Many businesses have successfully grown their revenue with affiliate programs, but getting there can seem overwhelming, especially if you’re not familiar with the nuts and bolts of it. With more companies adopting affiliates as a strategy, how can you stand out without going negative on your profit margins? If you’re just interested in getting leads, perhaps you’re more interested in paying per click than per sale.
On the other hand, maybe you’re just trying to see a difference in revenue and want to use affiliates to get there. You may be asking questions like these: How much should you pay your affiliates? How do you calculate the best affiliate rates for your business? How do you advertise your affiliate program? This article will provide answers so you can come away ready to implement your program and increase sales.
Calculating Your Affiliate Commissions
Several factors come into play when you want to determine how much to pay your affiliates. Not every industry will pay affiliates the same. Selling online courses and selling million-dollar yachts are two entirely different arenas for which you’d never pay the same rate. Calculating your affiliate rate will come down to six key factors to determine what’s best for your business. Let’s go through these factors one by one.
Profit margins are first on the list for a very clear reason. If your profit margin is 15%, for example, and your affiliate program offers 20% earnings, it’s only a matter of time before your company is dead in the water. You simply can’t pay more than what you’re earning with each sale without piling on debt that will come knocking at your door sooner rather than later. So instead of writing checks that you can’t cash, think about what your profit margins are for the product you’re trying to sell with affiliates.
If you have a long list of products to choose from — like a variety of cleaning supplies, for example — you can consider an average rate that would be beneficial to most of them or for those that sell the most with affiliates. Stay within these profit margins to make the most out of your affiliate program and move closer to your revenue goals.
Costs for Ads and Customer Acquisition
The odds are that you’re probably already budgeting for customer acquisition. If you’re trying to reach new leads with ads, consider the return on investment and how you can leverage your budget by moving it more toward your affiliate program. Of course, this doesn’t mean disabling your ads altogether. However, if you run the numbers and find that by cutting back on ad spending, you could motivate your affiliates to make money for you, that reach could prove more beneficial.
Consider allocating a percentage of your ad spending to your affiliates and analyze after a period of time which option works best for your products. Who knows? You might find that your previous acquisition model was cutting into your margins unnecessarily.
Affiliate Payment Terms
What are your goals for your affiliate traffic? Do you want them to visit and convert by signing up for your newsletter? Is this strictly for sales? Understanding what you want from the program will determine whether you want a pay-per-click or pay-per-sale model. While a pay-per-sale secures your revenue right away, a pay-per-click can bring your brand and product much-needed awareness. It all depends on where you are in developing your brand and what your business’s goals are going forward.
Competitor affiliate commission rates are one of the most important factors business owners should consider, but don’t be fooled into thinking it’s everything. Why does this move the needle so much for business owners? Well, high-value affiliates will often be looking at others in your industry to see who gives the best benefits. Something to remember is that cash benefits aren’t everything.
Putting forward a cut of your margins toward your program can also mean giving your affiliates the benefit of offering the best price with an exclusive discount code. If your competitor is giving better affiliate rates than you’re comfortable with, get creative with the perks you can include to entice people to choose your brand and advertise your affiliate program.
Let’s say your company regularly runs discounts and flash sales and lowers prices throughout the year. How will that affect the percentage of your affiliate earnings? The percentages should remain the same. No affiliates like to see their rate go down. This is something you have to factor in when you’re closing in on a number. If your product drops to its lowest yearly price during Black Friday and your affiliates push most of those sales, will you still make money? Take your lowest yearly price and work from there to be safe.
Lifetime Value of Customers
What happens if selling through affiliates causes you to break even on a sale? You might be surprised to hear that it’s not such a bad result. It all comes down to whether your customers often come back to purchase from you again. Think about what the lifetime value of each of your customers is. Will you get more money from them later? Breaking even on that first sale is a net positive if it means opening the door to repeat purchases from the same customer.
How Much Should You Pay Affiliates? Takeaways
Choosing how much to pay your affiliates according to your business’s specific numbers and goals will ensure the success of your affiliate program. If you’re looking for the best way to set up an affiliate program, LeadDyno’s affiliate system software allows easy management and tracking of your affiliate sales and payments while optimizing your marketing channels to better allocate your marketing spend.