One question every affiliate program has to answer is “what affiliate commission rate should we offer?”
It’s a difficult question and there’s no set answer. Instead, you’ve got to answer a series of questions to find the perfect balance between making a profit and rewarding affiliates.
We’re going to show you exactly how to do this in our complete guide to setting affiliate commissions.
Affiliate Commission Types
When it comes to affiliate commissions, the first thing people want to know is how much!
However, before we look at the big question on everyone’s minds, let’s look at the different types of affiliate commissions. This is an important distinction because a 20% commission rate can be very different from a $20 flat fee.
How do you choose between offering your affiliates a percentage rate, flat fee, or tiered rates?
Well, it depends 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!
Percentage Rate Commission
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.
For example, if I’m selling a car for $10,000, I might offer my affiliates a 5% commission, which would work out at $500.
Flat Rate Commission
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.
This option is sometimes popular because it’s simple, and gives affiliates more certainty. They know exactly what they’re going to get for doing their work.
In this case, you might offer a $500 flat fee for anyone who helps you to sell your car. This way even if the seller is negotiated down, the affiliate is still guaranteed the $500.
Tiered Commission Rates
Many affiliate marketing programs use tiered commission rates to motivate affiliates. This allows affiliates to earn more commission the more sales they make. A typical tiered commission structure might look like this:
- Sales 1-25: 10% commission
- Sales 26-50: 12% commission
- Sales 51-75: 15% commission
- Sales 75+: 18% commission
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.
Back to our car dealership, and this might mean affiliates get 5% on their first 10 sales, 6% on sales 11-50, and 7% on sales 50+.
What is a Typical Affiliate Commission?
When you’re trying to come up with your affiliate commission you want to know what everyone else is doing right?
The difficulty is, affiliate marketing is used in such a wide range of industries that it’s hard to point to benchmarks. With this in mind, the average affiliate commission rate is said to be between 5-30%.
We know, that’s a bit broad!
The point is, there’s no easy answer to choosing your commission, instead, you’ve got to look at your business, your customers, and your competitors to come up with an answer that works for your affiliate program.
We’re going to show you exactly how to do it.
6 Steps for Setting Your Affiliate Program Commission Rates
If affiliate marketing is to become a big part of your marketing efforts, then you’ve got to get your commission structure right.
The only way affiliate marketing is successful is if it works for both you and your affiliate partners. Commission isn’t the only element in this equation, but it’s certainly an important one.
Here’s a step-by-step guide you should follow to choose the perfect commission rates that will help grow affiliate sales.
1. What Do Your Margins Allow You to Offer?
Making thousands of affiliate sales is great, but if you’re not making a profit from them, then it’s all for nothing. You’ve got to be able to look at your affiliate products and know exactly what your margins are and how much you can afford to give away in commission.
Make sure you 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!
The best affiliate products have a good margin built-in so that there’s more room to reward affiliates, which means affiliate marketing isn’t right for every business.
2. Understand Your Customer
Understanding your target audience is essential to everything in digital marketing and e-commerce, so it’s not surprising that it factors into your affiliate commissions.
One of the key things you want to look at is your customer lifetime value: how much do your customers spend with you over the entirety of your relationship?
If your customer’s lifetime value is $5,000, then paying out a 20% commission on a first sale of $500 suddenly looks very attractive.
Understanding your customer also helps you identify the types of affiliates and influencers you’re looking to recruit:
- Are they beginners or more experienced? A startup might have different expectations for their affiliate income to an established affiliate site. If they have a good search engine presence or big social following, this might also factor into the equation.
- What kind of audiences do they have access to? What niches do they appeal to, are they a review site, retailer, etc?
- What platforms do they use? Are they bloggers utilizing SEO, PPC marketers, social media experts, email marketing specialists, etc?
- Are they selling budget products or premium items? The types of products they market will dictate the payouts they might expect.
All of this is vital information when you’re choosing your commission.
3. Look at Your Industry 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 because affiliates in that niche may have fewer 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 (also big affiliate networks and successful affiliate sites to get a general idea of what affiliate managers are offering):
- 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.
4. Consider Your Product Prices
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 commission 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 online businesses and digital products (web hosting, templates, plugins, podcasts, online tutorials, webinars), commission rates tend to be on the higher end, 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 fewer overhead costs to consider in comparison to physical products.
Compare these rates to those of physical products, which commonly pay much lower commissions due to the higher costs of production.
Amazon Associates pays an average rate of between 3% and 12%, 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.
5. Think About Additional Incentives
To make good affiliates great, consider implementing incentives that reward them 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.
Here are some tools you should be using to further incentivize affiliates:
- Lifetime Commissions: Allow affiliates to receive a recurring commission on all future purchases the customer makes.
- Recurring Referrals: Ensure affiliates get a payout every time your customer renews their subscription.
- Competitions and Prizes: Use RafflePress to incentivize each positive action your affiliate takes.
- Leaderboards: Create a sense of competition and reward your top-performing affiliates.
- Sign-Up Bonus: Offer an upfront bonus to new affiliates who sign up (you might set a minimum requirement for the number of sales before you payout).
Remember that affiliates and content creators don’t just want a commission, they want to create win-win partnerships, so look beyond commission and make sure you’re offering the complete package.
6. Look at it From the Affiliate’s Perspective
We talk a lot about passive income in affiliate marketing, but in reality, it takes hard work on both sides. You’ve got to look at the work your affiliates are putting in and ask yourself how much it’s worth.
When determining the affiliate commission rate that will bring the right people to your program, you want to think about things from a successful affiliate’s point of view.
Their goal is generally monetization of their content creation.
High commissions might be eye-catching, but ultimately, your affiliates need you to convert. This means they’re going to be looking at your landing pages, product reviews, content, coupons, and marketing campaigns to evaluate your potential conversion rates.
If you can demonstrate you do these things well, and that you have a successful, high-quality sales funnel, then you might be able to offer a slightly lower commission rate.
You Need Control Over Your Affiliate Commissions and Payouts
Whether you’re a small business or a huge brand, you need complete control over your affiliate rates. Your marketing strategies change with time, and so will your commissions, so you need different tools at your disposal to continue to incentivize affiliates.
If your website runs on WordPress, then the best way to run your affiliate program is through AffiliateWP. Our software connects seamlessly with your WordPress website and WP plug-ins to sync your products in minutes.
From there, you can make use of our high-level tools to implement your preferred commission structure and attract successful affiliates.
Your commission structure is all sorted, now it’s time to get started with AffiliateWP!