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.
4 thoughts on “How To Calculate Affiliate Commission Rate”
Thanks so much for these blog entries. While I’ve been piecing together information from ABestWeb forum posts and the like, I’ve daydreamed about finding a single resource that answered a number of my questions and offered some “for dummies” background and context for more complex concepts. Your blog fits the bill better than anything else I’ve come across online…
I have one question about calculating affiliate rates – would appreciate it if you had the time to share your thoughts. The program I’m setting up now is focused on lead generation. It seems to me that fraud should be factored into the first calculation you list above – the “maximum that you can afford to pay,” but I’m not sure how to quantify fraud. Your average convenience store, I’m told, plans for 5% of their profit to be lost to shoplifting. Based on your experience, is there a similar number one could apply for a lead-based affiliate program run with solid approval and affiliate monitoring policies?
First of all, thank you for your kind words. I highly appreciate them. These are the kinds of comments that keep me going. Thank you for taking the time to say that my work has helped you. That’s really good to hear.
Secondly, if you’re looking for an online “for dummies” guide to starting an affiliate program, I’ve compiled (and am constantly expanding) one here: Online Guide to Affiliate Marketing (hope you will find it of help too).
Now to your question: you may certainly factor in a % (I wouldn’t know which to recommend), but I never do it. With managed programs there is actually no reason to factor in fraud. Every fraudulent transaction should be reversible [more here], and when you find out that it is the affiliate who is involved in the fraud the affiliate should be banned from the program. This way you (a) get your money back, and (b) get rid of a non-kosher “partner”.
Finally, there’s another post on calculating competitive commission that you may find of help, and you may find it here.
The possibility of zero profit lost to fraud is encouraging. And surprising! And yes, I’ve found your Online Guide to Affiliate Marketing – it’s become a fixture in one of my browser tabs.
I have a few other questions – I reckon I’ll contact you by email and see if it’s possible to set up a bit of consulting with you.
Thanks again, Shawn
Shawn, “zero profit lost to fraud” = very achievable reality if (i) you partner with the right affiliate network (if that’s the platform you want to run your program on), and (ii) you manage your program (and not let it fly on its own). That’s the whole idea about classic affiliate marketing: pay only for the qualifying action as defined by you.
Yes, feel free to email me with any further questions.