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One of the conundrums that faces any advertiser with an affiliate campaign is how much commission they should be paying affiliates.

Unfortunately, there isn't a simple answer to this question, and setting a commission rate requires a lot of careful consideration.

When setting a commission structure it is also important to consider the cost of other online outlets. The affiliate channel can be a cost effective way of generating additional sales, if it is benchmarked against the cost of other areas of online.

The key to setting a commission structure that is going to engage all affiliates is flexibility. A “one size fits all” policy for setting a commission rate is not an effective strategy to drive additional sales volume through the affiliate channel.

Benchmarking against your competitors is one vital component of setting a commission structure. If it is not competitive within the segment that you operate, affiliates will either:

a)    Opt against promoting your programme.
b)    Promote the campaign but not give it as much exposure as your competitors.

Affiliates will partly base their promotion on the Earnings per Click (EPC) that the merchant generates for them. This is not based solely on the commission that is being paid, but also takes into account the conversion rate of your website.

If you have a website that converts at a higher rate than your competitors, you will not necessarily need to pay as high a commission, as affiliates will earn more money for each click through to your site. Of course, you may need to make an extra effort to tell your affiliates this is the reason for lower commissions but site conversion is often overlooked as a key priority within the affiliate channel and a well optimised and usable site will always be looked on favourably by affiliates.

You will also need to consider what the standard payment model is for that particular sector. For example, if you are in the telecoms or finance market, commission is generally paid at a flat rate while in retail and travel the norm is to pay commission as a % of the basket value.

It is also important to ensure that any objectives you have are reflected in the commission structure. If there is added value in new customers for example, a preferential rate could be put in place for any affiliate that is able to generate a significant level of new customer sales. Similarly, if there are certain products that have a greater margin than others, the commission structure could be set to reward affiliates who are able to sell high margin products.

'Super affliates'

Many affiliate programmes will see the majority of sales delivered by a small group of affiliates. There will then be a mid tier and then a longtail of affiliates making up the rest of the campaign. You are likely to see the greatest impact on sales by working closely with the top volume drivers, putting in place bespoke commission rates and sales targets whilst also ensuring that the mid and longtail of affiliates are not neglected.

Rather than setting commission tiers, it is more beneficial to work closely with individual affiliates on bespoke rates/targets. Tiers do not necessarily motivate the top affiliates to hit the highest commission rates and they can in fact be achieving the top tier already, essentially meaning that you could be paying more without generating additional sales. Similarly, unachievable tiers are likely to de motivate the long tail of affiliates who do not see the opportunity to earn increased commission.

By establishing the additional opportunities for increased exposure across affiliate sites, there is potential to engage with affiliates as media partners to deliver incremental volume. In order to have the flexibility to reward affiliates, it is imperative to set the base commission rate at a level where there is room for negotiation.

Working with different types of affiliate

Flexibility is also the key to working with different affiliate types. In order to extend your “reach” and to target as many potential customers as possible, a merchant should look to implement a strategy across a number of affiliate types – cashback, content, PPC, comparison and voucher code sites will all involve a different approach to maximise sales potential. 

For example, when working with cashback sites, an exclusive commission rate above and beyond what is being offered to other affiliates is going to be needed to gain additional exposure, whether this means being included in “top tips” sections or in newsletters to members which could have the potential to reach hundreds of thousands of members.

Similarly, voucher code sites can be classified as an affiliate group and can deliver high sales volumes. If a voucher code is issued then it is possible to set up a commission rate that is lower to offset the fact that you will already be taking a hit on margins to offer a discount (again, consultation with relevant affiliates will allow you to make a more informed judgment).

PPC affiliates

If part of your affiliate strategy is to allow brand rights to select PPC affiliates (either as direct to merchant PPC or as a complementary PPC campaign through a landing page) you will have to consider the commission levels that are paid to these affiliates. If the commission paid on the sale does not cover the affiliates click costs with additional profit margin, then a PPC campaign would not be a viable offer for the affiliate.

There is also the opportunity to increase the amount of PPC activity that the affiliate is able to do on your behalf, potentially covering off more generic search terms if you are able to offer them an improved commission rate. A minimal increase can result in a high percentage uplift in sales revenue generated due to the extra spend.

Finally, it is also possible to motivate the longtail of affiliates by offering them bespoke rates for hitting sales targets/increasing the visibility of your campaign across their sites. This could include writing reviews on products/services that you offer. Longtail affiliates are unlikely to hit a sales tier but if they are worked with closely, they are able to increase the sales they are driving with a minimal additional cost to the advertiser, with fantastic, targeted branding attached.

To summarise, flexibility and an understanding of the motivations for different affiliate types is the key factor in setting an intelligent commission structure for any affiliate programme. A full appreciation of the finer details should ultimately result in greater engagement with affiliates and crucially an increase in branding, sales and revenue.

Matt Swan

Published 31 August, 2010 by Matt Swan

Matt Swan is Client Strategist at Affiliate Window and a contributor to Econsultancy.

