Determining The Right Compensation Structure For Your Affiliate Program

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 ground

Determination and Basic Considerations

Looking 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.

----------------------------------------------------
Carsten Cumbrowski is an internet marketer and owner of the
affiliate marketing resources portal at Cumbrowski.com. He
is an affiliate and was also an affiliate manager for
several years.
http://www.cumbrowski.com/default.asp
http://www.cumbrowski.com/CarstenC/affiliatemarketing.asp