How to Determine Your Affiliate Commission Rates
Did you know that 81% of marketers use affiliate marketing to boost their business?
If you’ve decided to delve into the dynamic world of affiliate marketing then you’re making a business-savvy decision, congratulations.
The first hurdle you’re going to face is deciding your affiliate program commission rates.
Not paying enough can discourage representatives from joining your affiliate program, but paying too much can impact your profits. You need to find the sweet spot somewhere in between, and ensure that your commission structure is sustainable for your business in the long-run.
In this article, we’ll cover why it’s important to choose competitive rates, and provide a step-by-step method to determining the right commission rates for your business.
Will affiliate marketing work for my business?
Affiliate marketing is among the top e-commerce ideas used by marketers around the globe to improve online sales and boost brand awareness. Countless top global e-commerce sites recognize and leverage the powerful sales potential of affiliate marketing. If you’re not on this bandwagon then you’re missing out on countless sales opportunities.
Driving conversions and increasing purchases are the two main goals for 79% of marketers. By partnering with affiliates, businesses can achieve these goals with minimal effort. Nowadays, affiliate marketing can work in tandem with automation tools to monitor results with real-time data. That makes it an accessible and lucrative strategy for even the busiest marketing departments.
Why your affiliate program needs competitive commission rates
Affiliate marketing spending in the U.S. alone is expected to reach $8.2 billion by 2022. With so much money spent on affiliate marketing per year, how can you ensure that it’s worth your while?
Affiliate marketing trends show that its potential in 2020 is greater than ever before. For businesses, it’s a lucrative low-risk marketing strategy that boosts conversions and yields high ROI. For the affiliates themselves, it’s a passive money-making strategy that provides working flexibility in the digital age.
It’s no wonder, then, that there are thousands of affiliate programs in the world offering various commission rates. Before you can begin reaching out to great affiliates, you’ll need to ensure your rates are competitive enough to stand out in a sea of affiliate programs.
Commission rates are reward-based payments that your affiliates will receive when a sale is completed. These rates typically include a base rate and bonuses.
It might be tempting to set your rates low to maximize your profits, however this won’t always work to your advantage. There are considerable benefits of providing affiliates with lucrative rates. These include:
- Attracting high-performing affiliates
- Increasing conversions by giving affiliates an incentive to perform well
Perhaps you’ll pay each affiliate more per sale, but you could end up seeing more sales overall, which is better for your business in the long run.
What’s the average commission rate?
As we’ve mentioned, there are numerous affiliate programs in the world offering rates based on various factors.
This begs the question: Is there an average rate?
Commission rates vary depending on a few factors:
- Product price
- The industry (for instance, the health industry is currently seeing a boom in commissions)
- How much value a company finds in affiliate marketing
Moreover, there’s no average commission rate as such, every business has different rates to suit their specific circumstances.
With your business in mind, it’s time to follow some steps to determine your affiliate commission rate.
Steps to Determine Your Affiliate Commission Rates
Step 1: Check out the competition
The first thing you should do is get a good grasp on what your competitors are offering. Affiliate marketing isn’t a new concept, and it’s more than likely that other people in your industry have done it before.
By performing an affiliate program competitor analysis, you can find out what they’re offering. That way, you can ensure your competitive payouts stand out from others in your industry.
Check out your competitors’ websites to see if they have an affiliate program sign-up page that lists their base commission rates. If this doesn’t turn up any information, try logging into whichever affiliate network they use and searching for their program.
This will allow you to answer questions like:
- Do they have affiliate programs?
- What commission rates do they offer?
- What additional resources do they provide to their affiliates?
- How do they recruit affiliates?
Armed with this knowledge you can use it to inform your own affiliate strategy and potential commission rates. You’ll get a good idea of what is “standard” in your industry and leverage competitors’ experience and knowledge to narrow down your potential rates.
Also consider the market in which you’re operating. Just as your sales playbook is tailored to your specific audience, your affiliate commission rates should reflect your sector. For instance, if you sell super niche products then you might need to give affiliates more for each sale to attract enough people.
It might also happen that affiliates in your niche have less options and are more likely to accept lower rates. Moreover, if you’re operating in a highly saturated market you may need to offer higher commission rates to keep you in the game.
Step 2: Outline your margins
Now that you’ve got an idea of the industry standard rates from your competitor analysis, you can outline your margins to get a realistic grasp on what you can afford.
Your profit margins are subject to many changing factors such as volume, overhead, and the economy in general. However, as you’re considering starting your affiliate program, it’s necessary to get some idea of what you have to work with. You want to set up a program that rewards affiliates but still makes you money, of course.
Start by outlining your operational costs. This involves considering all the costs involved in the day to day operation of your business. Think about:
- Affiliate manager’s pay
- Processing fees
- Tools you use or will need to invest in (everything from predictive dialing software to team collaboration tools)
Once you’ve got a good idea of the operational costs of keeping your business running, you can calculate the amount you can afford to pay affiliates.
Another important factor is the customer’s life-time value (LTV). By calculating LTV of a new customer you can get a roundabout idea of what they mean to you in revenue.
Customer LTV is an important metric in determining a limit on spending to acquire new customers. Calculating customer LTV gets pretty complicated. However, at a basic level you’ll need to know:
- Average Order Value (total yearly revenue divided by number of orders)
- Frequency of Purchase (number of yearly orders divided by number of unique customers)
- Average Retention Time (average time that a typical customer continues to purchase from your company after their initial purchase)
Once you have these numbers, pop them into this simplified equation:
Average Order Value x Frequency of Purchase x Average Retention Time = LTV
In some situations - for instance, subscription-oriented affiliate programs - it makes sense to pay higher commissions on the customer’s first payment to the company. That’s if you know that you’ll make much more from the same customer later on. Think of it as a future investment.
Remember to follow best practices to increase customer LTV such as:
- Providing high-end customer service
- Offering 24⁄7 support through a cloud PBX for small business operations
- Mapping the customer journey
- Personalizing customer experience
Step 3: Factor in bonuses and incentives
So, you’ve scoped out your competitors and outlined your margins, what next?
Before you reach out to potential affiliates, it’s a good idea to have an idea of incentives or bonuses you can offer to get their attention. Incentives and bonuses are paid above base rate, and they’re an essential factor in keeping your affiliate partners motivated and happy.
Just as referral marketing tactics often provide customers with an incentive to promote the product ($100 reward when your friend signs up!), an idea could be to provide your affiliates with a first sale bonus. You can also offer things like:
- Exclusive deals
- Invites to events
- Branded merchandise
- Excellent service and care
- Increased rates for improved performance
Think about what you can offer affiliates to endear them to your brand and help you stay competitive, beyond monetary compensation.
Another best practice is to segment your affiliates based on different criteria, such as the kind of traffic they attract or the sub-niche communities to which they can provide access. Along with tracking your affiliate marketing KPIs, segmenting offers can help you to test different types of affiliates and measure their results against one another.
In the same way that call forwarding software allows you to receive business calls 24⁄7, affiliate marketing enables you to make sales around the clock, without lifting a finger. Finding the best commission rates can be a difficult task when you’re just starting out in affiliate marketing.
There are plenty of factors that combine to inform your affiliate commission rates, including your audience, product prices, market niche, competitors, and budget. You can simplify the process of determining your rates by:
- Analyzing your competitors’ affiliate programs to become aware of industry standards
- Outlining realistic margins to work from
- Factoring in bonuses and incentives that’ll allow you to thrive and keep your affiliates happy
At the end of the day, your rates should be based on what works for your business, your market, and your affiliates.