When formulating a commission structure, the first step would be to consider all stakeholders involved in the transaction. Though affiliate marketing is entirely performance-based — and nary a nickel has paid unless a transaction happens — there are many diverse parties taking a cut of the sale. The affiliate receives a percentage. The affiliate network receives a percentage. And, your affiliate manager might take a percentage. What originally seemed as a no-risk advertising channel could be one of the most expensive.
But that doesn’t have to be true. Online affiliate marketing is one of the most cost efficient marketing channels, as long as margins are appropriately managed. Here are four factors to consider when deciding your perfect commission structure.
4 Keys to Setting Affiliate Commissions
1. New vs. existing clients. New customers traditionally have higher lifetime value than present ones. This is because each new client develops your client base. And as soon as you have the customers, you pay less to convert them on future purchases. Customers who have bought from you know your product, appreciate your service, and trust you. It costs more to acquire a new customer as you must build that trust and credibility.
Since new clients are valuable, it is reasonable to provide incentives for your affiliate partners to create fresh traffic and new customers. You might already have new client marketing incentives set up — perhaps a first buy discount or another special offer. The exact reason you provide those incentives is the reason you need to pay affiliates more for creating new clients. Regardless of where the incentive is paid — i.e., to the client or to the affiliate — the result is identical. You are paying a bit extra to obtain that new client as you know your final revival is at the customer’s lifetime value.
Affiliates can also help your organization tap into new audiences and reposition inventory so that it’s relevant to them. By way of instance, perhaps your website is entirely in English, with no exposure to the Hispanic marketplace. One of your affiliates may translate your copy into Spanish and target that market, thus bringing new clients to you. Such a strategy — translating text — could be costly and time consuming. So increased commissions for all those new clients would help offset the affiliate’s initial investment.
2. Merchandise categories with varying margins. When you have many goods, your margins on every one will likely change. Electronics may have a tight margin, while home decor might have more leeway. If you’re seeking to set up a set commission construction — i.e., a set revenue-share percentage, regardless of what item the affiliate sells — then assess what your product mix is. What proportion of your earnings are low margin? What percent are high margin? From here, develop a mixed commission fee which will be rewarding for both you and your affiliate.
You can even set commission tiers based on specific product categories. By way of instance, you could pay 2 percent revenue share on electronic equipment, and 10 percent on home decoration, because the former carries a lower profit margin than the latter. A challenge of working with this double structure is the technical integration. You’ll have to create a product feed to the affiliate system, and for each affiliate transaction that happens you’ll need to submit item-level information to differentiate, say, electronic equipment from home decor. Neither task is very challenging, but it will require some work.
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This commission arrangement from Groupon.com accounts for merchandise categories in addition to new and present customers.
3. Paying for leads. Some merchants benefit by paying affiliates on a direct basis. By way of example, an insurance carrier may pay affiliates a predetermined bounty for every possible client who signs up for a quote. Alternately, an automobile dealership may pay affiliates for every customer that requests information on a particular vehicle, and perhaps an extra bonus if the client schedules a test drive.
A challenge with a lead-based commission structure is fraud prevention. If the form is simple to complete and the payout enough, a dishonest affiliate may determine strategies to auto-fill that form and collect commission on fake leads. To avoid this, you would require a dedicated affiliate manager to police the quality of inbound leads. Warning signs include numerous leads originating from the exact same IP address, or patterns in data entry such as spelling variants on a single name — such as”Jonathan Smith,””Jon Smith,” and”J. E. Smith.” When you detect fraud, then boot up the affiliate in the program immediately, and notify the network. And do not forget to undo any recorded leads connected with the lousy affiliate.
InsureMe.com’s commission structure is tiered by merchandise, and by affiliate operation in the preceding month.
4. Sales incentives. Structure your commission rates so you have additional margin to provide sales incentives. By way of instance, maybe you’re starting a new product line and you need affiliates to concentrate their marketing efforts on it. For those who have room on your commission structure, you can provide a temporary growth — or maybe sales bonuses — for reaching established revenue targets. I addressed earnings incentives here in “Affiliate Marketing: 3 Incentives to Drive Sales.”