Raise your hand if you would like to get extra revenue with an ROI of 1300%—that is, for every dollar you invest, you get back 13. What if, once the system were set up, it was fairly easy to maintain and continue making more money?
I don’t know about you, but I would love to have such a system in place. What I’m talking about is affiliate marketing. Or as it’s being called more and more—performance marketing.
Table of contents
- What exactly is affiliate marketing?
- How affiliate sales have grown in recent years
- Step 1: Understand the costs involved with setting up an affiliate program
- Step 2: Understanding commissions and how much to pay
- Step 3: Launching and running your affiliate program
We’ll be looking at affiliate marketing from a merchant view point. How to be successful at running your own affiliate program, how other people have used affiliates, what are potential affiliates looking at when deciding on which products and services to promote, what software is out there, how to keep affiliates happy and much more.
But first, let’s get something straight…
What exactly is affiliate marketing?
Affiliate marketing is a performance-based form of marketing. You as the merchant have a product or a service to sell, and I’m promoting your stuff as the affiliate/partner for a percentage of your revenue (a commission).
You as the merchant decide how big a commission to pay, and you only pay me when you have verified that the sale has indeed been made. If you have a “money back” guarantee, then it’s after that period is over.
How affiliate sales have grown in recent years
According to Statista, affiliate marketing spend has grown from $1.6 billion in 2010 to $5.4 billion in 2017, and is predicted to grow to over $8 billion in 2022.
Furthermore, the Affiliate Customer Insights study from CJ Affiliate revealed that customers that come through affiliates have a higher average order value and more orders per customer.
Real world examples of revenue growth by adding an affiliate program
This leading retail brand keeps seeing a 6:1 return on their affiliate marketing investment.
TOPMAN, a clothing brand, decided to create an affiliate partnership with Vouchercloud, a discount publisher, to increase their market share and sales.
The results? Market share increased from 35% to 76%, new customer rate went up by 10%, and their conversion rate lifter from 4.21% to 12.6%.
Not only for online stores
Debenhams, an English department store, was able to drive significant amount of people to claim in-store vouchers through an affiliate network. In fact, affiliates accounted for 57% of in-store purchases for that campaign.
It’s clear there is good money to be made with affiliate marketing if you know what you’re doing. So let’s learn how to setup and run one in three steps:
- Understanding the costs involved with starting up and choosing the platform to run the program;
- Understanding how commissions work;
- Launching and running your affiliate program.
Step 1: Understand the costs involved with setting up an affiliate program
First thing to understand in affiliate marketing is the costs side of thing. Generally speaking, these can be divided into three bigger areas:
- Management costs. We need someone, like an affiliate program manager, to keep an eye on and run the affiliate program.
- Platform costs. To run affiliate marketing, we need software or an affiliate network to help with the day-to-day stuff.
- Creative costs. Someone needs to design creative materials banners, videos, landing pages and more for the program.
Affiliate program cost #1: The cost to manage the program
One of the most important pieces of the puzzle. You need someone who’ll be responsible for the day-to-day running of the program. The affiliate manager will manage tasks like recruitment of affiliates, general communication with affiliates, designing policies, optimization of the program, reports, newsletters and more.
When it comes to finding that person, you have two options. You can either create a new position inside your company or use an outsourced program manager (OPM)—basically hire a company to take over the management side of your affiliate program.
Which way to go depends largely on your company size, the products and services you sell, and your revenue. It’s good to calculate what it would cost in-house and what an OPM would cost, taking into account different benefits that both of them bring.
Now talking about salaries, things get a bit more complicated. Affiliate managers (outsourced or in-house) get generally paid a base salary plus a performance bonus. Average salary for in-house managers according to SimplyHired is around $61,000.
In reality, it could be way higher or way lower depending on the products you’re selling. It will depend on whether or not there are performance incentives in place, and on whether you’ll need additional services, such as design and development.
Affiliate program cost #2: The cost of your technology platform
When choosing the right platform for you, you have two possibilities. Either go with an affiliate network or use specialized software in-house.
Affiliate networks are like mediators that provide merchants and affiliates with tracking and maintenance solutions to run their affiliate campaigns, making your life easier. Main pros include pre-existing network of affiliates and handling all payments to affiliates.
Existing network of affiliates raise your chances of being randomly discovered on their program directories, which can be a good thing. And not dealing with payments yourself lifts a huge burden from you.
On the downside however, you may have to spend more time “vetting” the quality of the affiliates who join your program as you want to avoid working with those who could damage your reputation.
You may also become limited by the software, if you want to get into more advanced applications that extend beyond the online performance channels.
Specialized software on the other hand gives you more freedom and customization options. It can be adapted to fit your needs, interface is generally better, and it’s easier to track individual’s performance.
