Home Affiliate Marketing & Advertising How to Set Up Affiliate Commission Rates for Affiliate Program

How to Set Up Affiliate Commission Rates for Affiliate Program

by Patrick D
affiliate-commission-rate-guide-2022

Adsterra works with over 12K advertisers, and many of them are now using our professional CPA network to place offers. On the other hand, our affiliates need the motivation to effectively promote these offers. So  brands and marketers frequently ask us, “How much should we pay affiliates?” Obviously, if their commission is too low, affiliates will simply go for a competitor’s higher offer.

So, how can you determine the best affiliate commission rate (and affiliate commission terms) for your business? In this article, we’ll outline steps to help you establish a competitive and long-term affiliate commission rate and explain why joining a CPA network might be the best risk-free option.

What are affiliate payouts?

When you run your own program and have a direct agreement with your affiliate partners, you’ll have to deal with affiliate commissions. On the other hand, when going for the much more manageable “affiliate payouts for conversions” (usually CPA, CPI, CPL), you’ll deal with established affiliate networks like Adsterra CPA Network.

In general, you have to learn how to choose the optimal payout for advertising your offer (how much we are willing to pay for the conversion). We mean:

  • Setting a limit on conversions for new affiliates and checking the quality of traffic.
  • Imposing traffic restrictions (geo, devices, OS, browser) and its cost (iOS and Tier-1 traffic is traditionally more expensive).
  • The fact of conversion, i.e.,  what exactly is a successful conversion: download, install, subscription, lead, click.
  • The payment itself even depends on the budget, the duration of the proposed campaign, and the complexity of the conversion.

 If you need to get results quickly and are ready to pay a lot, it is better to contact a CPA network to make your offer private (i.e., accessible only to advanced affiliates).

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Payouts for complex conversions

Complex conversions (purchase, subscription with payment, re-deposit) will always cost more. For example, some crypto offers pay from $360 for a client’s first deposit from countries like Austria, Finland, or Mexico (if the deposit itself is at least $350).

This approach doesn’t lead to many conversions, but any conversion that occurs is very valuable to the affiliate. For some Geos (where traffic is cheaper), the cost of converting users to leads will be lower. Subsequently, the number of conversions will be higher. For example, in the TikTok format, the payout for downloading a mobile application can be $3.20 (for a user from Tier-1, such as the United Kingdom or the United States), which is acceptable. It is obvious that estimating an optimal affiliate commission rate without prior experience is difficult. As a result, you’ll need to enlist the help of your affiliate network manager.

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Why are competitive affiliate commission rates necessary?

Commission rates usually consist of two parts: a base rate and bonuses. It can be tempting to keep them low to maximize your profits. Offering higher rates may result in higher conversions because affiliates gain a financial incentive to perform well. While you may be paying each affiliate a higher commission per sale, you might see an overall increase in sales.

When calculating the commission amount, you should also consider your competitors’ rates and other factors like Margins, Customer acquisition costs, and Discounts/promotions.

What affects average affiliate commission rates?

1. Profit margins

If your profit margin is 15%, it makes sense that you wouldn’t be able to offer a higher commission, such as 20%, because you’d be losing money. So, how do you pick the appropriate commission percentage?

It should, first and foremost, be lower than your profit margin, and it would be a good idea, if not both, to define the minimum, median, and average gross profit margins for each product or item category. Consider how complicated your program is – how many products do affiliates promote and how frequently.

The next step is to identify factors that may have an impact on your net profit margin, such as the average return rate, promotional offers, or fees, among others. You’ll be one step closer to knowing your budget’s limits and how much commission you can offer once you know these figures.

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2. Costs of acquiring new customers

You must continue to make money regardless of your acquisition costs. Examine your bottom line to see if you can afford to pay more. Assume that commissions will account for about 15% of your total spending. This does not imply that this is the final commission amount for your affiliates. Keep in mind that you have other options for acquiring customers, and affiliate marketing shouldn’t be the most expensive. Plus, it’s always a good idea to have some extra cash on hand.

Remember to differentiate payments based on each affiliate’s unique experience, engagement, and results.

