When Merchants (Unexpectedly) Decrease Affiliate Commissions...

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On November 5 at 3:47 pm ET affiliates of a major program on one of the top affiliate networks received a notice that started as follows:

The reaction to my tweeting of the above screenshot has ranged from negative [see this Tweet by Charles Born from California, or this one by John Coulson from England, or this one by Ken Schultz from Demark] to understanding [see Jake Ludington's yesterday's Case For Decreasing Affiliate Commissions post]. Regardless of the solid line of argument used for the support of the latter, I still have at least 5 problems with the above instance of affiliate commission drop:

  1. Lack of Advance Notice — Notifying affiliates at 3:47 pm about an important change that takes effect the very next day (shouldn’t such things be regulated by networks, imposing a rule that affiliate program terms cannot be switched overnight, but require a 7-days notice?) is unacceptable. What if an affiliate has a paid search campaign, the bids in which are immediately connected to the percentage of sale that they’re expecting from the program?
  2. Scale — It is hard to tell from the above excerpt, but we are taking an unexpected threefold commission decrease (from 3% to 1%) in this case.
  3. Q4 Expenses — When we’re talking products the demand for which rises during holiday shopping, it is helpful to remember that marketing expenses rise not only for merchants, but also for affiliates. Unless, of course, the latter are relying solely on their organic rankings in their marketing. But even then: what guarantees does this merchant have that their links, products and offers won’t be swapped for their competitor’s links, products and offers? Overnight (just as the commission drop) too.
  4. Contradiction — Calling an affiliate a “valued partner” (I would’ve customized this crucial email, using short-codes, to reflect the actual name), and talking how much you “appreciate” this “continued partnership”, yet doing something that (as phrased above) comes across as a completely opposite approach doesn’t help.
  5. Lack of Clarity — Based on the above text, it is unclear whether this threefold commission drop is something implemented for November-December 2012 only, or if it is going to stay that way for longer. And even though the very last line in this notice (the one you don’t see above) said “feel free to contact us with any questions”, if the merchant knows the exact period for which this is being done, it is best to inform affiliates of it — so that they could tweak their own marketing efforts accordingly.

I’d love to hear what others (merchants, affiliates, networks, agencies) think about this particular situation (or strategy?). The name of the merchant is irrelevant. The essence of the case is what does deserve attention.

About Geno Prussakov

CEO & Founder of AM Navigator – an award-winning OPM agency. Founder & Chair of Affiliate Management Days conference. Author of bestselling "A Practical Guide to Affiliate Marketing" (2007) and "Affiliate Program Management: An Hour a Day" (2011), speaker, consultant, and affiliate marketing evangelist.

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16 Responses to “When Merchants (Unexpectedly) Decrease Affiliate Commissions…”

  1. There’s no question that notifying affiliates less than 24 hours before a commission change is a lousy way to create a lasting relationship.

    In terms of scale – there might be a really good reason for the commission reduction. I think one of the bigger mistakes I’ve seen merchants work with is offering a far too generous commission when they launch their program and then have to reduce commission because the marketing costs were out of line with cost of acquisition in other channels.

    Regarding Q4 expenses – I spoke directly to that in my response. In a situation where the commission change is part of a holistic approach to an entire marketing budget, there are times when a company increasing marketing spend in-house directly benefits affiliates. Holiday buying can be one of those times.

    Another specific time I’ve seen it make sense is in software marketing. When a software company rolls out a new version of their product they typically do a large marketing push at the same time. I generally see a huge bump in conversions around a new product push, without changing any of my existing marketing strategies. Depending on whether those are existing customers who just happened to click my link instead of following the company marketing to buy the new version, the cost to the company to “upgrade” an existing customer can be significant.

    • Jake, I knew you would chime in. ;)

      Thank you for your comment.

      I agree, offering affiliates a higher-than-possible commission at the outset of the program’s launch (e.g.: to look more attractive) is a very common mistake. However, this particular program (which isn’t software; they are a B2C retail-oriented advertiser) has been around for several years, and their commission has always been at the 3%. Yes, they may have some strategic (or other) reasons for the move, but if there is benefit to affiliates in this move, talk to them! Communicate your reasons and (by all means!) advantages, if there are any. Otherwise, it is too easy to damage the relationship, and lose these affiliates to your director competitor(s).

  2. Sarah Bundy says:

    All good points – I would simply add that as a matter of principal it’s not the affiliate’s responsibility to manage the merchant’s budget, so if they go over budget, it’s just poor management on their side, or something that they would have had to accept in advance. Affiliates should not get the short end of the stick because a merchants budgets are coming close to maxing out, especially when payout comes AFTER a desired result takes place.

    • Great point, Sarah! It really goes back to my original thought: that performance-based marketing shouldn’t be regulated by “budgets”.

      I could see, how a budget could possibly influence a PPL refer-a-free-sample-lead-get-cash type arrangement. But the above merchant is runs a PPS affiliate program, which, by definition, shares a percentage of gross income (not budget).

      Of course, as Jake has mentioned in his article, affiliate marketing doesn’t exist in a vacuum, and the merchant may be incurring higher marketing expenses on other fronts. But then again: be more transparent about the subject (so, that affiliates understand what you’re doing, how long it’s gonna last, and what (possible) benefits there may be in it for them. Otherwise, it just looks like a huge step down.

  3. What are the odds that the merchant found out at 3:46pm that day that they needed to make the change?

    Again, a week’s heads up is fair (bad business IMHO but fair at least).

    Oh well…more affiliates who want to move to good programs :)

  4. Ken Schultz says:

    Hi Geno

    I totally agree with this post.

