“Affiliate marketing has made businesses millions and ordinary people millionaires.”
So wrote Bo Bennett, the founder and CEO of eBookIt.com and president of Archieboy Holdings. He created one of the first web-based affiliate programs. The way affiliate marketing works is simple: it’s a performance-based advertising channel in which a business pays a commission for a conversion to one or more affiliates.
The industry involves four players: brand, network, affiliate, and the customer. Not all of these players are always involved at the same time; some brands have an affiliate program and they manage the relationship with affiliates directly. In other cases, networks have offers for the affiliates to choose from and they also take care of payments.
While this may sound simple, the successful execution can be a big challenge even for the most seasoned marketer. If done without a strategy, affiliate marketing can be a huge waste of time and money. Specifically, in this post I will address the following:
- Can affiliate marketing work for your company in 2016? Most often, the answer will be “yes.” Within affiliate marketing, there are several different types of companies, all with different goals that have managed to make affiliate marketing work.
- What gets in the way of sales? Don’t be too excited about affiliates promising 100,000 impressions. There are a few obstacles between a promise and an actual sale.
- Before you start an affiliate program, it’s good to analyze what your competitors are doing. Understand that the competitive environment sets the standards for your commissions, commercial arrangements, and objectives.
- Having done your competitor analysis, you are in a position to look at setting up your program. The first step in setting up an affiliate program is selecting how you are going to track the sales and who you are going to work with. Shall I work with a network or run the program in-house?
- The objectives for an affiliate program are normally based on your overall marketing strategy, as affiliate marketing is just one tool to achieve your business goals.
- How do you define the right commission? Since they make the affiliate world go round, it’s imperative to make them right.
These issues have not seen much discussion within the online marketing community, certainly not as much as SEO, content marketing, PPC and other marketing channels. We read online that many companies over the past decade have relied on affiliates to produce sales for their brands. We also read that affiliate marketing has continued to grow, and the most recent figures on the industry from research conducted by the IAB concluded that $16.5 billion worth of sales was driven by the affiliate channel, while advertisers spent $1.1 billion on affiliate marketing in 2014, 8% more than in 2013.
In the US alone, it has been estimated that affiliate marketing will grow by $6.8 billion in the next 5 years.
But how exactly have these companies been successful?
You need to make sales: can affiliate marketing work for your company in 2016?
Assessing whether affiliate marketing is right for you should be straightforward. You should look at your product and how you could promote it to affiliates. Using cloud storage as an example, you will see a number of large US companies such as JustCloud and SugarSync as well as smaller niche cloud storage products such as Backup Genie.
Cloud Storage products tend to work well by paying high commissions to their affiliates due to strong customer retention rates.
JustCloud offers a high payout based on their strong customer retention rate.
SugarSync offers a revenue-sharing type of commission.
Looking outside the obvious partners, cloud storage companies can also benefit from approaching sites that focus on their niche. For example, online backup software could approach anti-virus software.
Affiliates can be paid on a lead generation basis, and SaaS companies (hosting, cloud storage) work very well with affiliates. The reason they work well is the subscription business model represents for an affiliate continuous cash flow every time there is a renewal. Also, subscriptions ensure a brand gets their money back over time, including what they spent for commissions, and will eventually make a profit.
If affiliates don’t make any sales and their reporting system states that a campaign had 100,000 impressions, 10,000 clicks, and 0 leads or sales, then that means the affiliate won’t be paid, nothing more. Affiliates and networks might say to their clients that they can produce 1 billion impressions, which is just jargon. They might not produce any sales at all.
Your affiliate program is your product and affiliates your customers
Even though commissions can be very high, affiliates still want to negotiate the best deal. This is where impression counts get in the way of sales. While cost-per-actions (CPA) and cost-per-lead (CPL) deals can be risk-free for brands because they are based on performance, they are not always ideal for affiliates, which prefer to get paid per impression (CPM).
It’s simply quicker and easier for an affiliate to generate revenue by counting impressions than counting sales. In the conversion funnel, every campaign starts with impressions, few of them become leads, even fewer become sales.
Offering an affiliate program means that a brand needs to convince new affiliates to choose their deals over cost per impressions (impression counts).
In other words, a brand needs to sell its own affiliate program to affiliates as if it were a product on its own.
One of the reasons brands fail to implement a good affiliate marketing strategy is that they underestimate two key skills: negotiation and persuasion. A good affiliate manager knows how to convince an affiliate to promote his product and to demonstrate that affiliates can earn more money with a CPA deal rather than a CPM deal.
In summary, brands are faced with two challenges:
- They need to avoid CPM and impression counts at all costs.
- Still they need to reward affiliates well for their efforts, based on their performance.
