While I strongly disagree that the highest affiliate program “payout” is the best criteria for choosing an affiliate program (because the actual payout you’ll get will always be determined by a combination of the affiliate program’s commissions, conversion rate, and reversal rate), today I’d like to address a question that many and especially beginning affiliates wonder about: How can one find the maximum commission a merchant is willing to pay through their affiliate program? It is absolutely reasonable for affiliates to seek an answer to such a question. After all, why settle for a lower commission when that same merchant can often afford to pay you more?

Here are some tactics you may employ while seeking to get the highest possible pay/commission from an affiliate program:

1. Talk to the affiliate manager (or merchant), tell them you’re interested in their program (you better have a good website or a convincing marketing plan to go with your interest), but would like to see if they offer higher-than-the-default-level payouts (often known as “private offers”) to select affiliates.
2. See if it’s a two-tier program and they also pay you commissions on sales driven in by affiliates that you may refer to them. In case it is, check how much they are paying in second tier commissions? Normally, you may expect at least the sum total of the first and second tier commissions.
3. Become an active and producing affiliate, and when you have demonstrated to the merchant what exactly you can do for them (especially as far as the conversion of your traffic goes), reach out to them asking for a higher commission. Out of the four “methods” I’m listing here, this one often works best.
4. Attend an affiliate marketing conference (or other gathering) to meet the merchants you’d like to negotiate with, and talk to them! A well-negotiated commission raise will pay off your trip expenses. Of course, you want to clearly understand what exactly that raise will mean for you (i.e.: how many sales of what value you are certain you can refer to the merchant, and what that additional percentage or dollar amount will translate into).

Whether you’re reading this as an affiliate, or an affiliate manager, and can think of other effective ways to find out the maximum commission an affiliate program can pay, I’d highly appreciate you chiming in with your comments below.

Yesterday as I was adding new coupons for a ShareASale-based affiliate program I have noticed a little (but a very significant) addition to one of the fields you can fill out when adding a coupon/deal to the network. They now have a field for special commission to be applied on coupon/deal transactions. The fine print (and an important rule) may have been up there for some time, but I certainly don’t remember seeing it a couple of years ago. Under the special commission field it says (highlighting mine):

So “this commission amount cannot be less than your advertised global commission rate for public offers” and “for private offers, it must not be lower than your designated commission rate for that specific affiliate.” Very important rule!

I couldn’t help but recall Todd Farmer’s “ShareASale is My Network of Choice” post. For affiliates it is extremely important to have such an understanding mediator between them and the merchants.

It isn’t unusual for merchants (including some of the largest online brands) to offer lower commission rates on coupons (or to coupon affiliates). I like what I see ShareASale doing above. If the merchant doesn’t want to offer coupons through affiliates, that’s fine. Institute such a policy, and have your affiliate manager police it. If, however, you do choose to use the affiliate channel to distribute coupons, factor in the commission affiliates will receive into the discount you’re offering, and still pay the full affiliate commission. Kudos to ShareASale for supporting affiliates there.

A merchant has emailed me the following text:

I would like to know what is the range of percentage paid out in the affiliate program? Someone told me it is between 3% to 25%. Is that right? What is the lowest rate you have seen so far? the median? and the highest?

Actually, the range is much wider than the “3% to 25%” you’ve been quoted. At one end of the spectrum, there are some of the larger brands (e.g.: Apple and Dell) that paying affiliates as little as 1% on the default level; and on the other end, there are industries in which merchants are happy to pay as much as 100% (or even more) in affiliate commissions (e.g.: Chemistry.com [matchmaking] and Superb Internet [hosting])

So, the range I’ve seen goes from 1% (sometimes even lower) to 100%.

However, I believe that the question we’ve started with has a huge potential to misguide a merchant in their search for the perfect commission figure to offer their affiliates. You want to look at the range within your industry. After all, you want your affiliate commission to be competitive when compared with what your principal rivals are paying.

Industry-specific affiliate payouts always depend on:

1. Size & popularity of the merchant — In most cases, the unfortunate reality is: the better the brand recognition (and hence, the click-to-sale conversion too), the lower the commission
2. Typical industry profit margins — A clothing merchant, for example, will always beat an electronics merchant in the commission figure (10-15% vs 3-6%), while a flowers and gift baskets merchant will most often beat a clothing merchant (15-20% vs 10-15%)
3. Type of sale — Is it a subscription-based service that’s being sold, or a retail product? Naturally, the commission in the former case will always be more generous than in the latter

Consider all three factors, study what your competitors are doing, and come up with both the range, and your own strategy based on a comparison of apples to apples.

