3 Reasons Why You Should Consider Increasing Your Affiliate Commission Rates

Setting the ideal commission rate is a balancing act between what rates attract the best affiliates and what rates are most affordable for your business. Overpaying can drain your affiliate marketing budget, but underpaying may repel your affiliates and encourage them to look elsewhere for higher-paying affiliate programs.  If you’re struggling to attract and retain affiliates or if your business is booming and you can afford to increase your affiliate commission rates, this article is for you. 

We’re going to evaluate why commission rates are important, how to set your commission rates, and we’ll review 3 reasons why you should consider increasing your affiliate commission rates. 

To start off,

Why are affiliate commission rates important?

Commission rates are your affiliate’s rewards for doing the hard work.

Set the commission rate too low and affiliates won’t want to join; set it too high and you might break your company’s bank.

That’s why you’re a tight-rope walker balancing on a wire between the two.

The top two reasons commission rates are important are:

1. They attract the highest-performing affiliates in your niche.
2. They provide incentives for affiliates to perform well and as a result, lead to increased conversions.

Increasing your rates means you’re paying each affiliate more per sale, but you may also receive more sales overall from doing so.

What is the average affiliate commission rate?

The average affiliate commission rate is between 5-30%. Most businesses start on the low side and raise their commission rates as the company grows. You want a rate that is enticing to your affiliate but affordable to your business.

Factors influencing commission rates include the product price, market demand, type of commission structure, what’s offered within the niche. Within each industry, there are commission rate variations.

We recommend looking at the commission rate for 10 competitors in your niche. Once you’ve written down the rates, it’s time to get your high school math hat on and take the average for all 10.

As an example,

Three of your major competitors offer these commission rates:

1. 4%
2. 6%
3. 10%

Add these numbers together:

4 + 6 + 10 = 20

Then, divide 20 by how many numbers are in the set–in this case, it’s 3.

20/3 = 6.67%

6.67% is the average

Our recommendation? Scale commission rates as your company grows.

What affects the average affiliate commission rate?

Again, affiliate commission rates depend on the industry you’re working in and rates vary from industry to industry.

It depends on two factors:

1. The product’s price. Less expensive products→ less commission, more expensive→ more commission
2. The value your company places in affiliate marketing. If your company doesn’t value affiliate marketing, you’re not going to prioritize affiliate commission rate budgets.

How to set/change commission rates?

Now that we’ve reviewed the average affiliate commission rate, it’s important to know how to set or change your rates.

With an application like LeadDyno, you can define a commission plan to match your company’s needs. These plans specify how much an affiliate receives for every purchase they refer.

https://youtu.be/HHKtffpSWWoYou can:  

• Create a payment plan
• Set intervals for payouts
• Set up custom payouts
• Set recurring affiliate payments
• Add affiliate bonuses
• And more

LeadDyno allows you to set up your affiliate marketing program, communicate with affiliates, and pay them–all in one place!

Once you have your LeadDyno application set up, let’s evaluate how to set or change our affiliate commission rates.

#1 Choose the Commission Structure

There’s no right or wrong way to set up your affiliate commission structure but there is the best way and that’s the way that works best for you–the merchant.

In SaaS affiliate programs, recurring commissions are standard. Over time, this method tends to be more profitable for affiliates since they have a source of recurring revenue.

With one-time commissions, an affiliate’s revenue from every referred affiliate stops the moment they’re paid.

Recurring commissions are the preferred alternative as it generates long-term passive income. It’s also ideal for subscription-based services since affiliates can bring in clients that are in it long-term.

There’s also the matter of tiered affiliate programs. In affiliate marketing, there’s a small group of affiliates in every program who drive the largest share of total affiliate revenue. This is dubbed the 5-80 rule: 5% of your affiliate program does 80% of the work.

At the bottom of your affiliate pyramid is your largest tier of inactive affiliates that never bring in any sales.

In the middle of your tier of lukewarm affiliates who drive occasional sales. The middle tier has the greatest potential for growth as they’re still active but not active enough.