Biggest downside of this is that you do not have access to a network of affiliates, which can be a problem when you’re just starting out or have no experience with outreach.
Secondly, you are handling all the payments, which can be a hassle the bigger your network gets.
Talking about prices, custom in-house solutions can have higher monthly fees, depending on the quality of the software. However, the trade-off is you do not pay the software company a commission like you would with many of the networks.
Taking everything into account, the more you sell, the better option in-house solutions are. But you definitely need to do your own calculations and take into account things like implementation work when going with in-house solution.
Recommended software and affiliate networks:
On the in-house software side of things, we have the following:
For affiliate networks we have:
This is by no means an exhaustive list as there are many more potential networks and platforms to consider. Do your research and choose the one that fits your needs the best.
As far as affiliates are concerned, they don’t seem to care that much about whether you’re on a network or doing it on your own.
Affiliate program cost #3: The cost of creative that’ll sell
To be successful as an affiliate merchant you must provide your affiliates with as much pre-made promotional content as possible. This makes their job easier and they’ll be more motivated to work with you. This includes promo videos, banner creatives, professional product images, landing pages, email templates, text ads and more.
Having solid creative is what’s going to help your affiliates the most. And when you’re nice to your affiliates, they will be nice to you—and that will help you attract even more and better affiliates which translates into more business for you.
For example, ConvertKit has invested in video trainings, webinars, brand assets, graphics, and other shareable assets that affiliates can freely use in their content:
Namecheap, a domain and hosting platform, offers more than 50 banners affiliates can use:
Step 2: Understanding commissions and how much to pay
Talking about commissions, first thing to understand is the model on which the commission is based. There are two main models in use. These are:
- Paying commission on a per sale basis;
- Paying commission on a per lead basis (PPL).
The first one is quite self explanatory and is used the most often. When paying commissions, you can chose to:
A.) Increase your sale prices across the board to “buff” the commission price (i.e. $10 t-shirts are now raised to be $11.20; your affiliate makes 12% but your costs remain the same). Jeff Macke of Yahoo Finance explains very bluntly how/why these kind of price increases can be tolerated by the market.
B.) Your prices remain the same and the commission comes out of your profit margin. There are no additional costs passed along to the customer, and if you’re working with good affiliates, the trade-off for decreased profits is a higher volume of inbound customers.
On the other hand, there’s Pay Per Lead. This form of payment is typically reserved for markets where leads are very easy to generate, and the product is either easy to sell – due to limited options or the customer has an immediate need.
Mazda, for example, was able to get 29% more people to test drive their new cars through online lead generation affiliate campaign. They worked closely with automotive review sites and blogs, offered more and better support than before, and gave them more freedom on the creative side.
Pay per lead can work, but it’s still a bit more problematic because you are giving away money on the possibility of getting a sale in the future—it’s not a sure thing. So you must really know first your own target audience and the audience of your chosen affiliates to make it work for both.
A word on average commissions
According to the Affiliate Summit AffStat Report, the most important thing for affiliates when choosing a merchant is commission. So how big should it be for your products/services?
Unfortunately, there is no such thing as average commissions. It depends on so many things like your brand, your financial state, selling physical or info-products, and more.
Also things like the support you’re offering to affiliates, supporting creatives you’re offering, affiliate manager, and more. It’s not as simple as paying the highest commission and people will love you. For a good case study on how to completely screw up your relationship with affiliates, read this article.
If there is no “average” commission which to base mine on, then how can I come up with one myself?
Fortunately, there are ways to calculate the commission based on what you’re selling, your profit margin, etc. After all, if there is one thing that can make or break your affiliate marketing efforts, it’s commissions. Pay too little and no one will want to partner with you; pay too much and you eat into your profit margin. It’s a tricky balancing act to get right.
Geno Prussakov, founder of AM Navigator and one of the most respected voices in affiliate marketing, proposes the following model for calculating commissions:
A.) Calculate the maximum commission that you can afford.
B.) Do a thorough analysis on what other programs are offering on the base level to ensure you’re competitive.
C.) Decide on the amount of the maximum commission that you want to leave for bonuses, performance based stuff, and private offers.
D.) Subtract A from C and you have your base commission.
When calculating the maximum commission that you can afford, start with tallying up all the costs involved—things like platform costs, cost of creating creative materials, landing pages, and also management costs involved with running such a program. Then, take a look at your profit margin and based on all that data, start calculating possible commissions.
Depending on your business, you can also offer higher commissions to affiliates that constantly send quality traffic your way. Amazon used to do this with its Amazon Associates program. The more people would buy through affiliate links, the more commission affiliates would get:
This kind of tiered commissions model can work even in a situation where you are breaking even on first buy and making money from there on in—as long as the customer lifetime value is higher than what you are paying out in the beginning. In addition, it spurs affiliates on to do an even better job at promoting your products for more piece of the action.
