Affiliate Program Management – Structuring Affiliate Commissions

When launching your affiliate program one of the first things you’ll need to look at is how to structure affiliate commissions.  You’ll need to decide if you’re going to set up a complex or simple payout structure.  There are multiple ways to do this but let’s take a look at the different options.  The options below are broken down into two types of affiliate programs; product sales and subscription/services sales.
Affiliate Program Commissions Management
Product Sales

Percentage of the total affiliate sale

Example: A customer purchases a laptop, mouse and keyboard for a subtotal of $750.  Your commission rate is set at 10%.  The affiliate payout would be $75.

This option simplifies the commission structure and is easy to understand for affiliates.  One percentage rate is given to the affiliate for the total sale and individual products do not factor into the calculation.

Flat dollar amount for each affiliate sale

Example: A customer purchases an iPhone case for $35. Your commission rate is set to $5 per sale.  The affiliate would earn $5.

This affiliate payout model can be used but does not work particularly well for product sales.  For example, if the customer purchases 3 iPhones the affiliate would not be compensated more for one item vs. three items.

Item based affiliate commissions

Example:
A customer purchases the following items;

1 sofa pillow ($25)
2 pieces of wall art ($45)
1 lamp ($70)
Total of $185

Based on your commission structure you will be paying;

7% for furniture décor
9% for wall art
3% for lamps

Your affiliate payout would then be; (7% x $25) + (9% x $90) + (3% x $70) = $11.95

You can see how this model is more complex than a flat percentage or dollar amount per sale.  This affiliate commission structure is usually introduced when an advertiser’s margins vary greatly from one product type to another.  This is very common in the affiliate channel but it’s recommended that you keep the item lists and commissions as simple as possible.

Here’s an example of a cell phone advertiser and their item based commission structure.

5% for Cell Phones
10% for Cell Phone Accessories
18% for Bluetooth products

As you can guess, the advertiser’s margins are tight for cell phones but much higher on Bluetooth products.  This structure above allows the advertisers to keep commissions in line with profit but also keep things relatively simple for the affiliates.

Subscription Based Sales

Subscription based affiliate programs are structure fundamentally different from product based programs.  With a subscription sale the customer is agreeing to pay a company a recurring fee for the use of their service or redemption of product.  This creates an inherent issue with only paying the affiliate based on the initial shopping cart subtotal.  The customer is much more valuable than just their initial payment because they have created an ongoing stream of revenue for the advertiser.  The affiliate needs to be compensated for that and based on the life-time value of the customer.

Here is an example of how a magazine advertiser would calculate a fair commission structure for their subscription service.

Acme Magazines sells 6 month magazine subscriptions ranging from $4.95 to $6.95 per month.  Their average sale is a $5 monthly magazine subscription and customers tend to keep a subscription for 1 year.  With those figures the life-time average value of a customer would then be $60 ($5 x 12 months).

When calculating the commission it wouldn’t be fair to only compensate the affiliate 50% of the sale because the first charge in the initial checkout process would only be $5.  Hence, the affiliate would only earn $2.50 on a customer that should generate the advertiser $60.  This is where converting to a flat, increased payout makes sense.  Let’s assume that the advertiser has a budget of 15% for the acquisition of a customer magazine subscription.  The commission structure would then be set up for a flat $9 (15% x $60) affiliate payout for each magazine subscription sold.  It is important to focus on the life-time average value of a customer and compensate the affiliates accordingly.  Doing this will create a very attractive program for affiliates and one that they’d be happy to promote.
Regardless of the type of product, service or subscription you sell, the affiliate commission structure is the cornerstone of creating an attractive program.  If not structure correctly, affiliates won’t be incented to send traffic to your website and your program will not gain traction.

Versa Marketing Inc. can work with your company to structure the appropriate affiliate commissions.  Our approach to affiliate management will take into consideration your profitability while combining that with our knowledge of what affiliates want to promote.  Our experience has taught us how programs should be structure in order to be successful.

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