Calculating the affiliate marketing commission percentage isn’t easy if you want to find the sweet spot between a high ROI and a lucrative loyalty program that users would want to join. If you decide to implement a loyalty program as part of your marketing strategy, you must make sure you have a solid plan. This means a competitive and motivating loyalty program commission rate for your affiliates. How do you do it? Let’s find out together!
A loyalty program commission is an amount paid to an affiliate for referring a new customer.
How much should you pay your affiliate partners?
One thing is certain: commissions that are too high or too low are harmful. Calculating a highly efficient commission rate for a loyalty program often depends on your industry and conversion rates. However, some general step-by-step rules exist for determining an effective commission rate.
Consider the difference between a percentage commission and an apartment commission.
For starters, choosing the simplest type of affiliate commission is advisable. The commission rate for each affiliate sale can be either a percentage or a fixed monetary amount.
The most typical variant of the loyalty program is a percentage of the sale. Depending on the affiliate products, a commission rate often ranges from 5% to 50%.
Fixed loyalty program commissions are best suited for businesses with one or two items. Fixed affiliate fees can be very helpful, for example, if you represent a SaaS product.
Affiliate commissions are usually preferable in cash. Unless you are a large eCommerce company, loyalty program compensation in the form of coupons or store credit has little chance of success.
Average Customer Lifetime Value (CLV)
To determine how much you can afford to pay your affiliates, look at your typical Customer Lifetime Value (CLV). CLV indicates how much profit the average customer brings to your business over the course of their relationship with you.
To calculate Customer Lifetime Value, you first need to estimate the average cost of acquiring a single customer, the average order value for a given period, and the customer’s repurchase rate over that period.
You can calculate the average order value by dividing your company’s total revenue by the number of purchases over a given period, such as one year. Then, determine the repurchase rate of your customers by dividing the total number of purchases by the number of individual customers in the same period. Now, you must multiply the average order value by the customer’s repurchase rate and subtract the result from the customer acquisition costs.
Therefore, below you will find a simplified formula for calculating the CLV:
(Average order value * Customer repurchase rate) = Customer acquisition costs.
The basic goal is to make sure that your loyalty program commission is well below the average Customer Lifetime Value. So you know where your limit is when you calculate the payouts you set with your affiliate partners.
Explore the best loyalty programs in your industry
The competitiveness of your affiliate commissions is an important factor in their success. To compete with them, you should investigate their loyalty programs. As a last option, you can also check the loyalty programs of companies that offer their products to your target audience.
You should not rule out creating an account or logging into a competitor’s affiliate programs to get in-depth information about their commission rates. Of course, you should not use your real name and company profile.
When analyzing, you should pay attention to the same commission terms that affiliate marketers use. Important metrics you should consider when evaluating a competitor’s affiliate commission rate are:
What type of commission is paid: apartment rate or percentage; what triggers the commission payment: Sale, lead, registration, or something else; is the commission high or low compared to the cost of the product;
- What benefits does the competitor offer its affiliates?
- How long are the cookies valid?
- Does the program provide commission levels?
(Increase the commission rate for outstanding affiliate results).
In addition to the information from the relevant loyalty programs, you can consult one of the resources that compile rankings with average affiliate commission rates for specific companies and niches.
Use data from prominent loyalty programs to make your commissions competitive and attractive to affiliate marketers.
Lower starting point – more room for growth
It’s now time to set up your first affiliate commission.
Once you have determined what kind of affiliate commission your business can afford, you may want to set the highest rate. In theory, this may attract a large number of affiliates initially, but how will that work out in the long run?
In this case, it would be wise to set the lowest possible commission while remaining competitive in your niche. This way, in addition to a higher commission rate, you leave yourself open to opportunities in the future.
You can build and implement your affiliate incentive system with more wiggle room between your competitive affiliate commission and what you can afford, given the customer’s lifetime value. This could be a commission scale or cash prize for the most productive affiliates and so on.
As you can see, starting with a lower affiliate commission rate may be more cost-effective in the long run. However, let us take a closer look at how affiliate incentives can contribute to the success of your loyalty program.
Affiliate benefits & bonuses
Let us say you have already charged the highest commission for your product, but it’s still not competitive enough. In this case, the best option for you is to use bonuses to motivate top affiliate partners.
Assume that the 25% commission rate is not profitable for your affiliates at the moment. Consider a creative presentation for your affiliate partners to get their interest. For example, this could be a monthly performance contest where the most productive affiliates win important rewards.
We have already touched on commission levels as another method of motivating affiliate partners. Affiliate partners who perform well over a certain period of time receive higher commissions.
Don’t forget about the vacation season and short spikes in payments to your affiliates. You can always temporarily increase payouts to your affiliate partners.
Overall, a bonus and incentive system is a great way to keep your loyalty program both competitive and cost-effective.
Loyalty Program Commission Structure
The work will not stop once the final commission rate is set. The competitive and high commission does not ensure a swarm of new affiliates. A number of other elements affect the performance of your loyalty program.
First and foremost, affiliate partners will want to know under what terms and when they are paid. Of course, they will only want to pay for the target action performed. Is this not one of the main reasons why you chose affiliate marketing as part of your marketing mix?
Nowadays, finding someone willing to pay affiliates for clicks or impressions is uncommon. The best strategy to avoid ad fraud is to reward only qualified leads or closed sales with commissions.
Your payment terms should be based on the nature of your business. For example, if you sell software as a service, you should estimate how long a customer takes to complete a single transaction.
Regular commission payments, e.g., once a month, are common in eCommerce.
The lifetime of a cookie is another important aspect of the affiliate commission system that depends on the type of business. The lifetime of a cookie means that the user who clicks on the referral link can perform a certain action, and the affiliate will receive a reward for it.
The lifetime of a cookie is crucial because, in the B2B segment, the user often visits the website multiple times and may pause for a long time before converting. This is one of the many reasons why your potential affiliates would choose your loyalty program payment terms over anything else.
Increase your affiliate commissions regularly.
Finally, set the loyalty program commissions amount, develop a payout structure and work out a motivating bonus system. However, the work with affiliate commissions never stops. Constantly develop and improve your affiliate commissions.
Throughout the lifetime of your loyalty program, make sure that payouts to your affiliates are accurate and on time. The more your affiliate partners’ army grows, the more difficult it becomes for affiliate administrators to control all financial activities.
In any case, to avoid reducing the efficiency of your affiliate partners, it is best to raise your commissions slightly at least every six months. Always monitor and analyze your affiliates’ performance to determine the efficiency of your affiliate commissions.
Good loyalty program management and timely compensation changes will help you increase the ROI of your affiliate marketing.
So… What tools can help you properly manage your affiliate commissions and your overall loyalty marketing program?
Fortunately, affiliate marketing software such as Scaleo can streamline and automate the operation of any loyalty program and help you set up and structure all affiliate payouts. With an affiliate marketing management solution, you’ll significantly boost the performance of your affiliate marketing campaign thanks to accurate tracking and powerful fraud protection.