I’ve had a merchant approach me with a basic question, but since many other merchants who are also new to affiliate marketing may wonder about the same things, instead of just replying to him via email, I am posting my reply below.

This particular merchant is considering starting his first-ever affiliate program on ShareASale, and is currently crunching numbers to calculate an attractive affiliate commission rate. He wrote:

I’m trying to figure out what commission I should offer to affiliates.  (I know from your blog that I need to leave room for special deals, super affiliates, etc.)  SAS gave me a demo affiliate account to view merchants in similar categories.  Here’s the problem: I can’t figure out how SAS is calculating their statistics…

…and the following example is given:

He is then asking me (a) how to read the data given in the “additional information” column (such as EPC, reversal rate, etc), and (b) how to use it to calculate a competitive affiliate commission for his niche (in this case, it is the “Education” vertical).

Let me answer the first question first:

• The 7 Day and 30 Day stats given above reflect affiliate program statistics for rolling periods of 7 and 30 days respectively
• EPC in this particular example stands for affiliate earnings (average across the program) per 100 clicks sent to the merchant [more on EPC here]
• The Reversal value reflects the reversal rate of affiliate-referred sales/leads (e.g.: if the reversal rate is 10%, then every 10th affiliate transaction (and consequently commission paid) has been reversed)
• Avg. Sale stands for the average affiliate-referred order value over a given period of time
• Avg. Commission shows you the actual average affiliate payout per transaction (e.g.: if it’s $74.15, then this is the average payout affiliates have earned from every sale referred)

To address the second question:

• You really cannot use the above-explained stats in calculating a competitive commission for your field/niche. This data does give you valuable information on what’s happening in your competitors’ affiliate programs; but to evaluate the competitiveness of your commission offer, you want to look in the “commission structure” column, and also check if there are any performance-based bonuses (or tiered commission increases) offered by competing affiliate programs. Also, do not limit your research only to the affiliate network that you’re going to be on. Study competing affiliate programs run on in-house platforms, and other affiliate networks. Many will not give you such data as the “reversal rate” that ShareASale gives, or the conversion rate that is so important for affiliates, but as far as the research into such basics as the commission and cookie life, all affiliate programs display this information to prospective affiliates prior to joining. So, just open affiliate accounts with all the major affiliate networks, and do your research.
• Also, the post you’ve referred to — or How To Calculate Affiliate Commission Rate — contains a few tips on how to structure your affiliate payouts, factoring in any monetary motivators that you want to factor in.

Today I am starting a series of posts (I am not planning to publish them in a consecutive manner, but new ones will be added as I come across the issues to address), and a whole new category – Affiliate Marketing Fallacies. In this rubric I will be covering the popular fallacies and misconceptions about affiliate marketing. About a year ago I recorded this video (my most popular YouTube video to date) where I addressed the misrepresentation of affiliate marketing as “possibly the absolute laziest way to make money.” I will certainly include it in the corresponding post in this new category as well.

Today we are going to look into yet another misconception about affiliate marketing.

A book by Patrick Tan entitled Success with Online Retailing: For Small Businesses, and published in 2003, has a chapter devoted to affiliate marketing (pp. 160-184). Among other things in this chapter, the author gives a definition to a super affiliate [see mine here], and speaks to the question of attracting such affiliates. Tan writes:

A super-affiliate is an Internet marketer who has made a successful living online. He is busy making money online and would not be interested in a program that pays mediocre commissions. You must offer exceptionally high commissions to attract the super-affiliates. (p. 166)

I have actually seen merchants who — being driven by (or talked into) the same thinking — were creating separate storefronts, with higher prices, to be able to afford higher than the vertical’s average commission rates. By so doing they’ve been making their offer uncompetitive, which reflected negatively both on the conversion their overall website, and on their affiliate traffic conversions in particular.

Recalling the topic I’ve discussed yesterday (but in no way supporting Amazon, as I believe they have a lot to improve in their affiliate program), the affiliate has partnered with a merchant that converted at 22%. While 20% is about an average conversion ratio (CR) for the top online retailers (see these charts), most e-tailers out there enjoy a considerably more modest CR. My personal experience with affiliate programs shows that while much depends on the vertical, solid CR generally ranges from 2% to 5%. So, speaking simplistically, if to raise your commission to the “exceptionally high” level you must raise your prices, making your conversion rate drop to 0.5% or less, you’d have to be paying your affiliates 44x times more to compete with them in the eyes of the affiliate.