    Allthough there can be many reasons for decreasing sales and advertisers approaches to this can be very different, it still leaves the affiliates somewhat disappointed and their reactions may be changing links to a competitors program (which in many cases can be done easily as you point out).

    I understand that advertisers sometimes need to regulate their budgets, but affiliate marketing is different since you ‘hire’ extra sales people to help you sell more. How would a normal sales person react to a cut in pay? Continue working for you? Maybe, maybe not.

    The more commissions are cut, the more affiliates will change to a competitor. I have seen this happen in our own network, and I am talking about the real strong affiliates that have good content and in many cases can point links elsewhere.

    My point is that advertisers should take this into consideration when they calculate for changes since they could easily loose future sales.

    Encourage affiliates by giving them better tools enabling them to create more Q4 sales than they would normally do. These extra sales leads means that the advertiser would not need to cut the commission.

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  6. A veteran affiliate’s take on the subject: Balancing Affiliate Commissions and Merchant Budgets (new post from Scott Jangro). The decision to drop or keep such a merchant will ultimately depend on how the commission decrease affects your bottom line.

  7. Transform says:

    This is a huge, huge issue in an affiliate marketing. One of the major reasons why affiliate marketing is like stacking a deck of cards rather than building an actual business. Calling someone valued while decreasing their commission to 1% is insulting. This unfortunately is very common in the affiliate business. To all the companies that run affiliate programs out there.. Think of your affiliate as actual partners, build relationships with them, give them the tools they need to succeed, treat them like an employee of the company, give them a fair commission like an employee at the company would make.

  8. Ken Schultz says:

    Good post by Scott

    The eCPC is a really good number that allows you to compare advertisers insite a network or across several networks.

    Many affiliates have a goal of a minimum eCPC that they want to earn from affiliate programs.

    If cutting commission means that the eCPC falls below this goal then there is ar risk of loosing that affiliate (depending on how well your relationsship is with the merchant as Geno points out in a comment).

    The eCPC formula is actually easy to change so that you take reversals into consideration. If the reversal % is 10 you just reduce the conversion rate in the formula with 10%, so the formula looks like this:
    (Average ordersize) * (Conversation rate reduced with reversal%) * (Commission rate)/100

    My experience is that many affiliates have a goal of at least 0,35-0,40 USD (based on rates in Danmark).

    So the merchant should ask themselves these questions:
    What is my programs current eCPC?
    What will be the future eCPC if I cut commission?
    How will the changed eCPC affect affiliates participation in my program?
    How will the change in participation affect my sales/turnover through affiliate?

  9. Great sequence of questions for merchants to ask themselves, Ken.

    In addition to these, I would also strongly recommend doing a serious competitive analysis prior to making any changes to that commission structure. In the process of the analysis, I would gather data (on the following variables and metrics) and analyze how a merchant would compare to their competitor(s) on the following fronts:

    * Competing affiliate program’s commission
    * Performance-tied bonuses and/or tiered commissions (if any)
    * Conversion ratio
    * Reversal rate
    * AOV
    * EPC

    Naturally, with all of the metrics on the above list you’d want to go with data collected over longer periods of time (at least 30-day averages; or, better yet, 3-months figures).

    With affiliate network-based affiliate programs most of the above-quoted KPIs and variables can be easily accessed (or derived from others) viewing your competitors’ affiliate programs through an affiliate interface. With in-house-based programs, competitive intelligence will be tougher to streamline, but not unrealistic to set up.

  10. Dave Tinneny says:

    Hey Geno,

    Do we know if this programme is managed in-house or outsourced?

    I agree completely with the issues you’ve pointed out in this notification, but I think the notice period says it all.

    It looks like another typical case of someone not fully understanding the channel. There is still a huge amount of education required, especially by people who formed their opinions years ago. I see this as an essential part of the programme manager’s job. Cutting commission last minute seems very extreme and I can only imagine that whoever typed it must have been under severe duress.

    If it’s managed in-house, they should have known about any budget cuts far in advance and planned appropriately.

    Outsourced can be different, as client expectations can sometimes lead to unavoidable last minute situations such as this – but that’s no excuse either. They should be educating their clients all the time.

    • I agree, Dave, regardless of the management option there’s “no excuse”; but I love the request for clarification on the exact setup here (as it certainly puts some things into context). It looks like in this case the program management is being outsourced.

  11. David says:

    Greetings Geno,

    I think they enjoy these types of things… guys in finance show the stats if we reduce payout by X% we get this uplift in profit…

    Along these lines I’m a little concerned about a recent development in Australian space when a large affiliate network bought out another. The downside is they went from offering a decent CPL to the new network offering almost a third. Really not in a rush to migrate offers over to “new” affiliate offers based on that difference, just wondering how much shit I would get in with them for posting the difference between the old and new offers?

    David

    • David, thank you for your comment. So, they bought them out, and cut the PPL payouts threefold?

      I guess, your situation is also complicated by the fact that the “supply” of Australian offers isn’t as bountiful as what’s available in the U.S., or even in the U.K.; and if, as a result of the above-mentioned acquisition, you were simply left without much choice, this is plain ugly.

      I am, however, a bit confused by you saying that you’re “really not in a rush to migrate offers over to ‘new’ affiliate offers.” How long are they giving you/affiliates until the “new offers” take effect?

      • David says:

        Ah I must actually retract that I had misread the offers, I spent some more time today doing a side by side comparison and calmed down a little. Dangers of a jumping to a conclusion….

        It seems only handful are only slightly less but some other offers are exclusive so hard to compare apples for apples. As for when we are pushed across to their new platform… they will advise…

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