3. Promotions and discounts

Many merchants overlook the fact that promotional costs must also be factored in. If your store offers a 5% discount on initial purchase, for example, you must factor this discount into your calculations. Do you offer free samples as part of your orders? How frequently do you hold sales promotions? Consider your fiscal year in terms of promotions and discounts, as well as the roles of your affiliates in such efforts.

High commission vs low commission rates: which is better?

Let’s assume you want to sell a $1,000 product with a 5% commission rate, you’ll have to pay your affiliates $50 per sale. However, if the product you’re selling is worth $10 and you pay 70% commission, you’re only getting $3 per sale in reality. Most low-priced items are very easy to sell, so you must also consider how many items you actually sell per month.  The point here is that your product/service’s pricing greatly influences the commission rate you’re offering affiliates. Ideally, you should set up an optimal commission so that affiliates could earn comfortably and you can make your profits.

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Affiliate commission structures

Consider the following types of commission:

The standard commission

A percentage or flat amount you pay affiliates for each conversion they drive.

First-time affiliate bonuses

Fixed bonuses or increased commissions to entice potential affiliates to join your program.

VIP commissions

Not all affiliates generate the same amount of revenue; some affiliates are particularly valuable, so you might consider rewarding them with a higher commission rate.

New affiliate commission

When your affiliates bring you more affiliates, you might have to pay a referral commission.

Tiered commission

Affiliates earn a certain percentage of commission on all sales up to a certain amount in the tiered commission model. Their commission increases once they reach their revenue target. This motivates them to achieve their sales targets and close more deals.

Example: An affiliate’s base commission is 5% of total sales up to $10,000. For total sales between $10,000 and $20,000, the commission rises to 7%. They get a 10% commission on sales over $20,000.

Guide to calculating your affiliate commission rate

​​1. Decide on the type of affiliate commission you want to use

Consider percentage vs. flat-rate commissions. Do you want your affiliate commission rate to be a percentage of each sale or a fixed dollar amount for each sale?

Percentage commissions are the most common, with the average affiliate commission ranging from 5 to 30%. On the other hand, fixed-amount commissions may work well for your business if you only sell a few products at a set price.

2. Calculate the average lifetime value of your customers

What is the maximum amount you can pay affiliates? Your profit margins are difficult to predict and subject to change, so use your customer lifetime value (CLV) to gauge your options.

CLV is the average amount of money a customer brings throughout their partnership with your business, minus the average cost of acquiring that customer. The longer an average customer keeps patronizing you, the higher your average customer lifetime value.

Knowing your CLV will help you determine an affordable and long-term commission rate for your program. Answer the following questions to calculate your average customer lifetime value:

  • What is the typical cost of acquiring a new customer?
  • In any given year, what proportion of your customers do you retain?
  • What is the maximum amount of revenue you can expect from each customer?

Your affiliate commission must be significantly lower than your average CLV to remain sustainable.

Remember that affiliate commission rates are included in your costs of acquiring new customers, so the commission cannot exceed your average customer acquisition cost. You can offer higher affiliate commissions if you have a high customer retention rate.

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3. Investigate your competitor’s commission rates

Your direct competitors may already be looking for affiliates. You can also find at least one company that does not compete directly with you but caters to the same niche and audience (and possibly attracts similar affiliates).

Examine their affiliate program’s commission rates and set a more appealing, competitive commission. Commission rates for each vertical are different, so you should maintain a consistent and competitive commission rate for your vertical.

Review the affiliate commission structures of each competing program you’ve identified.

  • What action (a sale, a generated lead, or something else) triggers the payment?
  • Are affiliates compensated in cash or in-store credit for the brand’s merchandise?
  • Is the affiliate commission a percentage of the sale or a fixed amount for each sale that is completed?
  • What’s the commission rate of each of your competitors? Is it expensive, cheap, or reasonable compared to the price of their products and other competitors’ programs?
  • Do they have a bonus program for high-performing affiliates?
  • Is there a tiered affiliate commission structure at the competitor?

When planning your affiliate commission, keep these questions in mind. You want your commission to be competitive compared to your direct competitors and any other brands that may be able to attract the same affiliates.

