Determining Your Affiliate Commission Policy
Creating Your Affiliate Commission Policy
Welcome to the lesson on how to specify and create the commission policy for your affiliates! When setting up an affiliate program, one of the most important decisions you need to make is determining the commission policy that will apply to your affiliates. This commission policy can play a crucial role in attracting and motivating affiliates to promote your products or services.
There are many different ways to run an affiliate program. Some of the choices are based on your strategic objectives, but others are based on your personal preferences.
In this lesson, we will provide an overview of the points to consider when deciding on an affiliate commission plan, along with some examples and further explanations where beneficial.
Points to Consider when Deciding on an Affiliate Commission Plan
Before you dive into putting together your affiliate plan, take a moment to think about these important points. Consider how each of these factors will affect your objectives for the affiliate program and how your potential affiliates might react. Oh, and don’t forget, when setting up your affiliate program software, you’ll need all this info to make sure everything is just right.
Product Profit Margin
When considering the profitability of your products or services, it is crucial to carefully assess the profit margin. By doing so, you can determine whether offering a higher commission rate to affiliates would be a viable strategy for boosting sales. If the profit margin is substantial, this gives you the opportunity to provide a more generous commission to incentivize affiliate marketers to drive even more sales. On the other hand, if the profit margin is relatively low, it may be necessary to establish a lower commission rate in order to ensure that the business remains profitable. This delicate balance between profit margin and commission rate is essential for maintaining a successful and sustainable enterprise.
Let’s say you have a product that costs $50 to produce and you sell it for $100, resulting in a profit margin of 50%. Now, if you offer a 10% commission rate to your affiliates, they would earn $10 for each sale they generate. In this scenario, you would still be left with a profit of $40 (40%) per sale after deducting the commission. Your profit margin drops from 50% to 40%, which is a 20% decrease in your profit margin.
However, let’s consider a different scenario where the profit margin is lower, perhaps only 20%. If you maintain the same 10% commission rate, your affiliates would still earn $10 for each $100 sale, but your profit per sale would only be $10 (10%). In this case your profit margin would drop from 20% to 10%, which is a 50% decrease in your profit margin.
In this example, the lower profit margin limits your ability to offer a higher commission rate, as it would lead to a potential loss or significantly reduced profitability.
This example illustrates how the profit margin directly affects the commission rate you can offer to affiliates. A higher profit margin allows for more flexibility in providing a more enticing commission, while a lower profit margin may require adjusting the commission rate to ensure the business remains financially viable.
When evaluating your products or services, it is important to factor in the price. This aspect can be viewed from different perspectives.
If you have a higher priced product, affiliates may be more inclined to promote it because they earn a higher net commission per sale. For example, let’s say your high priced product has a commission rate of 10% and costs $400. This means the affiliate earns $40 in commission per sale. In comparison, a lower priced product with a commission rate of 10% and costs $50 would result in an affiliate earning only $5 in commission per sale. It’s a pretty good bet that the affiliate will promote the higher priced product more than the lower priced product.
In fact, the higher net commission on the high priced product may allow you to lower the commission rate while still providing higher earnings to affiliates. In our example, we lower the commission rate on the $400 product to 5%. A sale of that product would result in an affiliate commission of $20 compared to the $5 commission on the lower priced product. The net commission to the affiliate is still significantly higher for the higher priced product even though the commission rate on the higher priced product is half that of the lower priced product.
On the other hand, offering higher commission rates on your higher priced products can greatly motivate your affiliates to promote them. For instance, if you increase the commission rate for your high priced $400 product to 15%, affiliates would earn $60 in commission per sale. This not only provides them with higher net commissions but also serves as a strong incentive to promote the product.
However, it is crucial to consider price alongside your profit margin to ensure that you do not end up selling a product at a loss after accounting for affiliate commissions. It is important to strike a balance between offering competitive commissions and maintaining profitability for your business.
It’s important to consider the different types of products you have available for your customers. Your product line may consist of both single-purchase products and subscription products. With single-purchase products, customers make a one-time payment to acquire the item. On the other hand, subscription products involve recurring payments over a specified period of time.
You might choose to offer affiliate commissions for either type of product, or for both types of products. This means that affiliates who refer customers to your website and result in a sale will earn a commission on that purchase, but the commission rate can be different for the single-purchase products vs. subscription products.
Setting the commission rate for subscription products brings in some additional complexity to the policy that single-purchase products don’t. While single-purchase products generally have two types of commissions – fixed and percentage – subscription products bring in the additional options.
