Determining Affiliate Commissions
When setting up the commission structure for your program there is no magic formula and many factors to be considered.
Evaluate the size of your market, the potential size of the market, and what you charge for your product. Conventional wisdom says that if you are selling a mass marketing product or a product with a large market potential, you may have to offer lowers commission rates; of course, your profit will be based on volume.
However, if you are selling a niche product (with a smaller market potential – for example: commemorative and collectable plates) you may need to offer a higher commission rate to entice affiliates to join the program. You’ll have fewer affiliates but they will be highly motivated. This can result in more sales for your and ultimately more revenue.
The cost of your product is a big factor. If you are selling computers and the average price is $1,500, many affiliates are okay accepting a lower commission rate because their potential earnings per sale is still relatively higher compared to selling $49 product for the same or even higher commission rate.
You’ll also need to factor in how your product rates compared to competitors in the same market. If you have the leading product in the space, you can probably get away with lower commissions. But if you are third or fourth in market share and trying to gain some ground, you may need higher commissions to lure affiliates to your program.
In addition, some market segments use a specific payment model. For example: the financial space generally pays affiliates a flat fee, while travel is typically based on a percentage of the total order that the affiliate sends to the merchant.
Website conversion is also a big issue. Affiliates often determine how much effort they will devote to promoting your product based on the Earnings per Click (EPC) that the merchant generates for them. This calculation is based on their commission rate and the conversion rate of your website. If you have a website that converts really well (gets people to make the purchase), you may be able to offer lower commission.
Keep your company’s business goal should also be top of mind. If your goal is attracting new customers, then maybe affiliates driving that type of traffic might be offered a better rate. And you may want to look at having different commission rates for different types of affiliate s- such as coupon affiliates, PPC affiliates, and super affiliates. Each of these groups has different strengths and will need to be addressed separately. You can also offer split commissions, whereby the commission is divided among multiple affiliates that participated in the process.
The bottom line is that you’ll need to be flexible, understand the motivations of different affiliate types and weigh all of these factors against your own business goals and needs. You’ll need to make a profit and you don’t want a commission structure that dilutes that.