There are a lot of things to consider when it comes to the determination of the right commission structure for your affiliate program. Here are a few tips and things to you might want to think about for your program.
Introduction
If you plan to implement an affiliate program and ask yourself what compensation structure would be the best for your program, here are some tips that will help you to make an educated decision that will not haunt you later when you realize that you got it all wrong.
Having it wrong that it is not working out for you is the worst case, because you are coming to the point to make a choice whether you discontinue the program or restructure its commission and with absolute certainty upset a bunch of your best affiliates.
Determining the right compensation structure for your program is only one of many decisions you have to make while you prepare the launch of your affiliate program, such as decisions about which network to use or to do it in-house, to have it managed by an OPM or not and all the other things take care of before you get your program off the groundDetermination and Basic ConsiderationsLooking at the commission structure of a competitor is always good, but not always the eternal truth and answer for the question what the right commission structure is for you.
You must consider things like how your prices are compared to the prices of your competitor. A competitor who is usually more expensive has probably room for a higher commission due to higher margins.
Also conversion, customer retention, lifetime value and overall satisfaction are usually specific to you. You don't have that information about your competitor in most cases, even though it would be a nice information to have. Higher conversion makes your program more attractive to affiliates than simply paying a higher commission.
Higher commission might gets you new affiliates quickly, but high bottom line commission paid per referred visitor ensures affiliate loyalty.
What is the goal of your program. Instant profit with the first sale a new customer makes or customer acquisition? Both of course, but depending on the competitiveness of your industry not always realistic. Different commissions depending on the actions performed by the visitor should always be considered.
You could for example categorize your products by margins and pay less for low margin items and higher commission for high margin items. You could also pay a flat commission amount (CPA) for new acquired customers as a bonus, in addition and/or independent from the actual purchase the customer made.
For general merchandise is paying a percentage per order subtotal (excluding shipping and tax etc.) the way to go, but it does not have to in all cases.
If customer acquisition is the foremost or even only goal of your affiliate program, revenue share or a commission that is a percentage per sale would not be the way to go. CPA, a flat commission for new acquired customers, would be the better option in this instance. In most cases should the CPA be higher than the commission would be if you would pay a percentage per order amount.
If you don't do that, then you risk loosing affiliates to competitor programs. The best approach to come up with a fair CPA is to determine the average lifetime value of a customer and pay a percentage of that amount as bounty to affiliates that send you new customers.
Additional Considerations
If you are not sure about a number due to the lag of metrics and stats available to you to backup your decision and/or lag of knowledge of what your competition is doing, always start with the lower commission first.
Affiliates will always be happy about an increase in commission. A decrease in commission if you realize that you pay too much is always bad and hurts your program. Some affiliates will abandon you and maybe even talk bad about you in industry forums and other communities.
Always leave room to be able to provide high performing affiliates with a bonus or incentive beyond the commission that is available to every affiliate without doing anything. Special arrangements with performers require special (higher) commission or chances are that the affiliate will not do it, because there is no reason why the affiliate should.
Don't forget to include the hidden cost for running an affiliate program into the calculation. The management (salary), infrastructure (affiliate network fees or In-house IT cost), material (creative's, sales copies, special promotions), accounting (cutting commission checks for affiliates) and other things all cost money, additional money you would not have to spend if you don't have the affiliate program.
Conclusion
I hope this will help you to determine the commission structure that is right for your program to guarantee long term success and growth.
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