If you’ve decided to build a strong affiliate team and program for your business, one of the first things you will have to figure out before approaching potential affiliates is your commission payout. Determining your commission payout is critical in developing a strong affiliate program; go too low and you will not attract affiliates or go too high and you’ll be spending your finances ineffectively.
I recommend joining affiliate networks and look at a variety of programs related to yours. Sites like Commission Junction, Share A Sale and LinkShare all provide affiliate management services (more on that in a future post). These sites list affiliate programs by industry or you can do a keyword search to find similar business and services to yours. You will be able to find information on the payout rate and the success of the affiliate program to get an idea of what commission your competitors are setting.
Now that you know what range your commission needs to be you need to determine if you can afford to deliver a competitive commission. Do you have the profit margin to give up 10-25% of each sale? Can you afford to pay $10 a lead? These and the following are important questions you need answers to before moving forward.
What is your lead conversion rate?
Out of 100 website visitors, how many convert into a lead through a signup or contact page form? How many visitors call you as a response to call to actions?
What is your sale conversion rate?
If you sell directly from your website, out of 100 website visitors, how many convert into a sale through an online order? Out of 100 leads, how many convert into sale?
What is your average sale value?
It’s simple! Take your last 100 orders and their total value and divide to come up with your average order size.
How often do customers return and make additional purchases?
Some call this calculating the lifetime value of your customers. Repeat customers are very important as this relationship could open up the opportunity to pay a higher commission if you are great at generating repeat purchases.
Ultimately, you are coming up with an amount of money you will earn when a new customer or lead is generated. This value tells you what you can afford to pay in commission. The higher the commission, the greater chance of your program being a huge success.
Commission Payout Example
- You generate 10 leads for every 100 visitors
- You generate 3 sales for every 10 leads (or 100 visitors)
- You average order value is $100
- Customers, on average, return 2 times in their life for 2 additional $100 purchases
So for every 100 visitors/ 10 leads/3 sales you are earning $300 in initial revenue plus $600 in future revenue for $900 total.
- A lead generates $90 in lifetime revenue and $30 in initial revenue
- A sale generates $300 in lifetime revenue and $100 in initial revenue
So now that you know what you make from a lead or sale, you have a better sense of what you can afford to pay in commission for each lead or sale generated. Take a look at what the competition is paying and if you can afford to pay more, do so, and attract their affiliates to your program.
Find further information on Affiliate Marketing here. Need a refresher on what an affiliate is? Check out our Affiliate Marketing 101: What is an Affiliate? article.