With subscription products commission can be paid on the first purchase only, or paid recuring for the life of the subscription. And if it is recuring, you could also pay a different commission on the first initial installment with a different commission on the recurring installments.
Paying commissions on subscription products can be a lucrative strategy in the long run. Since customers make recurring payments for these products, affiliates have the opportunity to earn commissions on each payment. This provides them with a steady stream of income, creating a strong incentive to promote your subscription products.
While paying commissions on subscription products can result in a higher total amount of commissions paid over time, it’s important to note that your single-purchase products may have a different commission rate. This means that affiliates may earn a different percentage or amount for sales of single-purchase products compared to subscription products.
By offering different commission rates for different product types, you can tailor your affiliate program to align with your business goals and objectives. For instance, you may choose to offer a higher commission rate for subscription products to attract more affiliates who are interested in earning recurring revenue.
Typically, there are two types of commissions: fixed rate and percentage rate. With fixed rate commissions, affiliates are paid a specific amount for each sale. Percentage commissions pay a calculated amount based on the commission percentage and the sale amount.
Let’s say you offer a fixed rate commission of $20 on all your products. This can work if all your products are priced higher and have a decent profit margin. It’s simple, and your affiliates know exactly how much commission they earn per sale. However, it doesn’t account for different pricing across your product line.
For example, at a product price of $30, a $20 commission would be quite high, and your net income from that sale would only be $10. Conversely, a product priced at $400 would net you $380 on the sale, but affiliates may not feel incentivized to promote the product.
What if you offered a percentage commission rate of 20% for all your products? This is a little more complex than a fixed rate because calculations need to be performed, and your affiliates don’t know the exact amount they will receive in commissions without these calculations. However, this does have the benefit of automatically adjusting for the price of the product.
A $30 product sale would pay a commission of $6, while a $400 product sale would pay a commission of $80. This percentage commission protects your net income on lower-priced products but results in lower net income on higher-priced products (although that might not be a bad thing, as affiliates will generally be more encouraged to promote your higher-priced products).
If you are looking to achieve growth for your business, an affiliate program can be an effective tool. It’s important to consider your growth objectives and how your affiliate program fits into those objectives. One effective way to attract more affiliates and contribute to your sales growth is by offering a higher commission rate.
When affiliates are offered a higher commission rate, they are more likely to promote your products or services with greater enthusiasm and dedication. This increased motivation can lead to higher conversion rates and ultimately, increased sales and higher net income. Additionally, the visibility of your business – especially in the online world – can be increased due to the various mentions, blog posts, and promotions by your affiliates.
Let’s consider an example. Imagine you have an online clothing store and you want to expand your customer base and boost sales. By offering a higher commission rate to your affiliates, you can attract more influencers and bloggers to promote your products. These affiliates will have a greater incentive to create engaging content and drive traffic to your website. This content can not only lead to direct sales, but it also leads to increased brand awareness.
Additionally, a higher commission rate can also incentivize affiliates to recommend your products over your competitors’. This can give you a competitive edge in the market and help you stand out from the crowd.
It’s worth noting that while offering a higher commission rate can be beneficial for rapid growth, it’s important to carefully consider your profit margins and overall business objectives. You need to ensure that your increased commission rates are sustainable and align with your long-term goals. Paying a high commission to encourage affiliates while losing money on every sale isn’t sustainable.
Analyzing the historical conversion rate from affiliate-generated traffic helps to determine the potential value each sale brings. By examining this rate, we can gain insights into the effectiveness of our affiliates in converting leads into customers.
A higher conversion rate indicates that affiliates are delivering more qualified leads, resulting in a greater likelihood of making a sale. It makes sense that top performing affiliates who are playing a significant role in driving revenue for your business should receive higher commission rates.
To fully understand the potential value each sale brings, you need to consider the lifetime value of a customer (outside the scope of this lesson.) While the immediate value of a single sale is essential, loyal customers who make repeat purchases over time can greatly impact the overall profitability of our business. Again, affiliates who are driving high-quality traffic that result in customers with a high lifetime value, should be rewarded.
Based on your analysis, you can make informed decisions regarding commission rates for your affiliates. Affiliates with a higher conversion rate and proven ability to deliver qualified leads should be rewarded accordingly. This incentivizes their top performance and encourages them to continue driving valuable sales for your business.
Credit Duration (Cookie Duration)
Credit Duration, or Cookie Duration, refers to the length of time during which an affiliate will be linked to a visitor and receive commission for purchases made by visitors they refer to a website. It is an essential factor in affiliate marketing programs as it determines how long an affiliate can claim credit for driving a customer to a website.
