How to Calculate Affiliate Commission Rates

Affiliate commissionAre you preparing to start an affiliate program but having trouble figuring out how to calculate the affiliate commission rate? Congratulations for giving it some thought and wanting to make things work! It is important to take the time to find a formula that benefits both you and your affiliates.

If you set your commission too low, publishers won’t bother to promote you. If you set it too high, you may later discover that you’re not making profit, or worse, you’re actually losing money. Decreasing the commission could cost you affiliates. How do you make ends meet?

There are no universal rules. Only you can figure out what works for your particular business and what doesn’t. As you get to it, remember that affiliate commissions represent just one part of the overall costs implied by an affiliate program. You want to keep track of all costs, as your ultimate goal is to make profit.

Also, it is important to understand that determining the affiliate commission rate means more than just establishing a flat amount or a percentage to pay on every sale or other qualifying actions. In order for your newly-launched affiliate program to grow and drive performance, you need a more complex commission structure.

So what does calculating the affiliate commission rate actually involve?

If you want your affiliate program to be successful, your affiliate payout budget should cover at least the following:

  • Standard affiliate commission – The flat amount or percentage the average affiliate earns for driving one qualifying action
  • Performance tiers – Commission increases or flat amount bonuses meant to encourage affiliates to sell more and reward the best-performing ones
  • VIP commissions – Some affiliates can drive more value to your affiliate program than others, so it makes sense to pay them higher commissions (think reviewers, niche influencers, major content affiliates, etc.)
  • First sale bonus – Paying a flat amount bonus or multiplying the commission on the first sale(s) (subject to time restrictions) is a great way to convince affiliates to put up their links and begin promoting your brand as soon as possible.
  • Commission for affiliate referrals – Depending on your line of business, it may make sense to pay a commission to affiliates who refer other affiliates. These could be marketing agencies, influencer platforms, affiliate marketing forums, work-from-home websites, etc.
  • Network recruitment incentives – Some affiliate networks, (see ShareASale example below) allow you to invite publishers into your program but they request that you offer additional incentives.

network recruitment incentives to consider when determining affiliate commission rate

How do you determine these to stay within budget and have an attractive affiliate program? There are a few simple but important steps that you can follow, and we want to go over them in the following lines. Below you may find our 5-step guide to help you calculate an affiliate commission rate for your program.

1. Assess Your Production Costs

The term “production costs” covers all the expenses you incur when manufacturing or reselling goods, or providing services, including:

  • Raw materials
  • Labor
  • Consumable supplies
  • Storage
  • Packaging
  • Delivery
  • Utilities
  • Taxes, and more.

You basically need to find out how much your products or services should cost for you to break even. The difference from that cost to your selling price will cover your profit and your affiliate commission rate. Don’t rush drawing the line, though, as there’s more to do and take into account!

2. Evaluate Competitors’ Commission Rates

As explained in our guide on competitive intelligence and analysis and in numerous other posts, your affiliate program strategy should take into account that of your competitors’. After all, you all target the same affiliates and end-customers.

In order to stand out from your competitors, you need to come up with a better offer, or at least a comparable one. You cannot do that if you don’t know what they are offering, so find out! To make sure you get all the details, consider creating an affiliate account and joining their programs.

It goes without saying that the account should not be created with your real name and merchant website. It should promise your competitors everything they want from an affiliate, so as to ensure acceptance and, implicitly, access to their affiliate programs’ details.

As you study competing affiliate programs, pay attention to the following:

  • Standard commission
  • VIP commissions
  • Performance tiers
  • First sale bonus
  • 2nd tier commission structure

Not all merchants present these details clearly. To make sure you have the correct information, check both their 7 days and their 30 days statistics, like average order value, average commission, EPC (earnings per 100 clicks), and conversion rates. Affiliates consider these when deciding which programs to join, and, if you cannot match them, you should find a way to compensate.

3. Check What Wholesalers Are Paying

Do you work with resellers like Amazon, Walmart, and other retail giants who run their own affiliate programs? Then you need to make sure your affiliate commission rate is higher than theirs. Chances are your target affiliates are already working with them and they convert better than your merchant website.

If that is the case, you will have to come up with a better offer for both affiliates and consumers. Just put yourself in their shoes and answer these questions: why should an affiliate promote you over Amazon or another one of your resellers? Why should a consumer buy from you instead of your resellers? Come up with a better offer or they won’t!

4. Consider the Customer Lifetime Value

Depending on the specifics of your products or services, chances are your customers will order from you repeatedly or buy other products or services as well. Once they placed their main order, you can market to them directly, so you won’t pay affiliate commissions on their subsequent purchases.

That is why, when calculating the affiliate commission rate, you want to keep the customers’ journey and potential in mind as well. It may make sense to sacrifice profit on a first-order or subscription if that order or subscription will drive two-three more.

There are several ways to calculate a customer’s lifetime value, but I prefer to keep things simple, as in this post on affiliate commissions: calculating the average value your business can obtain from a customer, by multiplying average order value by average purchase frequency and average retention time.

So, it may be worth paying even 50% per initial sale to an affiliate if you know that the customer they refer will continue to buy from you directly and the profits they will drive in the long run compensate for the higher initial payout. But, of course, before offering high initial commissions, you should study customer behavior and analytics carefully and do your math.

