In this article, I will walk you through all the different factors and considerations for setting a commission rate for your affiliates. Read from to top to bottom as it is important you follow the process in order.
So you have come to the point where you need to draft out how you are going to compensate your affiliates for referring customers your way. You have looked at your competitor’s affiliate programs and asked advice from others but your stuck with no clear path on what you should do.
My plan with this article is after you read you will be left with enough guidelines that creating your commission structure for your program will be a lot more approachable.
Before you start: Fundamentals.
I highly advise that as you put together your commission structure you keep an important factor in mind: Cost. Mainly, these two questions:
- Margins: What are the margins on my products or services?
- Budget: What is the budget I have set aside to pay affiliates?
Why are these important? Without knowing reasonable margins – how can you truly see how much you can afford to commission an affiliate per product or service? As for your budget: Your affiliate program shouldn’t be an after thought; it should have a line item on the accounting spreadsheet.
The LAST thing you want to have happen is see major success with your affiliates and then not be able to pay them.
Working with affiliates is all about trust so losing it by not coming through on your promise can be very detrimental. If you have to bug your CEO/CFO or fight your accounting department to work out a budget for the affiliate channel – by all means do so. It will save you trouble later on.
What you want out of your commission structure:
Now that you have a strong understanding of your cost – let’s look at what you really want out of your commission structure. Your commission structure should be:
- Simple: Affiliates signing up for your program need to be able to decipher how much money they can make — I would say, within 5 seconds of landing on your affiliate signup page.
- Competitive: it’s important to stay competitive with other affiliate program’s in your industry but not at the risk of your costs. which leads me to my next point…
- Above Costs: It goes without saying: your commission should always be within your margins and above costs of your product or services you are selling.
Before I get into range or exactly how much your commission should be within you margins – let’s get a more general understanding of the different commission types there are…
Different Commission Types:
You can choose to compensate affiliates on whatever action you’d like them to take. What I mean by this is: Buying your product or service, filling out a form, receiving a phone call are just some actions. To get a jist, here is the most common lingo for basis of commission types (below). I am sure as you have seen looking around on the web, you might come across this abbreviations:
- CPA (Cost per Action) – This is most commonly compensation to an affiliate for referring a paying customer.
- CPL (Cost Per Lead) – This can be compensation to an affiliate for someone he sends filling out a contact or online form.
- CPM (Cost per Impression) – Compensation for a banner “view” or loaded page or ad an affiliate gets someone to do.
- CPC or PPC (Cost Per Click or Pay Per Click) – compensation for an affiliate who gets someone to click on a link/image/etc.
- Pay Per Call – Just as it sounds:)
So what is the best most effective? It really comes down to your business, however a Cost Per Action is most common as it compensates the affiliate for actual money to product exchanging hands.
Various Commission Structure models:
Now that we have a primer on the various commission types – let’s see how companies/merchants/advertisers set their commission rates based on their products and services…
- Percentage of sale: A percentage of the price of whatever the customer who he/she referred bought. Example: 25% commission on a product that a referred customer paid $10 for. $2 would go to the affiliate.
- Flat Fee: Just as it sounds. Example: $25 commission on each product or service a customer buys that you refer.
- One-time: Commission is paid out one-time per referred customer.
- Reoccurring: Commission is paid out on a weekly/monthly/annual basis to the affiliate (usually based on the lifetime of that account that he/she refers).
- Product or Service based: If you have a wide range of products or services that range in price, you might denote different commission structures for each. Tip: Keeping with the “Simple” suggestion earlier, do it by product category vs. individual commissions for every product; you will be less confused and so will your affiliates.
- Unit Based: Some companies/merchants/advertisers will have increasing commission rates for affiliates based on how many referrals they make each month. For Example: 1-5 referral sales: $50 flat rate on each referral. 6-10 $75 flat rate on each referral (and so on…).
So what combination of these factors is the best? It really depends on your business but what I have seen the most of is: One-time, percentage or flat rate based.
So really: Is that it?
Most people get to this point and just want a simple answer: What % of my margin should my commission rate be? or Just tell me what is the best commission structure…and while I can give you some general guidelines – it’s a classic case of analyzing risk. Some companies might offer more commission because they keep customer’s longer (think of insurance- the switching and hassle is high for policy holders to switch so they stay longer – thus, the average payment value for that customer is high) while other’s offer quite low commissions because their margins are leaner. It really is up to you to know your business!
Did I cover everything?
While I covered the nuts and bolts there is still several aspects you might be wondering about such as: How to change your current commission structure without pissing off affiliates or other methods that are involved in commissions/payments (pending periods, minimum commission balances, etc.).