It is never just about the “commissions”, but always about the payout; and payout is always contingent on the (i) commission rate, (ii) conversion ratio, and (iii) reversal rate — the three variables that should always be looked at in a bouquet, and never separately. Often, higher conversion ratio coupled with a low reversal rate make moderate commission rates more attractive than “exceptionally high” rates.

Reference: Tan, P. 2003. Success with Online Retailing: For Small Businesses. Bloomington, IN: iUniverse.

So you have decided to start an affiliate program. One of the very first question that you will have to deal with is what to set the program’s commission rate at. There are various opinions on how to calculate it.

My short advice is this:

a) Calculate the maximum that you can afford to pay your affiliates
b) Do a thorough analysis of what competing affiliate programs are paying on the base level (to ensure that your offer is competitive)
c) Decide what part of the maximum commission you want to leave for bonuses, performance-based commission increases, and private offers
d) Subtract c from a, and arrive at your base commission

Further thoughts:

Some would recommend paying as much of your net profit margin as possible, and if you can afford to pay that entire margin — do so. The idea behind such thinking is that you are paying for a customer acquisition, and in such instances one really must be as generous to their affiliates as possible. While there is nothing fundamentally wrong with such an approach, and I am always only for being rewarding and motivating, one must not forget to think three steps ahead, and leave some room for growth.  I’ve seen that in most cases it is better for merchants to go with around 50-75% of the net profit margin while determining the maximum affiliate commission you want to pay.

If your calculations show that the maximum you can afford to pay your affiliates is 15% of each sale that they send to you, do not set the base commission at the 15%. Leave the largest possible commission for private offers. Private offers are essentially special commission rates offered to a limited number of affiliates — those that already have the traffic you are interested in (or already promoting your direct competitors), and hence, are able to send you a considerable amount of traffic and sales. Again, let me stress that you want to leave the maximum possible commission amount for those private offers.

I have also mentioned performance-based commission increases, and promotions. If you are going to be managing your affiliate program the very best  way you can, you will be running various promotions (the third part of this book will help you with those), and you will, at times, need some room to raise that commission level or to offer various bonuses. I advise my clients to set the default commission rate at least 20% lower than the maximum commission they are willing to pay out. Some super affiliates, however, will not consider a 20% increase to be substantial, and will only consider 50% or even 100% commission increases. In my practice I have seen that base commission being increased by as much as 80% (to get a power affiliate interested).

Having spoken of commission increases, it is essential to also mention commission drops — one of the deadliest sins of affiliate program management. Never, never, never drop the affiliate commission rate (unless, of course, you want to bury your affiliate program in the process)! More here.

With common regularity both affiliates, and merchants wonder what is a commission locking period.

Let’s take ShareASale (SaS) for one example. On this affiliate network for every transaction in their reports merchants see a “lock date” (see example below):

Affiliates, on the other hand, see both the “lock date”, and the transaction status (example of how the affiliate sees the above transaction):

If we look at Commission Junction (CJ), affiliates see the same data in the Program Terms. Here’s an example of how it looks in the Overstock.com’s affiliate program:

So what is the “locking period” or “lock date”? Simply put, it’s the period of time that the merchants give themselves to reverse/adjust the transaction. Affiliate-referred orders can get canceled on a whole number of reasons, but once the “locking period”, or the “lock date”, has come, the commission gets permanently locked in the affiliate account, and the merchant can no longer do anything to that transaction (voiding, editing, etc).

Most affiliate networks allow merchants to choose the length of time within which they want to be able to edit/void affiliate commissions (based on how quickly they can verify the validity of sales, or on their experience with returns, or whatever other reasons may influence the commission reversal/adjustment). For example, the CJ’s default locking period/date is the 10th date of every month (on SaS it’s the 20th of each month), but as it is evident from the above example, Overstock.com has decided to tie it to the number of days past the order placement.

In general, I believe it is fair for advertisers/merchants to have “locking periods”. As with anything, however, merchants want to be careful not abuse this right.

