If you have decided to explore the dynamic world of affiliate marketing or influencer marketing, then you are making an informed business decision.
Before you even start your first ad campaign, the first hurdle you’ll encounter will be choosing your commission rates. In other words, it’s how much commission you pay your affiliates or influencers per sale (or per lead) for their marketing efforts.
Not paying enough can discourage people from joining your affiliate or influencer program, but paying too much can affect your bottom line. You need to find a sweet spot once in a while and ensure that your commission structure is sustainable for your business in the long run.
This article will cover why it’s vital to choose competitive rates and provide a step-by-step method for determining the right commission rates for your business.
Why does your brand need competitive commission rates?
Whether you’re working with commission-based influencers, influencers in general, or affiliates, setting a commission rate is an important step. There are thousands of affiliates and impressive programs around the world that offer various commission rates.
Before you start reaching out to great partners and influencers, you need to make sure your odds are attractive enough to stand out in a sea of competition. If you stand out, you can attract influencers and affiliates that can increase your revenue and conversion rates.
Commission rates are reward-based payouts that your influencers or affiliates receive when a sale is completed or a certain action is taken.
What is CPS marketing? CPS is short for cost-per-sale, sometimes referred to as cost-per-action marketing or CPA marketing. This is when you set a commission rate percentage per sale.
CPL is short for cost per lead. This is when you set a dollar amount per verified lead.
These commission rates typically include a base rate and bonuses.
It can be tempting to keep your commission rates low to maximize your profits. However, this will not always work in your favor. There are significant benefits to providing attractive commission rates to affiliates and influencers. These include:
Attracting high-performing influencers and affiliates
Increase conversions by giving them an incentive to perform well
Maybe you pay more per sale, but you can get more sales overall, which is better for your business in the long run.
What is the average commission rate?
As we mentioned, there are numerous affiliates and impressive programs in the world that offer odds based on various factors.
This begs the question: Is there an average rate an advertiser pays?
The simple answer is no.
Commission rates vary depending on several factors:
Your profit margins, cost-per-order CPO (find the free cost-per-order calculator here) or your cost-per-lead.
Industry – for example, an airline has a lower commission rate than a fashion retailer because the airline has a lower profit margin.
How much space are you willing to give yourself for commission increases and bonuses?
With your business in mind, it’s time to follow some steps to determine your commission rate.
Steps to Determine Your Affiliate Commission Rates
Step 1: Check out the competition
The first thing you need to do is to understand what your competitors are offering.
This way, you can ensure that your competitive payments stand out from others in your industry.
Check out their website to see if your competitors have an influencer or affiliate program registration page that lists their base commission rates. If that doesn’t provide any information, try searching for their affiliate or influencer programs.
This allows you to answer questions such as:
- What commission rates do they offer?
- Are influencer commissions the same as affiliate commissions?
- What additional resources do they provide?
- How do they recruit influencers and affiliates?
Armed with this knowledge, you can use it to inform your strategy and potential commission rates. You will gain a good sense of the standard in your industry and leverage your competitors’ experience and knowledge to narrow your possible odds.
Also, consider the market in which you operate. Just as your sales guide is shaped by your specific target audience, your commission rates should reflect your industry. For example, if you sell super niche products, you may need a higher commission rate to attract enough people.
Also, there may be less choice and competition in your niche, so Influencers and affiliates are more likely to accept lower rates. If you operate in a highly saturated market, you may need to offer higher commission rates to keep you in the game.
Step 2: Outline your margins
Now that you have an idea of industry standard odds from your competitor analysis, you can outline your margins to get a realistic grasp of what you can afford.
Your profit margins are subject to many varying factors, such as volume, overhead and the economy in general. However, when considering starting your affiliate or influencer program, you need to get some idea of what you can offer your partners. You want to set up a program that rewards participants but still makes you money.
Start by summarizing your operational costs. This includes calculating the costs involved in the day-to-day running of your business. Think about:
- Program manager’s fee
- Tools you use or need to invest in
- Return and shipping costs
Once you have a good idea of the operational costs of keeping your business running, you can calculate the amount you can pay.
Another critical factor is the customer’s lifetime value (LTV). By calculating the YPV of a new customer, you can get a roundabout idea of what these mean in terms of revenue for you.
Customer LTV is an important metric in setting the spending cap to acquire new customers. Calculating customer LTV becomes quite complex. However, at a basic level, you need to know:
- Average Order Value (total annual revenue divided by the number of orders)
- Purchase Frequency (number of orders per year divided by number of unique customers)
- Average Retention Time (the average time a typical customer continues to buy from your company after their initial purchase)
Once you have these numbers, put them into this simplified equation:
Average Order Value x Frequency of Purchases x Average Retention Time = LTV
In some cases – subscription-oriented programs, for example – it makes sense to pay higher commissions on the customer’s first payment to the company. That’s if you know you’ll be doing a lot more of the same client later on. Think of it as an investment for the future.
To increase customer LPV, remember to follow best practices such as:
Step 3: Take bonuses and incentives into account
So you’ve scoped out your competitors and set your margins. What’s next?
Before reaching out to potential affiliates or influencers, it’s a good idea to get an idea of any incentives or bonuses you can offer to get their attention. Incentives and bonuses are paid above the base rate and are an important factor in keeping your partners motivated and happy.
You can do this for a few different things, including:
- In exchange for different website or social media placements (for example, appearing in the top banner position of a popular blog or having a featured item in a giveaway guide in position 1)
- Number of sales generated in a given period (for example, 80 sales in 1 month)
- Number of leads reached in a month (for example, 100 qualified leads generated in September)
- Reaching designated revenue markers (eg – selling $10000 in November)
- To sell the stock you need to clear (e.g. +1% commission on outlet items)
Just as referral marketing tactics provide customers with an incentive to promote the product ($100 reward when your friend signs up!), one idea might be to provide a first sale bonus to your influencers or affiliates. You can also offer things like:
- Special deals and coupon codes
- Invitation to events
- branded products
- Excellent service and maintenance
- Increased commission rates
Consider what you can offer your influencers and affiliates to love your brand and help you stay competitive beyond monetary compensation.
Tip: Group your influencers and affiliates
Another best practice is to segment your partnerships based on different criteria. For example, by influencers, bloggers or sub-niche. In addition to tracking your affiliate marketing KPIs and influencer marketing goals, segmenting bids can help you test different types of influencers and affiliates and measure their results against each other.
Whether you’re advertising pay-per-sale or cost-per-lead, it can be difficult to find the best commission rates when you’re just getting started.
Many factors come together to inform your commission rates, including your target audience, product prices, market niche, competitors, and budget. Here’s how you can simplify the process of setting your rates:
- Analyzing your competitors’ programs to stay up to date with industry standards
- Outline realistic margins to work with
- Factoring in bonuses and incentives that will allow you to grow and make your affiliates happy
Your rates should be based on what works for your business, your market, and your influencers and affiliates.