A 30-day credit duration means that if a user is referred by an affiliate and makes a purchase within 30 days from their initial visit, the affiliate will receive commission for that sale. This is the most common credit duration setting used by many affiliate programs.
However, credit durations can vary depending on the program. Some examples include:
0-day credit duration: With this setting, affiliates will only receive commission for immediate purchases. If the user does not make a purchase during their initial visit, the affiliate will not receive any commission for future sales, even if the customer returns to the website later.
60-day credit duration: This extended credit duration gives affiliates a longer window to earn commissions from referred customers. If a user makes a purchase within 60 days of their initial visit, the affiliate will be credited with the sale.
Lifetime credit duration: A lifetime credit duration means that once a customer has been linked to an affiliate, that affiliate will receive commission for all future purchases made by that user, regardless of the time elapsed between the initial referral and subsequent purchases. Lifetime credit duration settings can be attractive to affiliates as they know their efforts to obtain affiliate sales could provide lifetime revenue.
Combination of settings: Some affiliate programs allow for a combination of credit duration settings. For example, a program might offer a 30-day credit duration for regular products but extend it to a lifetime credit duration for subscription-based products or services. The choice of credit duration setting depends on various factors including the nature of the products or services being sold, the average purchase cycle, and the goals of the affiliate program. It’s important for businesses to carefully consider their credit duration settings to strike a balance between rewarding affiliates for their efforts and ensuring a fair attribution of commissions.
Researching industry standards for commission rates within your niche can provide helpful insights. This can help you benchmark your commission rate against competitors and ensure it is competitive enough to attract and retain affiliates.
Examples of industry standards for commission rates within different niches include:
- E-commerce: In the e-commerce industry, it is common to see commission rates ranging from 5% to 20% of the total sales generated by the affiliate. For example, Amazon Associates offer commission rates between 1% and 10% depending on the product category. Health and beauty product retailers often offer commission rates around 15%.
- Travel and tourism: In the travel industry, commission rates can vary greatly depending on the type of travel products being promoted. For example, hotel booking platforms may offer commission rates between 5% and 15%, while airlines may offer fixed commission rates per booking or a percentage of the ticket price.
- Financial services: In the financial services industry, commission rates can be more complex and depend on the type of product being promoted. For example, credit card companies may offer commission rates between $25 and $150 per approved application, while insurance companies may offer commission rates based on the premiums paid by the referred customer.
- Software and technology: In the software and technology industry, commission rates are often structured as a percentage of the sales referred by affiliates. Rates can range from 10% to 50% depending on factors such as the type of software and the pricing model. For example, web hosting companies may offer commission rates around 20%, while software-as-a-service (SaaS) companies may offer lower rates around 10%.
- Fashion and apparel: In the fashion industry, commission rates can vary depending on whether the affiliate is promoting individual products or driving overall sales. For example, fashion retailers may offer commission rates between 5% and 15% of the total sales generated by the affiliate. High-end fashion brands may offer higher commission rates to attract affiliates.
Here are some additional commission rate ranges…
|Niche||Typical Commission Rate Range (%)|
|Online Courses||20% – 50%|
|Ebooks||10% – 25%|
|Photography Membership||15% – 40%|
|Small Business Resources||10% – 30%|
These examples highlight the range of commission rates that are considered industry standards within specific niches. Of course, the commission rate that you decide upon is totally up to you.
You have choices as to whom you allow to be affiliates. You can open it up to anyone to be an affiliate, or you could limit it to only customers. Another option is to limit it to only select users that you explicitly want to be an affiliate, for example, strategic or high-profile users.
Here are examples of each type of affiliate registration:
- Open to anyone: In this scenario, you allow anyone who is interested to become an affiliate. This approach can be beneficial if you aim to reach a wide audience and expand your affiliate network rapidly. For instance, a software company might offer an open affiliate program where bloggers, influencers, or even other businesses can sign up to promote their products. This method allows for a diverse range of affiliates to join, potentially increasing reach and brand exposure.
- Limited to customers: If you prefer to work closely with those already familiar with your product or service, limiting affiliate registration to customers can be a viable option. By doing so, you ensure that your affiliates have firsthand experience and knowledge of what they are promoting. For example, an e-commerce store may offer an exclusive affiliate program to customers who have made a purchase. These customers can then refer their friends and family, enhancing the effectiveness of word-of-mouth marketing.
