Choosing the correct affiliate marketing commission rate can cause conflicted thoughts. On the one hand we want affiliates to promote our business and to gain us sales. On the other hand we don’t want affiliates taking sales we would have made anyway.
This conflict can only come about if the philosophy of affiliate marketing is misguided.
Fundamentally affiliate commission rates are no different to any other online marketing the company carries out.
Let’s look at PPC marketing.
If our current CPC budget is 5% of revenue the budget for affiliates should be exactly the same.
The key thing to get right is our CPC budget per click. Use our formula to calculate this if you need help calculating it for your business and website.
Affiliate commission rate is basically your CPC budget, we don’t see any reason for it to be looked at any differently.
Any problems with this approach?
Let’s look at some extremes.
We have an affiliate that manages to achieve a 20% conversion rate from the traffic they send to our website.
And another affiliate manages to achieve a 1% conversion rate from the traffic they send to our website.
Is it possible that either of these affiliates are going to end up costing us money rather than making us money?
No!
Because we are only paying a commission based on our calculated maximum CPC budget, the conversion rate of the affiliate can only be profitable for us (if we have calculated our PPC budget correctly)
OK, it doesn’t lose us money but does it reduce out profitability?
It’s possible.
If we are advertising on Google and our maximum CPC bid is 0.10 dollars we won’t necessarily be paying the full 0.10 dollars for every click. If our ads is really good we may be getting clicks for an average of 0.05 dollars per click.
But with affiliates we are always paying them the maximum for every sale.
Is this a bad thing?
For sure it can dent profitability but the flip side is we as a company have not had to invest any time into the marketing. The affiliate has spent the time creating a webpage for referrals or spent time perfecting their PPC ad on Google.
Yes we are paying more with the affiliate but we also do not have to pay any personnel.
We can say that the maximum we want to pay for clicks is 5% of revenue but we also have to take into consideration the staffing costs associated with the activity of PPC marketing. Not having the staffing costs is a big bonus to the bottom line.
In summary, the answer is it depends. Every company will benefit from not having staffing costs, the size of the benefit will vary between companies.
SEO
So far I have only talked about affiliate marketing whereby our affiliate advertises on Google and links to our website.
What about the affiliate activity where affiliates build pages on their websites which refer to us. In this activity not only do we receive more traffic because the affiliate is sending us traffic, we also receive more FREE traffic from search engines by having sites link to ours.
Again, this will offset the fact that we are giving the full budget on every sale.
Affiliate Commissions – In short
We believe we should pay our affiliates the exact same amount as our budget.
If your budget for clicks is 5% of revenue then 5% is what we should be paying our affiliates for every sale they generate.
We can also offer different commissions depending on the products bought. Products will have different profit margins and different conversion rates. When we have calculated our PPC budget for each segment we can offer the same commission structure to our affiliates.
And if we are not comfortable giving 100% of the PPC budget it can be adjusted. If our CPC budget is 2% of revenue, we could give an affiliate commission of 1.5% for example.
