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The logical explanation for why affiliate programs are so popular among digital entrepreneurs is the affiliate commissions they earn as affiliates. Affiliate commissions can be considered as the foundation of any affiliate marketing program. Bloggers and YouTubers are a perfect fit for this digital business model. Some affiliate programs or affiliate products offer appealing affiliate commissions. This is why digital entrepreneurs are lured to this affiliate marketing like a moth drawn to a flame. Some affiliates can indeed earn a six-figure affiliate commission in a single month. However, not all affiliates will be able to reach that level. It takes time, and you must work continually to accomplish your business goals and objectives. Matt Diggity and Adam Enfroy are perfect examples of successful affiliate marketers. Who knows, maybe the potential to earn affiliate commissions was what sparked their interest in affiliate marketing years ago.
It is understandable why affiliate programs need an appropriate reward system for their affiliates. However, if not carefully determined, it can significantly impact your affiliate program. You need to recruit more affiliates to promote your product/products. Suppose your affiliate commission rates are not enticing. In that case, affiliates may not be sufficiently motivated to send more potential customers to you. They will eventually quit working with you and join your competitors.
Unless you’re selling a digital product, you cannot afford to pay your affiliates a high affiliate commission rate. Physical products typically do not have higher profit margins as you have to bear the costs of manufacturing, warehousing, and shipping. In such cases, paying a high commission rate would further reduce your profit margins.
Always keep in mind that affiliate commission is a cost associated with your affiliate program. Many fail to see this clearly. You should train your mind to recognize the affiliate commission as a part of the costs of your business. Then you will find it much easier to determine the best compensation model for your affiliate program.
Now you know why setting the right affiliate commission rate for your affiliate program is challenging. We’ll go through how to calculate and set the affiliate commission rate for your affiliate program step-by-step. You should also better understand the various affiliate marketing compensation models.
There are a few important elements to consider while determining the right affiliate commission rate for your business. Let’s deep dive into each step of the process of determining the appropriate commission rate.
Choose The Type Of Affiliate Commission That Best Fits Your Affiliate Program
You have to understand that the main reason affiliates join your affiliate program is the financial return. Giving away store credit is not an effective strategy to encourage and incentivize them to promote your products and drive more traffic to your product landing page.
We believe an affiliate program must have a sophisticated affiliate compensation model to be popular among affiliates and be successful in the digital world. Then only high-performing affiliates who bring more sales will benefit from your affiliate program more than low-performing ones. That is just how it should be.
But when you first launch an affiliate program, you can’t adapt to such a sophisticated affiliate compensation model. Aside from the affiliate rewards, you have many other things going on in your business that demand your attention. That is why you should start with a simple affiliate compensation model, such as a percentage commission or a flat rate commission.
Even if you start with a simple commission payment structure, it should later be upgraded to a more complex affiliate compensation model. It is crucial to the growth of your affiliate program.
You Can Later Incorporate The Following Into Your Affiliate Compensation Model
Standard Affiliate Commissions – Paying new affiliates first sales bonuses to convince them to promote their affiliate links with enthusiasm. For example, new affiliates are given a reward (fixed commission or double the standard commission) in addition to the commission earned for sales made within the first 30 days of joining the affiliate program.
VIP Commissions – Some affiliates are really valuable to you, bringing you more sales than other affiliates. Giving your top affiliates a VIP commission will motivate them to put more effort into promoting your products.
Performance Levels – Incorporate various performance tiers into your affiliate program. The intention is to reward high-performing affiliates with higher commissions and retain them in your program.
Affiliate Referral Commissions – Paying referral commissions to affiliates who refer other affiliates. Your sales revenue will increase as you recruit more affiliates.
Network Recruitment Incentives – ClickBank, Rakuten Advertising, Digestore24, and ShareASale are just a few of the affiliate networks that make it easy to find the right affiliate to promote your product. However, you must agree to their terms, which may include providing additional incentives.
Assess Your Product Cost & Profit Margin, When Calculating The Affiliate Commission Rate
Evaluating your product cost and profit margin before deciding on the commissions of your affiliate program is extremely important. For example, suppose you plan to offer a 50% affiliate commission each time an affiliate helps you sell a specific product. If your profit margin on that product is just 25%, you know you can’t afford to pay your affiliates 50% commission. You will have to run your affiliate program at a loss.
Businesses like ClickFunnel offer their affiliates a commission rate of up to 40%, but not all businesses can afford it. You don’t necessarily have to offer your affiliates a higher commission rate just because other businesses do. All you need to be concerned about is the affiliate commission rates of your competitors.
If you sell a variety of products, your profit margins might vary depending on the product or product category. The ideal strategy to maximize business profits is to reduce the unit cost of manufacturing a product.