You’ll find it invaluable to study the following post (and video) by our very own Geno Prussakov: How to Structure an Affiliate Program to Generate New Business.

5. Draw the Line and Finalize Your Calculations

Corroborating the data gathered at the previous steps should help you reach a conclusion and make a decision regarding the commissions you can and should pay to your affiliates. Hopefully, you will be able to beat your competitors’ offers and convince affiliates to promote you.

When deciding what your affiliate commission rate should be, think long-term and, as advised above, make sure you won’t have to cut down commissions later. If you cannot offer higher commissions than your competitors, do not despair! Even though money matters, there are still ways to bring your program into the spotlight and convince publishers to give you a chance. Once they do, you will hopefully compensate for the lower affiliate commission rate through higher conversion rates, bonuses, and other incentives.

Your success at this stage will depend greatly on how you present your affiliate program to potential affiliates. We will cover that in the following lines. There is a catch, though!

As mentioned above, if you sell through giant retailers like Amazon, it is imperative to beat their commission rates and offers to end customers. They have excellent conversion rates, fast delivery, and great customer service, and, if you cannot match their offer, most publishers will prefer to promote them. If you could earn higher commissions and earn more promoting the same products, wouldn’t you do it?

Ideas to Make Your Low-Commission Affiliate Program More Attractive

When you cannot match your competitors’ offer, it helps to avoid direct comparisons with them. At this point, you already know what you’re up against. Now focus on how you can make a difference. Here are a few ideas:

Ideas to compensate for low affiliate commission rate

·        Different Commission Calculation Method

Let’s say most of your competitors calculate their commissions as flat amounts. If you cannot match their offer, calculating yours the same way will only highlight the difference. It is better for you to calculate your commission as a percentage. The more your affiliates sell, the more they can earn. The idea works the other way around as well: when you cannot pay high percentages, it may be better to pay flat amounts. This way, your affiliates will know exactly how much they can earn on every sale they drive.

·        Different First Sale Bonus Presentation

As an affiliate program management agency, we always recommend that affiliate programs have a first-sale bonus. These work wonders when encouraging affiliates to activate. Stand out from the crowd! You could increase the affiliate’s first payout by fifty percent, double, or even triple their commission. It could also apply to their first two or three conversions. As you get to it, don’t forget to set a time-frame (30 days) for the first sale bonus. This way, you will motivate affiliates to put up your links sooner.

·        Free Products or Demo Accounts

Some reviewers and influencers agree to promote certain brands and products in exchange for free samples or the possibility to test-drive their services. If you can provide those, the affiliate commission will be a mere bonus. If providing free products is not an option, consider offering unique discount codes.

Some of them may actually need your products and be willing to buy them at a lower price so as to meet their immediate need and, hopefully, drive sales and profits. Be careful though, as products and demo accounts cost money as well! You want to provide them to affiliates with a considerable following, who target the right audience and have the power to drive sales.

Also pay attention to engagement, as chances are you won’t see results from a publisher with high social media following but engagement levels close to zero. On the contrary, you may see better results from one with a lower following but higher engagement rates.

·        Longer Cookie Life

As you may have noticed, most sales occur within the first hours, days at most, from the buyers’ first visit to your website. Knowing that, when you set your affiliate program’s cookie life, don’t hesitate to be generous. Offer more than your competitors as a standard and don’t hesitate to increase cookie life even further for select affiliates. It won’t cost you anything but it will give them the impression that they are getting a special offer.

·        Focus on Buyer Benefits

In the end, your affiliates make money by recommending products to their audience. Sure, they will be more inclined to recommend the products and services that bring them the highest profits. However, they would lose their credibility if they didn’t promote offers that are worthwhile for their audience.

·        Exclusive Offers

Your affiliates are not profit-driving bots. They are people, just like you, with a need to feel appreciated and respected. You can satisfy that need through special offers, like personalized creatives, co-branded landing pages, exclusive or personalized discount codes, and preferential commissions.

Your affiliates will appreciate your attention and vote of confidence and may even start promoting you over your competitors. Moreover, those special offers and personalized creatives could help improve conversion and drive profits for both of you.

Back up affiliate commission rate with special offers

·        Insisting in Your Recruitment Efforts

If a publisher doesn’t answer your recruitment email it doesn’t mean that they don’t want to work with you. If you check their website, you’ll see that they work with tens if not hundreds of merchants that could be reaching out, and many more are probably trying to get to them. Therefore, assume that they are busy or they missed your first email. Allow for a few days to pass by and follow up on that first email, and on the second and third one as well, if necessary. Sending up to four follow-up emails is usually worth it.

Of course, the results will depend on the text and formatting of your recruitment emails as well, on your ability to highlight the program’s strengths and connect with the reader. Generally, you want to make the email about them, their value, and the benefits at stake for them. You want to show respect and, at the same time, flexibility, versatility, willingness to work with them to drive results. You need to give your affiliates a glimpse of the transformational leader that they’ll find in you or your affiliate program manager.

Get Help Establishing Your Affiliate Commission Rate and Making Your Program More Attractive!

Do you need help deciding what your affiliate commission rate should be or making your program more appealing to affiliates? Don’t hesitate to reach out! At AM Navigator, we’ve helped countless merchants make decisions related to their affiliate programs and appeal to the needs and interests of those affiliates. We’ll gladly review your affiliate program for you and provide our expert opinion, no strings attached!

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