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4. Set a low commission rate for your first commission

After researching your customer lifetime value and other brands’ affiliate programs, it’s time to set your own affiliate commission rate.

Set a range of commission rates that appeal to your affiliates and are affordable for your company.

Why? This gives you the flexibility to raise your commission rate in the future while still prioritizing your company’s needs.

Affiliates won’t mind if your commission rate rises in the future; it just means more money for them. However, if you start with a high commission rate and then have to lower it, you’ll almost certainly lose a lot of affiliates (and have a harder time recruiting new ones).

Furthermore, beginning with lower affiliate commission rates allows you to experiment with bonuses or higher commission tiers for your top affiliates.

With a lower commission rate, you’ll have more room to set up promotions for your affiliates to offer their website visitors.

You’ll also be able to offer more traditional discounts and sales to potential customers and launch a referral program.

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5. Decide on commission bonuses

Bonuses for top affiliates are a great way to reward them while also keeping your program interesting and appealing to all affiliates.

Commission bonuses can be used in a variety of ways.

  • Consider rewarding affiliates with commission bonuses (or other valuable gifts) if they meet specific lifetime revenue goals or are in the top 10% of your affiliates.
  • Offer a “streak bonus” when reaching a certain amount of monthly or quarterly sales earns you a special commission rate boost or a meaningful gift for a limited time.
  • Create a tiered commission structure where affiliates who make a certain number of lifetime sales receive a permanent commission increase.

Recurring commissions are a simple bonus to offer if your product or service is subscription-based. When a customer who purchased through their affiliate link renews or upgrades their original product or service, affiliates earn an additional commission. Affiliates are rewarded for bringing in customers who are a good fit for the product.

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6. Agree on the terms of the affiliate commission

You must also specify the conditions or requirements that affiliates must meet to receive commissions. Businesses usually pay affiliates only when a sale is made via their link.

Many programs also specify that affiliates are only paid if the product isn’t returned or the service isn’t canceled within a certain amount of time.

A B2B company with a longer sales cycle should consider paying affiliates for both lead generation and sales. If you choose to pay affiliates for leads, only pay for qualified leads: users provide an email address after clicking on an affiliate link. Set a lower, fixed commission rate for leads and a higher, percentage-based commission rate for completed sales.

  • Will you use affiliate cookies to track your performance?
  • After someone clicks on an affiliate’s link, how long will they be eligible for a commission?
  • Will affiliates only be paid if visitors who clicked on their affiliate link made a purchase the same day?
  • Will they receive a commission after someone clicks on their affiliate link for a set period?

Days, weeks, or months after a lead visits your site via their affiliate link, cookies allow you to attribute a purchase to that affiliate.

Affiliate cookies are essential for B2Bs with a longer sales cycle, as leads typically conduct more research before returning to your website to purchase.

Keep your cookie settings competitive with other affiliate programs in your niche. Using affiliate program software, you can easily set up cookies for your preferred time frame.

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7. Change your commission rate regularly

You don’t have to keep your affiliate commission rate constant. It’s even better to revisit your commission rate regularly to keep affiliates engaged and motivated.

After all, if a competitor’s commission rate is significantly higher than yours, your affiliates might defect to them.

The commission rate change does not have to be permanent. Determine which period you can afford a temporary commission bonus and which period will have the most significant impact on revenue.

This “surprise” bonus is a great way to boost sales during a slow month and grab affiliates’ attention. You could offer a flat-rate bonus (for example, a $20 bonus for every affiliate who generates $200 in sales in July) or a temporary commission increase (e.g., an extra 5% commission on sales made in December).

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Conclusion

As an affiliate program manager, setting commission rates is one of the most important decisions you’ll make. Fortunately, the process is simple, and there are a few things you can do to ensure that your affiliates receive competitive rates.

We’ve discussed the importance of competitive affiliate program rates in this post. We’ve also provided you with a step-by-step guide on setting sales commission rates for your affiliates. To summarize:

  • Calculate the highest rate you can afford to pay.
  • Take into account any bonuses or incentives.
  • Compare and contrast your commission rates with those of your competitors.

To truly keep affiliates motivated, you must pay out commissions on time, regardless of your set rate and terms.

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