On the top, you have your highest-performing tier.

So, a tiered commission structure continually incentivizes affiliates to stay active in your program. The way to incentivize this is to offer a higher commission rate for those affiliates who exceed a set threshold during a time period.

For example, if your standard commission rate is 10% and your threshold is $500 then you can pay a 10% commission for each sales dollar above $500 during a one-month period.

Or you can offer a flat fee bonus for affiliates exceeding the threshold. For example, an extra $25 for going above and beyond the threshold.

If you’re uncertain about a tiered structure, consider trying it out on a few affiliates first and testing its success before applying it to your entire program.

If you want to learn more about commission structures, view our video below:

https://www.youtube.com/watch?v=UXu9kE9Cxmc

#2 Determine the average commission rate between your competitors

Direct competitors in your niche likely have an existing affiliate program. And if not, other companies in industries adjacent to yours are competing for your affiliates.

To complete this research, find three direct competitors running affiliate programs. We also recommend finding at least one or two companies that aren’t direct competitors but offer a similar product or service and attract a similar audience.

Next, analyze their commission structures.

How do your competitors set up their affiliate programs? What action triggers the payout? How are affiliates paid? How are commissions structured: are they a percentage of the sale? Per lead? Does the competitor offer any bonuses for top-performing affiliates? Are there tiered affiliate commissions?

Most especially look for the commission percentage, structure, cookie duration, and any additional bonuses.

Your program should be competitive with your competitor's affiliate offerings.

#3 Determine average customer lifetime value (CLV)

A CLV asks “when a customer signs up with you, how long do they stick around?” This determines how much you can afford to pay affiliates as profit margins are difficult to determine and prone to fluctuations.

So instead, affiliate marketers use the average customer lifetime value (CLV) as a guide.

CLV is how much money the average customer brings in throughout their time as your customer, minus the average cost of obtaining said customer.

The longer a customer stays with you, the higher your average CLV value. And knowing this helps you determine a sustainable commission rate for your business.

The CLV formula is:

Average annual profit earned from a customer x Average number of years customer stays with your business - Initial cost of customer acquisition per customer

To calculate your average CLV, answer the following questions:

• How much money does it cost to acquire a new customer?
• What’s your customer retention percentage per year?
• How much revenue does each customer bring in?

In order to have optimal program sustainability, your affiliate commission rate must be below your average CLV. If it’s equal, you’ll merely break even with your affiliate program.

If you have a higher customer retention rate, you can afford to increase your affiliate commission rates.

#4 Set conditions for how to earn a commission

Once you’ve set a commission rate, you need to establish what you require of your affiliates.

You need to determine what conditions must be met for affiliates to earn a commission.

As we reviewed above, you can pay per lead, per sale, per action, per click, or however you like. Some businesses pay affiliates to generate leads and sales.

Leads and sales: If you reward affiliates for bringing in leads, consider paying for only qualified leads or leads that give you additional personal information like an email address after clicking your affiliate’s link. Set smaller commission rates for the initial lead and larger commission rates for the finished sale.

Impressions and clicks: We don’t recommend rewarding affiliates for impressions or clicks as affiliates can take advantage of you. Unfortunately, sometimes affiliates find fraudulent ways to gain clicks without putting in the effort.

Other questions to consider:

Are you going to use affiliate tracking cookies and if so, how long?

Tracking cookies are files created and stored on a visitor’s web browser when they click on one of the affiliate links, allowing you to track the affiliate’s sales numbers.

If you decide to use them, determine the cookie’s duration. Cookie duration means that if a user comes to your site using an affiliate link and purchases something within 30 days. The referring affiliate receives a commission for this purchase.

Cookie durations can last between 1-90 days with 15-30 days the standard duration. Longer cookie durations are more attractive to affiliates because it provides a larger window for them to make sales and earn a commission for that payout period.

There are other ways to track affiliate sales, but cookies remain the most popular.

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Who’s eligible for what?

Determine which affiliates are eligible for different commission payouts. For example, you might give your higher tier affiliates a commission bonus, or an incentive for your lowest tier affiliates.