Having an affiliate program, in essence, gives the opportunity (just the opportunity) for a brand to be in front of more people in places where they do their research.
Just because a brand got 100,000 impressions and 10,000 clicks from their affiliate campaign, it does not mean that the affiliate is productive. It does not even mean the person using the browser saw that impression.
Another key aspect of having success with affiliate marketing is explained by Rae Hoffman, blogger at MarketingLand and affiliate marketing expert. She explains how an affiliate program should look in 2016, using the example of Gawker Media’s Lifehacker site:
“Gawker Media’s Lifehacker site centers around solving problems people experience in everyday life. They identify a problem, solve the problem, and include an affiliate link to where the user can purchase the solution, when applicable.”
In other words, brands should try to recruit affiliates that match with their products. As a general rule, it’s better to recruit a few affiliates that send quality traffic than to have tons of affiliates with irrelevant audiences.
In summary: Brands should not settle for a CPM deal with affiliates. They should convince affiliates that their program is the most rewarding and demonstrate this with high conversion rates.
Realizing your affiliate program is your product and affiliates your customers is the first step to success. You still have the problems of generating a sufficient volume of quality traffic, getting the commissions right, recruiting affiliates, and checking what your competitors are doing.
How competitor analysis can set the standards
Before you start an affiliate program, it’s good to analyze what your competitors are doing. Understanding the competitive environment informs your decisions on how you will launch the program as well as your commissions, commercial arrangements, and targets.
Another thing to watch is the cost-per-action (CPA) and cost-per-lead (CPL) of your competitors. For example, if your competitor pays $100 commissions per sale, and you notice his product is promoted on all relevant websites and marketing channels (PPC, SEO, Review websites, Email affiliate), then you have two options:
- Match that commission and those channels. This can be a problem, as most small companies with limited marketing budgets cannot afford to pay that much per sale.
- Improve your conversion rates. Don’t worry if you can’t match your competitors’ cost-per-actions (CPAs). Start experimenting with new affiliates and improve your conversion rates, because the more conversions you produce, the more your affiliates get paid. They will prefer promoting your product over someone else’s when they see the number of customers they can generate.
The quality of your product is very important
From what we have said above, I think you can see that successful affiliate marketing is not just about how high the commission is. It’s not just about the money. You need to have a great converting product and this is how you can beat your competitors.
A great converting product is the easy way to repeat conversions, which means more customers for you and higher paychecks for your affiliates. As an affiliate, would you rather earn $100 every 3 days (or whenever the conversion happens) or $50 per sale 10 times a day?
Basically, within the whole customer conversion funnel, from awareness stage to purchase, there should be a strong match between your product and your audience. In the funnel, customers start with the awareness stage. And when the product has great conversion rates, it means that customers move quicker through the funnel down to the sale stage, where brands and affiliates make money.
Focus on your product quality and conversion rate optimization.
Think quality, not quantity.
Shall I work with a network or run the program in-house?
There isn’t a right answer to this question. Your company might prefer a network or it might prefer to work directly with affiliates.
But to find out which you need, answer these questions:
- Do you need a reporting system?
- Are you actively looking for affiliates for the first time?
- Have you worked out your commission rates?
- Have you got creatives ready?
- Do you need to take care of the affiliate relationship?
- Do you need tracking technology?
If you answered “yes” to all these questions, then it’s a no-brainer: you need an affiliate network.
Besides these minimal requirements that networks can help you with, there are other things to consider. Sometimes networks have very useful relationships with big affiliates and can therefore help you grow your program very quickly. And they have a publisher team that builds the relationship with the affiliate for you.
Networks will also manage the payment side of the program, which is a big plus because affiliates want to be paid on time and want to have reporting live as it happens to be able to optimize their campaigns and reduce waste.
What’s the catch?
One of the disadvantages of working with a network is that they charge a commission, which is normally up to 30% of what you charge affiliates. For example, this is how it works: Brand C affiliate program might sell $1 million of clothing. They pay their affiliates 10% commission, so the total commission of the program would be $100,000. The affiliate network would then charge 30% override on this figure so the brand would pay $130,000. The affiliates would get the $100,000 commission and the affiliate network would get $30,000 override.
Depending on the network, you may also need to pay setup costs. This covers the cost of integrating you to the network and testing tracking etc. Start-up fees can range from nothing to over $5,000. I have been asked for $30,000 before and, obviously, I never started with that network. This cost is often negotiable when you discuss contracts with the network, but it is worth noting when considering the start-up costs.
Building your own affiliate program
If you answered “no” to the questions above, the other option is running a program in-house, which can be a very time-consuming and risky business, but also more rewarding and profitable.