A merchant, who has recently started an affiliate program emailed me the following question:

Affiliates are currently being credited their commission at the moment of sale. What if an order gets canceled, or we sell something that is no longer in stock?

First of all, make sure you it is not possible for the end user to order something that is out of stock. Once it sells out, it should be removed from your website, your affiliate data feed, or at least the order function should be disabled.

Secondly, the short answer to the above question is no, you do not have to pay affiliate commission on orders that either get canceled by the customer, or are in any other way invalid for you. In fact, it is a good practice to clarify in your affiliate program’s Terms and Conditions that you compensate affiliates for valid sales/orders/subscriptions/leads, and clarify exactly what “valid” means.

Normally affiliate transactions are being voided if/when any of the following behaviors are registered:

Customer Behavior

• Payment authorization failed
• Fraudulent sale
• Returned order or unclaimed shipment
• Repeated order
• Canceled order

Affiliate Behavior

• Fraudulent transaction
• Test transaction
• Self-referral (if you’ve specified in your T’s and C’s that you do not allow it)

Merchant Behavior/Circumstances

• Test transaction*
• Order non-fulfillment

The list may be longer, depending on your affiliate program agreement/restrictions, but the above list covers the most popular reasons for reversals. Beware that an affiliate may request you to provide proof of the above. Do not leave such affiliate requests unattended, as this will undermine their trust in you and the transparency of your affiliate program. *Also, when you place a test transaction at your website, and you do not want to test a particular affiliate link, make sure you have cleared your cookies before placing the order through. Otherwise, a commission may be credited to the affiliate account whose link you have clicked last.

A word of warning to close with: do not abuse your right to void sales. Some online industries – hosting, for example – are sadly known for a large volume of reversed affiliate transactions. Excessive numbers of such reversals often breeds suspicion in affiliates’ minds, thus compromising the issue of trust, a cornerstone of any merchant-affiliate relation.

Every once in a while affiliates post (in blog, forum, or other social media channel) about merchants lowering the commission rates in their affiliate programs. History also testifies that this happens not only with smaller brands, but larger online merchants were caught doing this as well. Some justify commission drops by inaccurate initial calculation of the default commission level, others by financial constraints, but no reason will ever be good enough reason in the eyes of the affiliates.

You want to make your calculations right at the very outset. Lowering the commission rate (permanently or even temporarily) at any time during the life of your affiliate program is a grave mistake.  It can easily bury your reputation, and your affiliate program. Put yourself into your affiliates’ shoes and you will understand why.

Respect your affiliates, and let your actions mirror this respect. You can go up, but never, never, never go down on that commission rate.

One of the most effective types of affiliate incentives is commission increase.

There are two basic ways merchants increase affiliate commissions:

1. Based on Performance

Performance may be measured in the number of sales or the cumulative monetary value of affiliate-driven sales.

Example A: The default commission is set at 10%, but affiliates that refer 10 or more orders get 12%, 20 or more – 14%, 30 or more – 15%.

Example B: The default commission is 10%. Affiliates that generate $1,000 worth of orders get a bump to 12%; $1,500 or over – 14%, $2,000 or more – 15%.

Performance-based commission increases may be tied to a period of time (most frequently one month, automatically starting from the default level every next month), or be permanent. Naturally, the latter type attracts more affiliate attention (everyone wants stability).

It is important for me to note that when working out the tiers, you want to make sure you set realistic goals. There is a merchant on Commission Junction that offers the following commission increases (based on monthly performance):

Judging by the list of their bestsellers, their AOV (average order value) is somewhere around $300-340. This means that to get the 0.5% commission increase, an affiliate has to send them 115+ orders every month; while to get a bump from 6% to 7% in any given month you would have to refer 147-167 orders to this merchant. And we’re talking fairly high-priced purchases here!

2. Based on Merchant’s Decision

It is always sweet to receive an unexpected e-mail from a merchant that informs you that due to your hard work (or in an effort to motivate you to become more active with their program) your commission has been raised. It is, however, not as exciting if the commission increase is only temporary.

Example: “Until the end September 2009 we have raised your commission from 10% to 15% per sale”

The above “promo” is hardly worth running (unless you’re a highly seasonal merchant that historically experiences a drop in sales once September ends), because you are going to decrease affiliate commissions to the lower level right before the Q4 sales kick in.

Conclusion: Look at your incentive initiatives from your affiliates’ perspective. Achievable always beats the unrealistic, while permanent always overshadows the temporary.