One of my blog readers has e-mailed me a question about what commission to offer when launching an affiliate program. It is a good question. Therefore I have have decided to reply in a blog post.
Truth be told, I have already addressed this question in detail in my A Practical Guide to Affiliate Marketing volume. Here’s the direct quote:
When deciding at what level to set the default commission rate, calculate what you can afford to pay and remember to leave room for time-limited commission increase offers, promos, and private offers.
There are various opinions on how to calculate what you can afford to pay your affiliates. Some would say to pay as much of your gross profit margin as possible, and if you can afford to pay out as much as 50% of that margin ““ do so. The idea behind such thinking is to be generous to your affiliates, as you indeed should be. However, do not forget to think three steps ahead, and leave a little room for growth. Starting from around 20-25% of your gross profit margin may be a better idea to determine 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. (p. 31)
In a nutshell, I believe it is sensible to set your default commission level some 20% lower than the maximum commission you are able (and willing) to pay out to your affiliates. Additionally, do keep in mind that some super affiliates may not consider a 20% increase to be substantial enough, and will expect to be offered 50% or even more above your default level. It is not unusual for an affiliate program to offer 10% on the base level, 12-13% through promos, and 15% in private offers to super affiliates.
Check out our updated article on what your affiliate program’s commission rate should be.