The total cost of a business is the combination of its fixed and variable costs. The fixed cost is a cost that is independent of any specific business activities and does not depend on the number of products you produce. Unlike fixed costs, the variable costs vary depending on your production volume. The unit cost is calculated by dividing the total cost by the number of goods produced.
You must reduce both fixed and variable costs to reduce the unit cost. Fixed costs, such as rent, can be reduced if you get into long-term rental agreements with the landlord or relocate your business to a less expensive area. If you shop around for lower insurance premiums, you can save money on insurance as well.
Outsourcing your deliveries to a third-party delivery service can help reduce variable costs such as fuel and vehicle maintenance. You can also negotiate with suppliers to lower your raw materials cost.
The above example demonstrates how to calculate profit margin. According to the calculation, the profit margin is 28.78%. If you can minimize the cost of production, you can maximize your profit margin. It is clear that you cannot pay your affiliates promoting your products a 50% commission rate when your profit margin is just below 30%.
Note: When calculating profit margin, you must include transaction processing fees, discounts, and affiliate commissions to the total cost.
Evaluate Affiliate Commission Rates Of Competitors
Sometimes, the purpose behind launching an affiliate program is to expand your business across borders. This allows you to identify a similar audience in other countries, and your prices could be highly affordable to them. So, in addition to focusing on local competition, you need to be well-aware of who you are up against on a global scale.
All you need to do is choose two or three direct competitors with established affiliate programs. There may be direct competitors who do not have affiliate programs, but the fact is that you must outsmart them as well to succeed. You need to keep an eye on what your competitors are up to. Choosing at least one indirect competitor related to your niche is also essential.
How do you identify competitors? You can quickly identify your local competitors by performing a Google search. If you want to target a specific country, you can use a VPN while googling to find out who your competitors are in that country.
There are multiple other ways to find competitors. If you know one direct competitor of your business, it is easy to find more competitors. Using a Similarweb, you can instantly identify a few competitors for free.
Suppose you introduce a Premium Email Marketing Tool that digital marketers can use to run Email Marketing Campaigns to drive more traffic to their websites. Similarweb, can you help find your search traffic competitors. Those who compete most directly for the same search traffic. Competitors can be searched by inserting a URL or typing the competitor’s name. In a matter of seconds, Similarweb will provide a list of competitors competing for the same search traffic.
Once you find your competitors analyze their affiliate compensation models to ensure your offers are more attractive for affiliates than your competitors. Unfortunately, you may find it difficult to obtain information on some affiliate programs, especially about their affiliate commissions, which they do not disclose openly.
In that case, you can contact their affiliates and inquire about the commission rates. A competitor backlink checker can help you find affiliates who link to your competitors’ websites. However, It is difficult to ensure that you will receive 100% accurate information from affiliates regarding their pay. That is the biggest drawback of this approach.
You can also join their affiliate programs as an affiliate and monitor how they reward their affiliates for a certain period to have a solid understanding. You do not have to use your real information or website when signing up. This is a more accurate yet time-consuming alternative.
Affiliate commission is one aspect that helps attract more affiliates. Still, other factors also contribute to the popularity and success of your affiliate program. It is critical to learn what your competitors are doing to increase their brand awareness.
How do you keep tabs on what our competitors do? Is it a time-consuming and challenging task? No, It’s actually incredibly simple if you use Google Alerts. Enter your search query (In this case, your search query would be your competitors’ names). You will get notifications (to your email or RSS Feed) every time your competitor’s name is mentioned.
For example, let’s take HubSpot. You want to know whether HubSpot is getting mentioned or is building profiles. All you have to do is set up Google Alerts, and Google will notify you whenever HubSpot’s name is mentioned in a video, blog post, or book. However, keep in mind that Google cannot monitor social media posts.
You might want to conduct a comprehensive competitor analysis that includes more than just comparing affiliate compensation models. In that case, you might consider conducting a Competitor Capability Analysis. Then you can clearly identify who is the best in your niche and where your company stands compared to its competitors.
Assess The Average Lifetime Value Of A Customer
Customer Lifetime Value (CLV) is another useful affiliate marketing metric that indicates the revenue a business expects to receive from a single customer throughout its business relationship.
The longer a customer continues to buy from a business, the higher customer lifetime value becomes. First, let’s clarify why determining the customer lifetime value is important.
Why Should You Determine Your Customer Lifetime Value?
Customer lifetime value helps you identify your business’s most valuable customer segments.
Referrals, sales, and positive reviews will eventually increase if a business can optimize its customer lifetime value.
As it helps identify the ideal customers for your business, you can plan and develop customer acquisition strategies targeting them.
It helps to reduce customer acquisition costs.
According to a Harvard Business Review article, acquiring a new customer could cost a company somewhere around 5 to 25 times the cost of retaining an existing customer.
A study conducted by Bain & Company found that a 5% increase in your existing customer retention could lead to a 25% to 95% increase in profits.