- Select users only: This type of affiliate registration entails personally selecting individuals to become affiliates, typically because they possess strategic value or have high-profile influence. Such affiliates could be industry experts, celebrities, or influential bloggers. For instance, a luxury fashion brand might collaborate with a well-known fashion influencer and invite them to join as an affiliate. This approach leverages the influencer’s reputation and credibility to promote the brand, targeting a specific audience segment.
Regardless of the type of affiliate registration you choose, it’s crucial to have clear guidelines, terms, and conditions for your affiliates to follow. This ensures consistency, professionalism, and maintains the reputation of your brand throughout the affiliate marketing process.
Consider the relationship you have with your affiliates. If you have a strong and loyal group of affiliates who consistently drive sales, you may want to reward them with a higher commission rate to show your appreciation and encourage continued promotion vs a standard rate that you give to other users.
For example, let’s say you have an affiliate named Sarah who has been promoting your products for years and consistently drives a large number of sales each month. She has developed a loyal following and her audience trusts her recommendations. In this case, it would be wise to show your appreciation for Sarah’s efforts by offering her a higher commission rate than your standard rate.
By offering a higher commission rate to top-performing affiliates like Sarah, you are incentivizing them to continue promoting your products and driving sales. This serves as a form of recognition for their hard work and dedication, which can further strengthen their loyalty to your brand.
On the other hand, offering the same standard commission rate to all affiliates, regardless of their performance, may not provide enough motivation for high-performing affiliates to continue giving their best effort. It may also make it difficult to differentiate between affiliates who bring in minimal sales and those who consistently excel at driving revenue for your business.
Do you want to provide some extra incentive for your affiliates? One way to do that is by offering a multi-level affiliate program. With a multi-level program affiliates can earn commission on their own sales, plus the sales of any affiliates who are in their downline. This might encourage top affiliates to find and recruit more affiliates into your program.
Let’s dive into an example of a multi-level affiliate program. This program has three affiliate levels defined: The base level (the affiliate making the sale), level 1 (the direct parent of the base level), and level 2 (the grandparent of the base level). The commission structure is 10% for the base level, 20% for level 1, and 10% for level 2. with a commission structure of 20% for downline affiliates and 10% for the upline on the commission earned by the downline.
Refer to the below image and discussion…
- Base Commission: First, a base commission needs to be established for all affiliate sales. For this example, for each sale generated by an affiliate they earn a 20% commission as the base commission rate. i.e. a $100 sale would be paid a 20% commission equaling $20.
- Upline Commission: Level 1 earns a 20% commission on base level commissions. Level 2 earns a 10% commission on base level commissions.
- Downline Recruitment: Maria has a downline. She recruited Alex who became an affiliate. In addition, Alex also recruited an affiliate, Anna. So at this point Maria has two levels of affiliates under her: Maria is at level 2, Alex is at level 1, and Anna is at level 0 (base level).
- Base Commission Paid: Now, let’s say Anna refers a customer who makes a $100 purchase. As per the multi-level program, Anna (at the base level) earns a 20% commission rate, which amounts to $20.
- Upline Commission Paid: Alex (level 1), as the upline parent, also earns a commission on Anna’s sale. Based on the 20% commission rate for the level 1 upline on the downline’s commission, Alex would earn $4 (20% of the $20 commission earned by Anna). Maria (level 2), as the upline grandparent also is eligible to earn a 10% commission on Anna’s commission. Maria would earn $2 in commission (10% of the $20 commission earned by Anna.)
- Total Commission: In this example the total commission paid would be $26 ($20 + $4 + 2) or 26% of the $100 sale.
The multi-level program encourages affiliates like Maria to recruit and expand their downline even further. Each time an affiliate in the downline generates a sale, both the affiliate and their upline earn commissions based on the same structure mentioned above. This cascading commission structure can continue as the downline grows, creating a network of affiliates.
By implementing this multi-level program, you provide an extra incentive for affiliates like Maria to not only focus on their own sales but also actively recruit and support their downline. This can result in increased sales and expanded reach for your business while motivating top affiliates to become strong leaders within your affiliate program.
Remember, the specific commission rates and terms of a multi-level program can vary. This example is based on a 20% commission rate for base affiliates, a 20% commission for the parent upline, and a 10% commission for the grandparent upline. You can adjust these rates according to your business’s goals and financial capabilities.
Affiliate Program Generator
If you would like to generate an affiliate program by using our Affiliate Program Generator, just fill out the questionnaire below. After answering all the of the questions, you can get a download of your custom generated affiliate program. In many cases you will be able to copy the content from this download and paste to your website.