I am signed up with a number of affiliate programs for the purpose of monitoring their promotions and affiliate motivation methods; and the day before yesterday (on March 17 at 2:05 pm) one program manager has sent me a newsletter which started with the following text:

I wanted to follow-up with you regarding the Tractor Supply Activation Campaign as our reports show your site has not yet generated any sales with our program for the past 6 months.   We want to help you make the most of our partnership and begin generating steady revenue.

Exclusive One Time Offer!
We have extended you a 7% Private offer now through March 31st as an incentive to become active in the [Merchant's Name] program.  Please log into your [Affiliate Network's Name] account to accept this offer to take advantage.

AND, as an extra incentive…

Generate $500 sales during this time frame and we will extend the 7% private offer through April 30th.

I am not mentioning the name of the company, because it is really irrelevant here. I will use them as an example of how this could have been handled better.

The default affiliate commission in this program is 5%. They have raised it to 7% for me for 14.5 days in March, and are telling me that if I generate $500 in sales during these 14.5 days, they “will extend the 7% private offer through April 30th”. And then what? Then it’ll drop back to 5%. Well… Maybe not. Maybe it will stay at the 7% mark through the end of the next month if I generate $500 (or will it be $1000 for the full month) in April too, and so on.

Here’s why I do not believe it’s a good incentive:

Anything that involves a commission drop isn’t a good idea. It just doesn’t go down very well with affiliates. Once you’ve raised that commission for them, either keep it at that level, or at the very least, give them a longer-term perspective (e.g.: keep generating $500 in sales every month, and we will keep you at the “private offer” level). Another option, which may even be more attractive (as dollar amounts are generally much more enticing than percentages), is offering your affiliates a cash bonus for performance.

For example, if $500 in sales over 14.5 days makes economic sense for you to give affiliates extra 2% in commissions, they why not offer them an automatic $10 bonus on every batch of $500 in sales sent in? After all, it is a fairly small gratitude as it is; so why cut it back at any time?

Also, when bonuses are tied to a time period (say, all sales through the end of Spring will qualify you for a $20 bonus per every $1000 sales sent in), it comes across much better than a temporarily raised commission level.

Affiliates reading this, I would also appreciate your input if you want to post it in the “Comments” area below.

Got my November 2009 Internet Retailer issue in the mail yesterday, and in it they have published some interesting data on the 2008 compensation of top online retailers’ executives, including those who are in charge of marketing. Each executive’s compensation package represents a sum total of base salary (s), bonus (b) and stock compensation (sc).

The top 5 highest paid execs were: SVPs of Amazon.com S. Gunningham (seller services) and M.A. Onetto (worldwide operations) the total compensation of which was $5,044,125 and $4,598,107 respectively; CEO of Nutrisystem, J.M. Redling with $4,572,312; COO of BarnesAndNoble.com, M.S. Klipper with $4,191,511, and CEO of Newegg.com, T. Liu with $4,191,511.

Only 8 marketing execs were mentioned on that Internet Retailers list of 120+ executives, and here’s how their 2008 salaries rank:

1. Leslie Kilgore (CMO, Netflix): $748,077 (s) + ? (b) + $1,334,546 (sc) = $2,089,703
2. Thomas F. Connerty (EVP/CMO, Nutrisystem): $350,000 (s) + $0 (b) + $649,026 (sc) = $1,025,139
3. Bradford Matson (CMO, BlueFly): $350,000 (s) + $227,038 (b) + ? (sc) = $585,269
4. Houman Akhavan (VP of Marketing, US Auto Parts Network): $209,616 (s) + $173,990 (b) + $166,155 (sc) = $570,010
5. Kristin M. Rogers (EVP of Sales & Marketing, PC Mall): $338,042 (s) + $22,689 (b) + $116,072 (sc) = $490,693
6. Michael Rudolph (VP of Marketing, ThinkGeek): $213,337 (s) + $49,040 (b) + $188,533 (sc) = $450,910
7. Sonya L. Lambert (VP of Marketing, Vitacost): $144,000 (s) + $107,496 (b) + $189,365 (sc) = $440,861
8. Stormy D. Simon (SVP of Marketing & Cust Care, Overstock): $200,000 (s) + $0 (b) + $242,476 (sc) = $375,583

Note: whereever you see the question mark above, the data wasn’t published

As it is obvious even from the above list, much of the compensation is tied to results: both individual and company’s overall performance as well. Internet Retailer comments:

…the growing role of stock in top executives’ total compensation underscores the trend toward e-retailers linking executives’ pay to company performance.

That’s only accelerated in 2009, as online retailers responded to the economic downturn. “There is far more emphasis on incentive-based compensation versus base salary,” says Wendy Weber, president of executive recruitment firm Crandall Associates Inc. “Companies are asking for more skin in the game.”

