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%)
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.