The first thing to do is create a list of affiliates. Online you won’t find any list of affiliates as such, but you can use LinkedIn Groups, search for affiliate networks, CPA affiliates, and related networks, and ask to join that group. Then you can start posting within the group your intention of recruiting new affiliates.
Normally, this method works very well because groups are composed of people that wait to be recruited.
How do you write the perfect LinkedIn pitch?
If you want to explore the LinkedIn option to recruit affiliates, I would suggest you approach like this:
“Hello, we have an amazing product with high conversion rates within these X,W,Z countries in the X industry, and we can pay very good and continuous commissions over time. We would prefer affiliates with product review experience, but everyone is welcome for testing”.
Example of pitching on LinkedIn
Some of the benefits of having an in-house affiliate program:
- Cost saving. While networks might charge a 30% override, you might pay only 5% when using a tracking solution. So for every $100 spent on commission, you would only pay $5 rather than $30.
- Better understanding of the company products and customer needs. You benefit from account managers’ knowledge of your products or services. This can often be lacking with the network.
- Speed to market. It can mean a quicker turnaround on time-sensitive offers. The in-house manager would be able to contact key affiliates instantly and arrange promotions.
- Complete control. With the program managed in-house, you have complete control over your affiliate program.
Disadvantages of an in-house affiliate program:
- Payment and commissions. Affiliate networks normally have a finance team that arranges invoicing and payment. When running in-house, you will be ultimately responsible for affiliates being paid.
- Reporting. When using a network or an agency, they are typically responsible for creating weekly report templates and measuring performance. If you want to get insight into a number of variables, this can often be quite time-consuming.
- Policing the program. When you manage the program in-house, you are responsible for ensuring that affiliates are promoting your brand ethically.
- Recruitment. If you are starting an affiliate program for the first time you can really benefit from working with networks that will instantly give you access to thousands of affiliates, a task which would be very time-consuming if done in-house.
Recruiting the right affiliates
One of the best practices when recruiting affiliates is to give a chance to everyone. In affiliate marketing the Pareto rule still applies: 80% of sales come from 20% of your affiliates. The problem is that you don’t know who belongs to the 20% group. You can use the affiliate selection tool, which I have summarized in one of my previous articles:
“To help you with the selection process, you can build the Balanced Scorecard by starting from the following requirements: information, quality of traffic, volume, commission request, affiliate type, sales funnel, traffic delivery speed.”
Commission Junction is the perfect example. While it doesn’t have formal affiliate approval process, they strongly recommend you possess three requirements, otherwise you won’t be successful as an affiliate:
- Commit to Affiliate Marketing. Many people jump into affiliate marketing thinking they’ll be making money on the internet the first week and live happily ever after; the truth is, there is no magic bullet. Earning money as an affiliate publisher can be difficult unless you’re truly committed.
- Create a Game Plan. A solid game plan on how you can maintain and continually build traffic to your website is important, and figuring out what sets you apart from other publishers will improve your chances at winning.
- Set yourself apart. In accordance with CJ’s Publisher Service Agreement, a publisher account that does not generate any “commissionable” transactions for a period of six months will be deactivated and a non-refundable $10.00 (US) Dormant Account Fee will be assessed.
In other words, don’t apply to CJ unless you can produce high conversion rates and drive lots of traffic to websites.
Unless you have a website that is ready to convert, jumping into affiliate marketing before you’re ready could end up costing you time and money.
Another thing to consider when recruiting affiliates is the objective that you have for your business: Are you trying to increase sales? Do you want to have more leads? Do you want people to just sign up to something?
Every affiliate can help you with different objectives so understanding your goals is the first thing you have to do to determine your recruitment strategy, which is the topic we will talk about next.
Setting your objectives and strategy
Again, it is important to set objectives. This clarity allows you to select the right affiliates and define your commission.
Some common objectives that you might have for your program could be:
- To increase the sales volume by 5% year on year
- To increase the sales value by 10% month on month
- To increase average order value by $20 by October 2017
- To increase the number of active affiliates in the program by 30% by the end of the year
Once objectives are defined, you need to set up the strategy that helps to reach them. This strategy is divided into 4 parts: terms and conditions, setting PPC rules, approach to validating sales, and recruiting the right affiliates.
Within the terms and conditions of the program, you will focus on how affiliates can promote you. The terms and conditions can therefore play a big part in how you are represented online and how successful you will be at achieving your objectives.
Within your terms and conditions, you need to define what can and cannot be promoted through PPC. The most obvious restrictions are brand terms and misspellings. So one of your objectives could be to increase your visibility on search engine affiliates, and you can do this by targeting only long tail keywords. Other things to consider are whether affiliates can link PPC directly to your site and whether they can use your URL in the ad copy. These are decisions you need to state in your terms and conditions.
