This page is an extract from our White Paper : Managing an Affiliate Programme. A best practice guide for setting up and running an affiliate programme to maximise sales revenues for UK merchants.

Please contact us to request a full copy by email or by telephone 0845 643 1567.

Commission Plan

Rewarding affiliates correctly is critical to your affiliate channels success. Pay too little and affiliates will join your competitors programmes, pay too much and you risk losing money.

There are various ways to compensate affiliates, pay per lead, pay per sale or pay per click. Pay per lead is suitable if you wish to reward affiliates on a visitor requesting a catalogue or submitting contact information on a service you provide. Pay per sale is the normal compensation method and is suitable to pay a set percentage or fixed amount per sale. Pay per click is used within the affiliate channel for bringing traffic to your website, much like from Google Adwords. Some price comparison websites run through affiliate networks as an option and they use pay per click to be rewarded.

So, how much to pay? First of all have a look at what your competitors are paying. This is important to your strategy as your offering will need to be similar or better to what they are offering, otherwise affiliates will be put off in joining your programme. The next step is to work out if you can afford to pay this level of commission to affiliates. We will concentrate in working out the percentage to pay on a cost per sale basis. Use this handy formula to work out the maximum you can pay to affiliates –

Max Cost Per Sale / 1.30 / AOV (Ex VAT, Ex Shipping) X 100 = Max % to Pay Affiliates

To explain the above let’s run through an example:

Jim owns an online clothing shop and wants to run an affiliate programme. Jim knows his ex VAT, ex shipping AOV is £85 (always use ex VAT and ex shipping if you don’t want to pay a percentage of these amounts to affiliates) and maximum cost per sale he wishes to spend to attract a new customer is £15. He uses the formula above.

15 / 1.30 / 85 x 100 = 13.57 or 13.57%. We divide by 1.30 to allow the commission for the network (if using one).

This percentage should be viewed as your top level commission to pay out to high achieving affiliates and you could reserve this amount for VIP affiliates in the future. You can now compare your commission amount to what your competitors are doing to see how competitive your offering can be. When comparing please note we have found out the bigger the brand, the lower the commission rate they offer. Take Viking Direct for example, they pay between 5% – 7% commissions to affiliates, while Euro Office pay up to 15%. Euro Office does this to attract affiliates from the market leader.

A handy way to further incentives affiliates is to create a tiered commission plan, which pays higher levels of commission on the amount of revenue or number of sales made. In the example above Jim may reserve 13.5% for his VIP or super affiliates. Pay 8% to affiliates as standard and 11% to affiliates who make 10 or more sales per month.

© Online Marketing by TrafficSource UK Ltd

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