As more brands are looking for alternatives to traditional advertising to promote their products, affiliate marketing has grown into a $6.8 billion industry. It is an effective tool for gaining new customers and increasing sales, and it is known for producing a high return on investment (ROI).
ROI is a performance metric used to determine how successful your affiliate marketing program is for your e-commerce or SaaS business. It is a key indicator of the effectiveness of your affiliate program. Knowing your ROI will help you determine which affiliate partners are earning you money and which ones aren’t. It also allows you to optimize your program so you can avoid spending time and resources on the tactics that aren’t generating any income.
In this article, we’ll show you how to calculate the ROI of your affiliate program and help you understand why it is important.
How Do You Calculate ROI?
Once you have assembled the information needed, you can determine your ROI. You can calculate it for the affiliate program as a whole or for individual affiliates, your affiliate commission models, or the incentives that you offer your affiliates.
Gather the Information You Need
Before you calculate your ROI, you should know a few key pieces of information:
- The goals of your program. Figuring out your ROI won’t do much good if you don’t know your goals for your affiliate program. Many affiliate programs are designed around increasing sales, but yours may be different. Understanding what your goals are will give you a benchmark to measure your ROI against.
- The revenue, costs, and gross profit of your affiliate program. These numbers are needed for the ROI formula and are important in making sure your ROI is accurate.
- The time frame you’d like to analyze. Calculating the ROI for the first month of your affiliate program may not be useful since it takes some time for the program to get off the ground. To get as accurate an ROI as possible, analyze at least six month’s worth of data.
Use the ROI Formula
Finding your ROI is simple. It is calculated by dividing your gross profit — your revenue minus your costs — by your costs, and then multiplying it by 100. The formula for an affiliate marketing campaign looks like this: (Affiliate Marketing Revenue – Affiliate Marketing Costs) / Affiliate Marketing Costs x 100 = ROI.
What falls under costs can vary for each business. Consider things your affiliate marketing software pricing, how much you spent on banner creation and landing page development — if you outsourced those items — and your affiliate commissions. You can even incorporate the time spent on managing your affiliate program into your costs. It’s important not to leave anything out if you want your ROI to be as accurate as possible.
To see how the ROI formula works with a real-world example, let’s say that your affiliate marketing program generated $2,000 in revenue, and you spent $1,500 on the program. When you plug those numbers into the formula, the ROI comes out to 33%. Here’s the calculation: ($2,000 – $1,500)/$1,500 x 100 = 33%.
Determine the Strength of Your ROI
Whether or not you have a strong ROI depends on your brand, your gross profit margins, and your affiliate marketing goals. In general, a 5:1 ROI ratio is considered good. This means that for every $1 you spend on your affiliate marketing program, you should be earning $5 in revenue. If your ROI is worse than that, you should either optimize your affiliate program or allocate your budget elsewhere.
What Do You Do With Your ROI?
Once you know your ROI, you can use it to understand the value of each of your affiliates and identify your growth potential.
For example: If one affiliate generates a 50% ROI and another one only generates a 10% ROI, you can put more effort into building your relationship with the first affiliate. If you’ve spent $1,000 on your affiliate marketing program and it yields an ROI of 125%, you can gauge how much additional revenue you could generate if you doubled your affiliate marketing spend.
You can also use your affiliate marketing ROI to compare it to the effectiveness of your other marketing campaigns. If your affiliate marketing ROI is 200%, but your content marketing ROI is only 50%, you should invest more into your affiliate program.
To ensure your affiliate marketing program remains successful, you should review your ROI at least monthly, if not weekly. Different variables can affect your ROI, and analyzing it regularly can help you adjust your affiliate marketing program quickly if your ROI begins to decrease.
What Is the Difference Between ROI and ROAS?
You may have also heard of return on ad spend (ROAS). As a metric, ROAS is similar to ROI, but ROAS doesn’t consider your gross profit. It is most often used to determine how much budget to allocate to your affiliate marketing program.
Here’s the ROAS formula: Revenue Generated/Amount Spent = ROAS. Using the same numbers from the example above, the ROAS would be 1.33. Here’s the calculation: $2,000/$1,500 = 1.33.
Like ROI, a strong ROAS depends on various factors, but a 4:1 ratio is considered good. So for every $1 you spend, you should be bringing in $4. If the amount you spend on your affiliate marketing program exceeds the revenue it brings in, you should reallocate your budget to other marketing channels.
Looking for More Affiliate Marketing Tips?
While affiliate marketing can result in a strong ROI for your e-commerce or SaaS business, it takes work and often requires a lot of optimizations before it starts to pay off.
LeadDyno’s affiliate marketing software provides all the tools you need to make sure your affiliate program is a success. We offer detailed campaign reporting, communication tools so you can stay in touch with your affiliates, and integrations with over 20 e-commerce platforms and CRMs.