Optimized company CLV can increase customer loyalty and retention
How Does CLV Factor Into Determining The Optimal Affiliate Commission Rate?
Knowing the customer lifetime value of your business will help you determine a reasonable, affordable and sustainable commission rate for your business. As we mentioned earlier, affiliate commissions represent a cost to acquire new customers for your business. So, for your affiliate commission to be sustainable, the average customer acquisition cost must be much lower than your company’s average customer lifetime value.
If it’s equal to your CLV, that means your business’s total cost and total revenue are equal. In other words, there is no net loss or gain. However, this does not imply that you should shut down your business. Your business will start earning profits due to economies of scale in the long run. But if you determine your CLV wisely, you won’t have to wait long to enjoy the profits.
Set Your Own Affiliate Commission Rate
Now you have gathered all the information you need to determine the affiliate commission rate for your affiliate program. To begin with, you chose a standard commission structure. Then you calculate your business’s product cost, profit margin, and customer lifetime value. Moreover, you perform a competitor analysis to better understand how your competitors pay their affiliates. It is now up to you to determine the best affiliate commission rate for your affiliate program.
First, you should choose an appropriate range of affiliate commission rates. When deciding the proper commission rate range, two conditions must be fulfilled.
It must be affordable for your business
The affiliate commission rate you offer must be attractive compared to competitors.
For example, suppose you decide that the best commission rate for your affiliate program is between 10% and 25% after considering everything. Start your it with a commission rate that is at the low end of the affiliate commission range. This will give you plenty of time to observe how your business progress. If required, you have the ability to increase your commission rate. This strategy will ensure that you will not lose any of your existing affiliates. On the other hand, you will be able to recruit more affiliates to your affiliate program.
Setting Affiliate Commission Conditions That Are Appropriate For Your Affiliate Program
When you prepare your affiliate terms and conditions, there are a few things you must remember to incorporate. If you fail to specify or encompass these terms in your affiliate agreement, you run the risk of losing the trust of your affiliates. This might potentially result in negative reviews for your affiliate program. Therefore, be sure to include the following in your affiliate commission conditions.
- Type/types of your affiliate program (One-time and Recurring)
- Type of affiliate commission
- How you track affiliate links (client-based tracking or server-to-server conversion tracking) and Cookie Lifetime
- Eligibility for Affiliate Bonus, Discounts & Coupons
- Payout (Minimum payout and payment schedule (weekly, fortnightly, or monthly)
- Accepted payment methods. Please keep in mind that the minimum payout and payment cycles may vary based on the affiliate’s desired payment method.
- If a customer requests a refund, whether you deduct affiliate commission from the affiliate’s balance (Ideally, you should deduct; else, your earnings may suffer)
- If an affiliate breaches the agreement, you clearly mention whether or not you pay the affiliate’s balance before terminating the agreement.
Periodically Revisit Your Affiliate Commission Rates
Nothing makes your affiliates happier than hearing that the affiliate commission rate of your affiliate program has increased. That is why it is important that you undertake a market survey periodically and change your commission rate accordingly. Because your competitors can surpass you by offering more enticing affiliate compensation.
You can pay a temporary bonus(flat-rate bonus or extra commission rate on sales made in a particular month) to your affiliates in addition to increasing the affiliate pay. This is an excellent way to promote your affiliate program.
But for you to raise your affiliates’ pay, you must also revisit your pricing strategy. This is why pricing is a process that must be continually re-evaluated. Prices cannot be expected to be stable since markets are highly volatile; prices frequently fluctuate.
All reputed affiliate programs usually re-evaluate their pricing and affiliate commission rates at least every three months and make changes every six months. This allows them to retain their existing affiliates while also attracting a load of new affiliates. More affiliates mean more backlinks to your website. This will increase both referral and organic traffic.
Wrapping Up
Affiliate marketing is a great way to earn passive income for affiliates and brands to increase their sales. Anyone can create an affiliate program to boost their sales if they own a business. One of the difficulties in creating such an affiliate program is determining the appropriate affiliate commission rate.
Above, we have outlined how to set an appropriate affiliate commission rate for your affiliate program. All you have to do now is follow the procedure step by step.
Only because you set up a proper affiliate compensation model doesn’t guarantee your affiliate program will be popular; you’ll have to promote it yourself. For this, social media marketing can be regarded as a very effective method of promotion.
Hopefully, this guide will help you better understand affiliate marketing and calculate the commission rate that will be most beneficial to your business.
A Word Of Advice For Daring Entrepreneurs – If you can start a business on your own, launching an affiliate program shouldn’t be too difficult. Sometimes to win the competition, you have to make bold decisions. You don’t always get it right the first time. There is a learning curve to everything. Believe in yourself and take pride in what you do. Your potential is boundless, but we must first discover it within ourselves.
Let us know if you have any questions about determining affiliate commission rates in the comments section below! Your input is precious to us.
