Affiliate commissions are an important part of running your affiliate program, but how do you decide on the right commission rate?
Looking around at other affiliate programs, you might wonder how they can afford to offer higher rates, or conversely, how they can get so many affiliates on board with lower rates. If the seemingly endless possibilities are making your head spin, don’t worry – there are some specific guidelines you can use to make this decision, so that it feels less like guesswork and more like an informed calculation.
In this post, we discuss some of the main factors to consider so that you can settle on the commission rate(s) that feel right for your affiliate program!
Step one is understanding your target audience
If you want to find that sweet spot that will attract quality affiliates and bring in the sales, you’ll need to know who you’re dealing with. What affiliates are the right match for your program? What kind of audiences do they have access to – and what do they buy? Are they budget shoppers, or are they looking for premium products? Your target audience can tell you a lot about the types of affiliates that will be most effective for your program, and that informs your commission rates, too!
Your product prices (and costs) are a big factor
If your products are higher-priced, higher-quality, life-changing, money-saving, or otherwise high-value, you may be able to get away with lower commissions rates. This can be because commission percentages on higher prices result in a higher dollar amount per sale, or because the products are so in-demand that the sheer number of sales adds up nicely for your affiliates.
When it comes to digital products, commission rates tend to be on the higher end in general – often 50% or above, with some as high as 70-80%, or even 100% in the case of initial sales incentives or activation bonuses! How is this possible? Well, primarily because digital products have such a high profit margin to begin with. With digital products, you simply have more room to experiment, because you likely have less overhead costs to consider in comparison to physical products.
Digital courses and software are all great examples of products that offer high commission rates. Some sites like MindValley offer 50% rates on digital courses that are priced as high as $1000, which means a lot of earning potential for affiliates – especially ones in relevant niche communities who have audiences that are particularly interested in digital courses. This can produce a rewarding win-win situation that keeps affiliates happy, while being lucrative for the publisher.
Compare these rates to those of physical products, which commonly pay much lower commissions due to the higher costs of production. Amazon Associates has an average rate of between 3% and 10%, for example, and Target offers up to 8% depending on the types of products and the number of sales. However, even if these rates are lower, a high sales volume can end up producing more money for your affiliates in the long-run.
What can you afford?
It’s important to have a firm handle on your budget, so that you don’t end up committed to commission rates that you can’t afford, or end up missing out on quality affiliates because you didn’t realize you could afford to pay more. First, calculate your profit margin, then be sure to account for your business costs and expenses. If you calculate that a commission rate would take away from your profits, it’s probably too high!
What if you’re just starting out?
If your brand is relatively new and still gaining momentum, you may not have the same leveraging power as a well-established brand. Affiliates can be less willing to invest in a new program unless there’s a substantial commission rate, so you might have to offer more to start. Keep in mind that you can always lower the rate later, while letting existing affiliates keep the rates they signed up for.
If you run a digital store or membership site that’s been around for a while and has good brand recognition, you will probably be able to work with lower rates and still keep your affiliates happy. Remember: affiliate marketing is about relationships, so you want to play the long game in order to set yourself up for success! Try to come at it from the perspective of creating a win-win situation.
A lot depends on your market and competition
Let’s say you’re a frontrunner on the scene of a market that’s fairly new – in this case you have more flexibility in the rates you choose. However, if you’re in a highly saturated market and you’ve got a lot of fast-moving competition, you may not be able to get away with that; higher commission rates might be required to keep you in the game.
What if you sell super niche products? In this case, you may have to give affiliates more per sale in order to attract enough people. Products that are more specialized can get lost in the crowd, and you may need to offer better deals for affiliates if you want to reach enough potential customers. Alternately, working within certain niches might actually benefit you, in that affiliates in said niche may have less options, and be more willing to accept lower rates. They also might be more dedicated to the niche, and more passionate about promoting relevant products!
You also want to think about your competitors – do they have affiliate programs? If so, what commission rates are they offering? What additional resources do they give their affiliates? How do they recruit affiliates? Researching this can give you a good idea of a rough strategy (and commission rate) to work with. You can adjust your rate as you account for additional factors.
Flat fees, percentages, and incentives
How do you choose between offering your affiliates a percentage rate, flat-fee, or tiered rates? Well, it can depend on your niche; some industries favor flat rates, while others work strictly with percentage rates. This is where it helps to be aware of your market and competitors!
Let’s take a look at the different types of commissions:
- Percentage rate. One of the most common types of affiliate commissions, percentage rates give affiliates a set percentage of each sale, or a percentage of the customer’s total order. This can be especially motivating for big ticket items, premium products, and popular products, even if the percentage is low.
- Flat rate. A set, specific one-off fee per order, or per item sold. You might use flat rates to entice new affiliates who are less familiar with traditional affiliate practices, or to reward affiliates for new affiliate referrals, for example. Just like with discounting digital products, flat rate affiliate commissions can sometimes have a greater psychological effect.
- Tiered rates. With tiered rates you can motivate your affiliates to work harder by rewarding them with higher commissions the more they sell or earn. If you plan to offer tiered rates, you’ll want to take this into consideration when calculating your base rate, so that you leave yourself room to grow, without committing to rates you simply can’t afford.
Incentives and segmented rates
To make good affiliates great, consider implementing incentives that reward your affiliates for improved performance, no matter where they started. Things like cash bonuses and increased commission rates for improved performance give opportunities to more than just your top sellers, and can help to get dormant affiliates promoting again.
You might decide to segment your affiliates based on certain criteria, such as the types of traffic they bring in, or the sub-niche communities they have access to. You could find that some types of affiliates respond best to certain commission rates, or that others should be rewarded for bringing in more traffic from new communities you want to reach, for example.
Overall, it’s good to be flexible and willing to adapt in order to accommodate different types of affiliates that have different strengths. Overlooking this can lead you to miss out on potentially valuable members of your team – and sales, too!
Consider the affiliate’s perspective
When determining the affiliate commission rate that will bring the right people to your program, you want to think about things from the affiliate’s point-of-view. For example, many affiliates will be looking for sites that have good conversion rates; if your site converts well in general, you might be able to offer less commissions per sale, knowing that the sales will be high enough to make up for it.
You also want to think about what you would want if you were an affiliate. What’s the lowest amount of money you’d be willing to accept for doing the work required to make a sale? What number would be worth your time? This is why it’s important to understand your target audience; knowing who they are makes it much easier to imagine things from their perspective and make decisions that will make them want to join (and stay loyal to) your program.
See the big picture
At the end of the day, your audience, product prices, competitors, market niche, and budget all combine to inform your affiliate commission decisions; they show you the big picture – a bird’s eye view of your options. While it’s always helpful to be aware of the industry standards as well as the most up-to-date trends, remember that, as with most aspects of running a business, trial and error is crucial if you want to effectively fine-tune your methods! Ultimately, the rates you choose should be based on what works for your business, your target audience, and your affiliates.
What has worked well for your own affiliate program in terms of commission rates? Do you have any insights or experiences to share? We’d love to hear them, so leave us a comment below!
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