A big confusion area when analyzing or creating an affiliate program: What formula will give me a competitive, cost-effective affiliate commission structure to offer affiliates in my affiliate program.
In the above video, we talk about the fundamental questions you need to ask to create the formula for an effective commission to offer your affiliates. We cover the:
- The Margin Question.
- Analyzing your Affiliate value touch-points.
- Aggressive vs. room to grow.
Watch the video and read more on each area to be an expert at creating a competitive and sustaining commission structure.
If your new to creating affiliate commission structures and want to learn about all the various aspects and components, head over and read my article on, The Ultimate Guide on Affiliate Commission Structures
The Perfect Commission Structure Point #1: The Margin Question
If you are starting an affiliate program or analyzing whether your current affiliate commission structure is really doing your affiliates or affiliate program service, you need to ask yourself the margin question:
After cost, how much margin (per product/service/account) do I have to work with in constructing my commissions structure?
Many SaaS companies get distracted in this area and often create their commission structure off of:
- What their competitors are offering and offering a commission structure higher.
- Making up a # they think would attract affiliates.
Both of these strategies fail in the fact they are: not grounded in your business’ unit economics.
Once you know how much margin to work with, you might rush to consider what exact amount is going to be offered for your affiliates in return for them driving customers to order your accounts or plans. However, you need to analyze the next part…
The Perfect Commission Structure Point #2: Your Affiliate Value Touch-points.
With any SaaS-based companies, there are varying degrees of how well the customer adopts your service with ease (like in a self-service model) or needs additional help from either internal resources (Account Manager, customer support, etc.) or outside advisors (like consultants, coaches, etc.).
Let’s take for example:
Case #1: a marketing automation SaaS company. The common problem that they solve for customers is: their software automates marketing processes within small organizations to reduce cost and improve efficiency. Now, automation platforms can get quite complex and a majority of customers set up their automations based on different aspects of their business. Therefore, 90% of the time – the SaaS company sees their customers hire an agency or consultant to help them with this.
Case #2: As a counter example, Let’s take a VPN company. Many customers sign up, follow a few instructions, and now can turn on/off their VPN services for their own needs. They do all this them self and don’t need any outside help.
In Case #1, An affiliate might specialize in helping their clients become customer’s of this SaaS-based service AND continue to retain that customer by helping them with their automations. With this, you might consider a recurring monthly commission structure as the touchpoint of value associated with the affiliate, goes beyond the initial driving of the customer.
In contrast, Case#2 – the affiliate is just driving brand awareness to the prospect, the prospect becomes a customer, and there is very little value given from the affiliate to the prospect after they have become a customer to the SaaS-based service. Therefore a one-time commission makes more sense here.
And before you launch or change that commission structure of yours – consider the final point…
The Perfect Commission Structure Point #3: Aggressive vs. Room-to-Grow.
It might seem beneficial to offer the HIGHEST commission structure within your margin – right from the beginning. But I do want to warn you. If you offer the highest commission you can offer, you restrict the following:
- The ability to raise your commissions for all affiliates if you see the channel working for your business.
- The ability to raise your commissions per individual affiliate if they send/refer you quality customers.
- The ability to lower commissions. Yes – that is right. You CAN lower commissions but the problem is: when you lower a commission rate in your program, it sends a negative signal that the company isn’t doing well or they don’t trust their affiliates (And human nature, overall, doesn’t favor loss aversion one bit.).
Common Questions/Objections I receive on Commission structures.
It’s a recurring theme, that I get a few questions after I explain these tenants of a perfect commissions structure. In these section I plan to answer them…
Q: That’s great but – my competitors just raised their commission structure. Shouldn’t I raise my commissions structure as well to compete for those affiliates?
A: I always go back to the margin question. If raising your commissions stays within your margin – then that is a question you can only answer. However, if you are going negative just to keep up with competitors (and expect to have an unrealistic 100% life-time value for all accounts referred), then it is bad practice and completely risky.
Unless you’re in a completely commoditized market – I would never even consider this. There is often a assumption around the correlation of commission structures and attracting affiliates to your program over competitors. However, what happens in real life is: Affiliates promote your product and service because it fills the problem/solution category and is a company they stand by and recommend. It’s very unlikely affiliates shop affiliate programs for best commission structure without considering problem/solution fit of the service offering itself (unless your product or service doesn’t have a whole lot of differentiation amongst competitors which is the crux of the problem to begin with). If they do shop around – there likely not value-added affiliates for your program.
Q: I am offering a one time rate but my competitors are offering a recurring. Should I?
A: Go back to Point #2. If you are compensating affiliates on touch-points that don’t provide additional value, you’re only raising your customer acquisition costs without getting anything out from it (i.e. retention). So the answer is:NO.
Q: What about progressive or tiered commission structures (whereas, the more an affiliate refers the higher percentage of the amount of their one time commission increases) play into the considerations above?
A: In my experience, progressive or tiered commission structures work for a certain type of affiliate but not really for the majority. It works for the affiliate that can scale up their traffic and referrals with ease (which is usually less than 10% of all of your affiliates). If you are considering this: test it with a small amount of affiliates that fit this mold, but always consider point #1 and point #2 in the how and why you are doing this.
is there a question about commission structures for your affiliate program that didn’t get answered above? Feel free to comment below.