Interesting observations. The affiliate marketing payment model is obviously given preference in this economic climate, and there is nothing strange about it. It keeps all parties engaged, and when there is performance and growth, everyone is happy.

Merchants that are new to affiliate marketing often ask me if my company is the same as Commission Junction or LinkShare, and if not, how exactly it fits into the scheme of things, and how is my “performance bonus” different from “transaction fees” that affiliate networks charge.

The first thing that needs to be clarified is that my company is not the same as CJ, LinkShare, ShareASale, or any other affiliate network. Affiliate networks are mediators that provide merchants and affiliates with tracking and maintenance solutions to run their affiliate campaigns. They are sometimes also called “affiliate solution providers” (ASP’s), as no additional software is required for the merchant to start and run an affiliate program if they decide to use an affiliate network. All you have to do is open a merchant account with the network of your choice, and the affiliate network will provide you with access to their own affiliate program software that tracks, reports, and helps you run your affiliate program.

Outsourced affiliate program manager (aka OAPM or OPM) companies are something different. In a nutshell, it is your outsourced option to having an affiliate program manager work for you in-house. An OPM handles all standard affiliate program management duties, including identifying and recruiting new affiliates, motivating the current ones to perform better, developing affiliate promotions, handling all on-going affiliate communication campaigns, and much more [see my earlier Affiliate Program Management: Areas of Responsibility post], but often at a more cost effective fee than an in-house manager.

So, an affiliate network provides you with access to software to run your affiliate program, while an OPM company provides you with the affiliate program management solution. OPMs can work both with affiliate programs that are network-based, and with those that are run on self-hosted software.

Now, let’s talk about “transaction fees” and “performance bonuses”.

A transaction fee (also sometimes called an “affiliate override”) is what you pay your affiliate network. It is normally calculated as a percentage of each affiliate payment subtracted from your account. You can think of it as of a credit card processing fee. Those of you who have merchant accounts with credit card processing companies know that to process a transaction you pay anywhere between 2% and 4% of the total amount of the transaction. It works similarly with the affiliate networks’ transaction fee; with the only difference that it is not tied to the order amount, but to the transaction that occurs between you and the affiliate that has referred a sale. As mentioned above, the affiliate network’s transaction fee is normally a percentage of what you pay your affiliate, and the exact percentage varies from 20% to 30% depending on the affiliate network. If you agree to pay affiliates 10% of each referred order, on each $100 order sent in, you pay them $10, and the affiliate network charges you addition 20-30% of the $10 that you pay your affiliate.

Performance bonus, on the other hand, is something that an OPM normally charges you. It can be tied either to the affiliate commissions paid out, or to the cumulative monetary value of all affiliate-referred orders that occur within a set period of time (normally, one month). Incorporation of a perfomance bonus into the contractual agreement with the OPM is important for both the merchant and the outsourced program manager. For the merchant,  it ensures the affiliate program manager is motivated to keep the program growing, while for the OPM, it essentially provides a “no cap” arrangement, making the job follow the standard affiliate marketing model: the more you sell, the more you’re paid.

To follow with the above-quoted example of an affiliate program that pays 10% commissions: suppose, you have an order for $100, and your affiliate network charges you a 20% override (transaction fee), while the agreement with your OPM states that he/she will work for you on a $500/retainer + 15% performance bonus basis (where the performance bonus is calculated based on the total order value). In such a scenario, the breakdown of your affiliate marketing expenses will look as follows:

$10 – to affiliate (i.e. 10% commission of the $100 order)
$15 – to OPM (i.e. 15% performance of the $100 order)
$ 2 – to affiliate network (i.e. $10 affiliate commission * 20%)
——
$27

I see your eyebrows raised at that $15 performance bonus already. “That’s a rip-off!” you’re saying out loud. Stay with me for a 5 seconds longer, and I’ll explain how it normally works with OPMs. The lower the monthly retainer — the higher the performance bonus. You have to keep them motivated too. They invest a lot of time and energy into getting a program off the ground, and $500 may not be covering much of it (again, this is just an example; so don’t take the remuneration figures literally). Along with the “$500/retainer + 15% performance bonus” option, any OPM would more than likely offer you options that would follow such pattern as these:

• $1000/retainer + 10% performance bonus (in our above example, it would amount to $10 of each $100 sale)
• $1500 + 5.0% performance bonus (or $5 of each $100 order)
• $2000 + 2.5% performance bonus (or $2.5 on every $100 affiliate-referred sale)
• . . . and so on

You discuss the exact compensation model with your outsourced program manager prior to signing a contract, and generally OPMs are open to switching between the payment model options on advance notice, and, certainly, mutual agreement.

The exact figures of the monthly retainer and the corresponding performance bonus differ depending on the industry and the OPM company, but I hope the above example has helped me visually illustrate the differences between affiliate networks and outsourced affiliate program management agencies, as well as what expenses a merchant normally incurs with each affiliate transaction.