Commission strategy defined
First of all, you need to define the cost per acquisition (CPA). How much are you ready to spend to get a new customer? In other words, if it costs you $250 to acquire a customer, you should have a plan to make $250 off of that customer within the next year to have a healthy cash flow.
Ok, so now let’s do a bit of math. Let’s start with the basics. The simple way of finding your commission is to calculate the CPA, which is to divide the total amount of marketing dollars by the amount of actual customers that come from those efforts:
(Marketing Spend/Customers = Cost Per Customer)
Of course this is a very simplistic view of how to calculate things, but it’s better to start form here if you are not calculating anything. Now you can do a bit more math to find your commission.
Let’s make a quick example. Let’s say that you spend $1,000 in PPC Affiliates, which brings you 500 visitors, so you are spending $2 / visitor.
If 10% of those visitors convert into leads (50 leads), then your cost per lead (CPL) is $20.
If 10% of those leads convert into customers (5 customers), then your cost per acquisition (CPA) is $200.
Now, depending on your business, this can be high or low. It doesn’t matter. What matters is that you have these numbers and the costs associated with three areas: visitors, leads, and sales.
You can then decide the commission you want to pay, whether per click, per lead, or per sale, explore new less expensive ways for visitor acquisition, and work on conversion optimization to improve that 10% conversion rate.
Unfortunately, things are a bit more complicated than this! Let’s understand why…
Your customer retention rate
If you are in business for a few years, you pay attention to your customer retention rate. If not, you should, your business depends on it!
In order to calculate your customer retention rate (CRR), you need to know:
- Number of customers at the end of the period – E
- Number of new customers acquired during that period – N
- Number of customers at the start of the period – S
Once you have those, the formula is pretty straightforward:
CRR = ((E-N)/S)*100
So to make things simple, let’s say you started the quarter with 200 customers (S), you lost 20 customers but gained 40 customers (N), so when the period was over you had 220 (E).
Using the formula, we’ve got ((220-40)/200)*100 = 90; in other words, a 90% retention rate. Good for you!
Customer lifetime value
With such a high retention rate, you can get excited thinking about the commission you can offer your affiliates! But you are still one step away from the right commission offer. You need to calculate the customer lifetime value (CLV). Here is a simple formula:
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years)
If you are a software company based on a subscription model, and your average customer pays $10/month for 3 years, then you’ve got this formula:
$10 x 12 months x 3 years = $360 in total revenue (or $120/year)
Of course, again, this is very simplistic; 3 years is a long time, and you should segment your customers for an accurate picture.
Calculating your final commission
Let’s say you make $360 per customer over the 3-year period and have a 90% retention rate. Now you are in the position to calculate the perfect commission. There isn’t any formula for this. It comes down to common sense. If you can afford to offer a CPA at $100, then do it, but make sure it’s linked to your CLV and CRR.
What you should remember
Regardless of the business you are in, here are my recommendations on how an affiliate program should look:
- Do not pay per impressions or clicks. Affiliates always want to run campaigns with the lowest possible risk for them and ask for CPM payment. Don’t do that. In light of the considerations I have made, I don’t see a good reason for CPM.
- Your affiliate program is your product and affiliates your customers. You have to do a bit of persuasion work to convince your affiliates to choose your product. You can succeed by showing how your affiliate program can make them lots of money through high conversion rates, even when commission rates are not competitive.
- Do competitor analysis before anything else. At the early stages of every affiliate program, you should know what your competitors are doing, how much they are paying, and what the standards are for the market.
- Set up your commissions based on the analysis of your competitors. Earlier in this article we discussed that the quality of your affiliates is more important than the quantity. Don’t worry about the number of affiliates, just make sure their contextual impact with your product is strong.
- If you don’t know where to start, always start from one network. They have a lot of features that can interest you and make your job easier. Affiliate networks take a big cut of 30%, but they provide a performance campaign in which you don’t pay if you don’t get the results you want.
- Your commission should reflect the financial value for your brand. Make sure your commission is sustainable over time; you can’t afford to lose money to get more sales. Always pay attention to customer retention rates (CRR) and customer lifetime value (CLV) to calculate your ideal commission.
This is not the perfect affiliate marketing strategy, but it’s the perfect method to buy yourself a bit of time. It helps you understand if your strategy and your product can work out by testing and putting affiliates to work, without any financial risk. Affiliate marketing is not a “set it and forget it” type of business. It’s a continuous optimization work, and this strategy gives you the tools to do just that. Optimize for success.
About the Author: Luca Tagliaferro is a digital marketing manager, affiliate manager and founder of www.lucatag.com, a digital marketing blog where you can buy his eBook in Affiliate Marketing Strategy, and founder of www.cloudstoragenews.it, the biggest review website on cloud storage in Italy.