25 more posts from this author

Comments (9)

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Depesh Mandalia, Head of Digital Marketing at Lost My Name

"Rather than setting commission tiers, it is more beneficial to work closely with individual affiliates on bespoke rates/targets. " Completely agree. The merchants that I've found to be the most responsive and effective communicators are those that as an affiliate I'm more willing to give my precious time to. Commission tiers are not as motivational as a merchant asking 'what can we do to help you drive more sales' - for example, knowing the best sellers, or key ATL marketing messages or having insight into the type of traffic your site is driving through the blackwall from your site to the affiliates can make all the difference in improving the relationship and increasing sales - setting the commission correctly is only half the goal for a merchant

almost 6 years ago

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Steevo

interesting article, as someone who has worked both merchant side managing campaigns and as an affiliate I think you've more or less covered off the basics here. A couple of points though, I don't agree that cashback sites should be given incremental commission - the reverse should definitely be true. Cashback sites for most merchants are viewed as giving discounts to select groups of highly price concious customers (most of whom would have bought anyway but are looking for the very best deal) and effective a direct hit on revenue whereas other affiliate models are viewed as marketing costs which generate incremental sales. It is also demotivating as a none cashback affiliate to see cashback sites giving away commissions as high as I can earn purely as discounts that I can't match, never mind getting to a position where they are able to offer more. Cashback has the potential to kill the affiliate channel if it grows too large or too quickly and needs to be managed carefully in merchants affiliate mix.

almost 6 years ago

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Mobile Broadband

Agree with Depesh above. The best success I've had as an affilaite is working with networks / merchants on bespoke commission rates for individual promotions / products. This is much more motivating and and allows for very targeted activity rather than blandly trying to sell as much of everything at a given time as possible.

almost 6 years ago

Matt Swan

Matt Swan, Head of Business Intelligence at Affiliate Window

Hi, Thanks for the feedback. Steevo – thanks for the reply. This piece has been written from a merchants perspective and how they can engage with the various types of affiliates. While there may be some negative connotations with regards to cashback sites, they are a large volume driver for merchants. With a carefully planned cashback strategy, merchants are able to benefit from an increase in volume as well as new customers without significantly harming the rest of their affiliate base. We have carried out a lot of research here at Affiliate Window and the number of cashback sites that overwrite the cookies of other affiliates is negligible. On the contrary, the majority of times where the cashback site has made a sale, they are the only referring affiliate. Cashback sites are beginning to become a consumers first port of call, rather than an afterthought so they play a major part in a merchants online strategy. It is important that merchants understand the complexities of setting a commission structure – this blog post just covers the basic considerations. Thanks, Matt

almost 6 years ago

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Hero Grigoraki

"If you have a website that converts at a higher rate than your competitors, you will not necessarily need to pay as high a commission, as affiliates will earn more money for each click through to your site".

I find ths statement a bit weird, in an otherwise very logical article with normal suggestions to merchants. When a new merchant is being set up, no one knows what conversion rates will be achieved through the affiliate channel. Using the overall site's CR is an indication of what we can potentially expect for the program, but we should always take under consideration the kind of traffic received and through which channels. If, for instance, the merchant receives the majority of traffic through brand-related keywords, it's natural that the conversion rate will be higher than that from long tail.

I would advise merchants to set commission rates in accordance with their margins, be that on product level or type of affiliate activity, alongside setting targets of what they are looking to achieve through their program, and always take under consideration competitors' programs. Once they have 6 months worth of stats on how affiliates convert, then they can potentially start revisiting rates and engaging in optimisation techniques with specific affiliates.

Thanks

almost 6 years ago

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Andy Guest

Good article Matt, covers the basics but surely affiliate marketing has moved on from just "How much do you pay affiliates?" to more a question of "How do Merchants/ Networks target the different affiliate categories for the best returns?"

Its easy to offer affiliates more money for more sales volume & this argument can be justified, however why not diversify the model a little & pay Cashbacks & Voucher Code sites for "New Sales" & Longer Tail affiliates for New & Repeat Custom, or pay Email affiliates on CPC / CPA hybrid (budget allowing).

This does all depend on which segment of the space we are discussing as not all the above options would work for mobile or Travel Merchants etc.

Having worked in the space for a few years now I am still surprised at how little information some Merchans have / or share on their own consumers i.e. Lifetime Values, CTR's, Margins available to affiliates, Margins available for discounts etc.

One size certainly doesn't fit all & a bespoke approach is definatley key to tapping into each affiliates audience base.

almost 6 years ago

Matt Swan

Matt Swan, Head of Business Intelligence at Affiliate Window

These are all very valid points that have been raised.

There are a wide range of scenarios to consider when setting a commission structure, but it is important that merchants understand the fundamentals before becoming more savvy with their offering.

I hope this post has outlined the basic considerations of how a merchant can work with the various affiliate types, without alienating any of them.

almost 6 years ago

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Yannis Anastasakis

This is clearly extremely sensible thoughts and advice - thank you. Having said this, I am constantly seeing some fundamental differences between sensible marketing and online promoting in our industry, and everyone else! :) The affiliate marketing work we are doing through a customer of ours is specifically relating to the travel industry. It is a closed, invitation-only network of publishers that combines several features and booking processes and structures that are specific to travel. I am finding that a lot of the otherwise extremely sensible advice that one finds in this article - and throughout the affiliate industry - would not apply to us! A lot of the benefits and unique selling points that today attract multiple partners, would simply collapse if we did things like allowing anyone to sell, or working with a flexible commission structure... I would very much appreciate any feedback anyone may have - if you are aware of other industries where this may also be truth?

almost 6 years ago

John Courtney

John Courtney, CEO and Executive Chairman at Pay on Results SEO, Content Marketing, Social Media, Digital PR, PPC & CRO from Strategy Digital

Went to the A4U Expo roadshow in Bristol last night and the talk was all about being clear on your objectives and segmenting to target affiliate campaigns. Great networking btw.

almost 6 years ago

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