your program instead.
We recommend that you create an offer that will be more beneficial for both affiliates and your consumers. “Put yourself in your consumers’ shoes and think of why they would want to purchase something from you instead of some of the resellers,” suggests Essie Holland, a marketer at an essay writing services review website Writing Judge.
Besides, you should think of what can motivate your affiliates to promote you over your resellers. In 2020, Amazon saw a surge in organic growth due to the Coronavirus pandemic and cut their commission rates to affiliate partners, which opened up a greater opportunity for smaller affiliate programs to attract publishers who were looking for better rates and increased flexibility. Keeping an eye on trends like these can help you find opportunities to market your program effectively to new affiliate partners.
Depending on your niche and the type of your product or service, your customers may buy them repeatedly or use products and services from other brands, as well.
One of the benefits of affiliate marketing is that after somebody makes a purchase through an affiliate program, brands can communicate with these customers directly, market, and sell to them, with no need to pay an affiliate commission again.
Therefore, we recommend that you keep in mind your customer’s potential and all the stages of their customer journey. Sometimes, it makes sense to make less profit on the first purchase or subscription if it can bring you more profit in the future.
You can calculate your customers’ lifetime value in different ways. For instance, you can multiply the average value of an order by average retention time and purchase frequency.
If you know that customers will continue to buy from you directly, bringing you more profit in the long run, you may consider increasing the affiliate commission rate by up to 50%.
The main thing is to carefully analyze your customers’ behavior and all the necessary stats.
A Note on LTV and CAC in the Context of Affiliate Marketing Commission
As a merchant, you will only pay an affiliate commission for the first interaction or sale. Repeat sales to that customer are commission-free. As such, you may want to factor customer LTV into your affiliate commission structure, as it may well be one of your lowest-cost customer acquisition channels!
Once you’ve gathered all the necessary data, you can make final calculations and determine the best commission rate for your brand. Your main objective must be to not only ensure enough profit for your company but also to come up with a better offer than your competitors.
We’ve already mentioned that you should consider the long-term benefits of the affiliate program. However, you should also make sure that you won’t need to decrease the commission rate in the future.
If you cannot afford a commission rate that is higher than that of your competitors, you can still use various methods to attract affiliates’ attention and to persuade them to give you a chance. Try to come up with unique incentives.
Affiliate marketing is extremely popular because it’s beneficial for both brands and affiliates. Any business can create an affiliate program to increase sales and website traffic.
The success of your program, however, depends on your ability to come up with an attractive offer for potential affiliates. You should research your competitors, calculate your production costs, and take into account your customers’ lifetime value.
We hope that our guide will help you understand how affiliate marketing works and calculate the commission rate that will work best for your business.