Calculating commissions in action
Let’s say I’ve decided to open an online t-shirt shop that sells, well, custom t-shirts that look something like this:
Since I’m trying to keep things as simple as possible for myself, I go with a dropshipping solution. In that scenario, I’m responsible for coming up with, promoting my designs, and taking care of customer service. My partner, the dropshipper, will take care of actually making and shipping of the products.
After doing my research I’ve decided to go with PrintAura who can do what I need them to do for total of $16.75. Taking that and my selling price of $30 and marketing costs into account I end up with this chart per product:
My yearly marketing budget is $3,000, and during the year I plan to sell 1,200 t-shirts. With this in mind, I calculate that my marketing cost per t-shirt is $2.5, or 8.3% of total costs—as I sell more, those will go down, but this is the basis.
So profit is 35.8% or $10.75 per t-shirt. I’m willing to sacrifice up to $6 for my affiliate program commissions. This is step A done from calculating commission.
Next, looking at my competition, they are offering $4 to $5 commission per t-shirt. Additionally, they provide mediocre creative support in terms of product images, banners, and web copy. Step B done.
Step C and D: taking into account what kind of support my competitors offer, I’m confident that I can provide my affiliates with better creative support and thus decide to go with a base commission of $4, which leaves me $2 for bonuses, performance kickers, and private offers.
For your products and services the numbers will look different, but this is a basic example for how calculating commissions work in real life.
Step 3: Launching and running your affiliate program
It’s time to launch the program, but launching it without having any affiliates on-board is kinda dumb—without them we won’t make any sales.
Recruiting people into your program
Getting affiliates to join your program is mainly all about being visible and active in places where your affiliates are. So places like affiliate networks, affiliate forums, blogs, and more. One other idea is to run a PPC campaign for your affiliate program and get affiliates through that.
Another good idea would be to join the top affiliate programs in your niche to get an insight into who are top affiliates, what kind of support they’re getting, creative, and more. Then use that knowledge to put together a comprehensive offer and contact them directly.
The next step is to contact them directly, explaining what you’re about, what you have to offer, what kind of support you’re offering, and more. Your goal is to get them to check out your program and possibly join it.
Getting super affiliates on-board
Besides your “normal” group of affiliates, you have also this special group—super affiliates. These are the people that can single-handedly bring in 50% or more of your affiliate revenue. These could include things like coupon and lead generation (remember Mazda) sites among others.
I really like Geno Prussakov’s definition of a super affiliate as someone who is mature, has potential to drive a lot of sales, and is making at least five figures a month in gross profit:
“It is not unusual for one to three such affiliates in the program to be driving 50-70% of all affiliate program’s sales.”
They are mature enough to have seen all sides of the business and are using all that knowledge to drive massive sales numbers.
They look specifically for programs that have an high conversion rate, along with one that shares a decent percentage of revenue with the affiliate. As with recruiting “normal” affiliates, it’s all about research and preparing a killer offer.
Your killer offer has to include things like your conversion rate, commissions to your current traffic, creative collateral, etc. More often than not, super affiliates will test drive a program to see how it works on their audience. If they’re not happy with the results, they’ll simply drop out. So make sure when you’re approaching them that you have everything ready to go.
Now that we have affiliates, how about keeping them on the program?
Keeping affiliates informed: the affiliate newsletter
Keeping in mind that you’re likely not the only product your affiliates are promoting, it’s important you remain top of mind when it comes to promoting your stuff. The easiest way to do this is through an affiliate newsletter.
A well designed newsletter may include:
- Statistics on top performers;
- Top new performers;
- Case studies;
- Upcoming promotions;
- New creative;
- New products;
- Changes in commission.
Basically anything that makes their life easier and keep them motivated is good. So throwing different contests, promotions, an article or two on a new tip or trick is helpful.
Another thing is to make sure that you or whoever is running your affiliate program is accessible for questions and help all the time.
That could mean things like instant messages, forums, Skype, some kind of internal system, and so on. The idea is to always be there when your affiliates have questions and answer them.
When it comes to frequency of updates, affiliates themselves report that they prefer to be contacted either monthly or weekly.
A good place to start is to send updates every two weeks and then, depending on the results, either go faster (weekly) or slower (monthly).
As we’ve seen, affiliate marketing can be a good channel for getting new customers and growing your revenue, if you have taken the time to set it up correctly.
Invest your time to select the right affiliates, give affiliates the creative collateral they need to succeed, be in constant contact with them, and choose the right person to manage the program in the first place.