How should affiliates market your product?

Do you want your affiliates to market your products or services in a certain way? Using a certain platform? LeadDyno allows you to preload your content for your affiliates to easily share to Facebook, Twitter, Instagram, and other platforms. Decide how you want your products marketed and provide your affiliates with the necessary materials.

Do affiliates earn commission bonuses?

Are you going to add further incentives for the highest-earning affiliates?

When is a commission paid out?

Some programs offer a “waiting period.” Waiting periods hold on to an affiliate's commission money for a set period of time. Affiliates can only keep their commissions if the product or service isn’t returned or cancelled within a certain timeframe. This is also a low-risk strategy as you only pay affiliates when you know your business receives an ROI (return on investment).

#5 Check-in with your commission rates

Periodically revisit your commission rate. It doesn’t need to stay the same forever, especially if you want to keep your affiliates engaged with your program.

Checking in also means continually examining the competition to see what they’re offering. If they’re boosting commission rates up from 10% to 15%, you should consider doing so as well! If they’re decreasing their cookie duration, maybe you should leave yours as is. Regularly check in with your competitors’ programs to always have an edge.

We also recommend setting periods of time for surprise bonuses. An extra bonus can drive more sales during slow periods and motivate affiliates to work harder. You can either offer a flat-rate bonus ($100 for every affiliate bringing in more than $1000 in sales) or a temporary commission increase (extra 10% commission for Black Friday weekend).

And if you’re business is booming then you might want to consider increasing your affiliate commission rates. If you aren’t sure why you should, keep reading!

3 Reasons Why You Should Consider Increasing Your Affiliate Commission Rates 

Reason #1 - It’ll give you an edge over your competitors

As if you needed yet another reason to have the competitive edge. If you can afford to increase your commission rates, we highly recommend you do. 

Affiliates in your industry involved in programs with lower commission rates may be attracted to your rate and may want to join in on the affiliate fun. 

Reason #2 - It’ll attract the best affiliates in your niche. 

Top affiliates in your industry are attracted to programs with 1) higher commission rates and 2) longer cookie duration. Plus, increasing your affiliate commission rates raises the bar for affiliate performance and may motivate your inactive affiliates to reengage with your program. Again, 5% of your affiliates are doing 80% of the work. You need ways to reengage the other 95% of your affiliates and raising commission rates is one way to do it.

Reason #3 - You can afford to.

By now you should have your commission rate calculated. If your calculations show that you can afford to increase your rates: do so! Don’t reallocate the funds to a different marketing campaign. Invest in your campaign and it’ll pay you back by:

Gaining new customers. 

“People are much more likely to buy from someone they already know and trust so you can have much higher conversions than reaching the new audience with cold outreach.”-Mike Beatty, Make Time Online

And customers are more likely to buy from someone they trust. And trust breeds brand loyalty.  

Reaching new, relevant audiences.

Marketers rated affiliate marketing as a credible and effective means to gain new audiences and customers. 

Most marketers rate these industries as being the best for affiliate programs:

• eCommerce (80%)
• Beauty (77%)
• Apparel (68%)
• Tech (68%) 
• Health (61%)
• Subscription services (61%)

Building a portfolio of backlinks thereby increasing your exposure. 

Affiliate marketing is a beneficial way to build a catalog of backlinks because your affiliates link to your website or product. It’s especially helpful when the affiliate is from a different niche whose audience isn’t familiar with your brand.  

These backlinks are vital for ranking in search engines and allow you to rank higher and maintain your rank. 

Increased search engine exposure allows you to gain sales organically. 

Affiliate Commission Rates - Conclusion

In conclusion, affiliate commission rates are important for attracting the highest-performing affiliates within your industry. They provide incentives for affiliates to perform well and lead to increased conversions. Increasing your affiliate commission rates gives you a competitive advantage, attracts the best talent, and ensures your brand’s exposure through backlinks. Give your affiliates the rewards they deserve, and they’ll pay you back in sales.