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
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.