The backbone of affiliate marketing lies in the commission you pay your partners, which is also an incentive to motivate them. As you run an affiliate program, you will reward your affiliates with a specific commission in exchange for each sale they make via their affiliate links.
But how do you know the rightaffiliate marketing commission rates? Simply put, you need to set a rate that attracts great affiliates while balancing your profit margin.
It is crucial to balance between an attractive rate to incentivize affiliates and an affordable amount you can pay consistently.
Follow these 7 steps for a comprehensive guide on setting proper affiliate commission rates for your program.
Main Contents
7 Steps to Set a Proper Affiliate Marketing Commission Rates
Step 1. Understand different commission structures
Different affiliate marketing programs apply different commission types and structures. No idea which model to begin with? Consider between a few common ones like flat rate, percentage commission, and a tiered commission structure.
| Commission structures | Benefits |
| Flat rate | Suitable when selling fixed-priced products The same rate for all affiliates Rated in the dollar unit (e.g., $10 commission per sale) |
| Percentage-based | Vary between 5-30% Motivate affiliates to promote goods that result in a higher average order value |
| Tiered | More sales equal with higher commissions Payout bonuses when affiliates reach goals |
Regarding the reward, some eCommerce retailers might pay with store credit. But cash is more enticing to encourage people to earn passive income.
Step 2. Evaluate customer lifetime value
Your profit margins decide how you can afford to pay your affiliates. However, this metric tends to fluctuate and is hard to determine. Use the average customer lifetime value (CLV) to simplify things.
CLV is how much money someone brings in while being your customer minus the average costs to acquire that customer. The longer they stick with your business, the higher your CLV becomes. Understanding your CLV helps you decide on an affordable and sustainableaffiliate marketing commission rate.
The basic CLV calculation goes like this:
Average CLV = Average annual profit gained from a customer * Average number of years of someone being a customer – Initial customer acquisition costs per customer
Assume the following for example:
Annual profit from the customer = $1,500
Number of years they are your customer = 3 years
Cost to acquire that customer = $1,800
The average CLV for this customer would be: $1,500 * 3 – $1,800 = $2,700.
To calculate your average CLV, you need to answer the following questions:
- How much does it often cost to bring in a new buyer?
- What percentage of customers do you get in a given year?
- How much revenue can each of your customers bring in?
Keep in mind that affiliate commission rates are part of your costs to get new customers. So, the commission must be below the average customer acquisition cost. If it equals your CLV, you will only break even and will not make profits.
Step 3. Evaluate your competitor’s commission rates
Likely, some of your direct competitors are already recruiting affiliate partners. Even if they are not, other businesses with the same target audience as yours are still competing for partnerships with high-quality affiliates.
When setting an affiliate marketing commission rate, a crucial stepis to find 2 direct competitors with standard programs and how much they offer as commissions.
It is good to include one business you do not directly compete with but runs the same niche and aims to acquire the same audience. You will get a good overview of their product prices, target customers, and the rate they pay affiliates for promotion.
Consider these factors when examining their commission structure:
- Which action triggers the affiliate payouts: a generated lead, a sale, a click, etc.?
- What commission structure does the competitor follow: flat rate, percentage, or tiered commission?
- Are affiliates paid in credit toward the brand’s products or in cash?
- Do top-performing individuals receive bonuses or higher commissions for affiliates?
- How does their commission rate stack up? Does it seem low, high, or reasonable compared to their product prices and other competitors’ programs?
After analyzing the commission rates offered in their affiliate programs, you can set a competitive, attractive rate of your own. It is difficult to recommend whether the rate should be high or low. This largely depends on your product prices and the number you expect to sell within a given period.
Undoubtedly, a 30% commission on a $150 is less valuable than an 8% commission on a $1,700 item. Affiliates are okay with low commissions from high-value merchants since they can earn much more from a few sales. While business owners selling low-priced and mid-range goods should offer a higher rate.
Your commission rate should be competitive compared to other businesses that aim to attract the same affiliates. Simply put, if most competitor affiliate programs provide a 15% average affiliate commission rate, you will not succeed when offering only 10%.
Step 4. Set your starting affiliate commission on the lower side
Now that you have analyzed your CLV and other brands’ affiliate programs, it is time to set your own rate. Pinpoint a range of commissions that is both competitive and affordable. Then, choose a base rate at the lower end of that range.
Why? A low rate from the beginning allows you to experiment with bonuses and higher tiers for excellent affiliates. And because a low rate results in more profits for your business, it is easier to set up promotions for your affiliates’ website visitors.
Even better, you can still give traditional sales and discounts to certain customers. Or try out other types of marketing (e.g., a referral program) without overspending.
You can raise the commission rate later while prioritizing your business needs first. Increasing the commission will not bother affiliates as it adds to their earnings. But starting with a rate you are later forced to drop is a risk you do not want to take. Existing affiliates may walk away, and it is more challenging to recruit new ones.
Step 5. Consider performance-based bonuses
Besides the generalaffiliate marketing commission rates, offering bonuses for top-performing affiliates is a good idea to keep the program interesting. Your partners will be encouraged to strive for better outcomes, acquiring more sales to increase your revenue.
See if you can apply performance-based bonuses in these ways:
- Give bonuses or valuable gifts to affiliates meeting specific revenue goals.
- A tiered commission structure enables affiliates who reach a specific sales number to gain a permanent higher rate.
- Enable a streak bonus for when an affiliate achieves a given number of monthly or quarterly sales will receive a limited-time boost in commission rate.
Consider the recurring commission as a bonus if you sell subscription-based products or services. This model allows affiliates to get an extra commission when a customer who originally bought via their affiliate link upgrades or renews their product.
One thing is sure: It will motivate affiliates to bring in more potential buyers that best fit your product.
Step 6. Define clear commission conditions
Setting the rate is just a part of your overall affiliate commission planning. You need to establish the affiliate commission conditions and requirements for affiliates to get the rewards.
Affiliate requirements to earn a commission
Most business pays a commission for each sale made via an affiliate link. Some even state that affiliates can only earn this money if the customer does not return the product or cancel the service within a time period.
This is a low-risk guarantee for your business. You only pay for affiliates when your business receives a return on investment.
If your business follows the B2B model with a longer sales cycle, you can pay commissions based on both leads and sales. This staggered structure motivates affiliates since potential buyers will research what you sell.
In case you want to commission affiliates for their leads, only pay for qualified ones. For instance, a lead provides their information (email address, phone number, etc.) after visiting the affiliate link.
Set a small, fixed commission rate for such a lead and a higher one (ideally percentage-based) for completed transactions.
Tip: Never pay for clicks or impressions since they expose you more to affiliate fraud. Unethical affiliates may take advantage of this model and conduct scams.
Using affiliate tracking cookies
How long will your affiliates qualify for a commission after someone visits their links? Are they commissioned only when that visitor purchases right away? Or can they still earn that reward after a certain time period?
The affiliate cookie is something you need to include in your affiliate marketing agreement with a potential partner. Using affiliate tracking cookies within a given time allows you to commission an affiliate days to months after the lead clicks your affiliate links and purchases later.
For instance, a customer visited an affiliate link but did not buy anything at that moment. If they return after XX days (e.g., 7 or 15 days, depending on your choice) and make a purchase, it still counts as a completed sale for your affiliate.
Determine how long you want these affiliate cookies to last. Some programs make it last for days, months, or even longer. B2B businesses must focus on providing a clear cookie window because their leads often research more before buying.
Besides theaffiliate marketing commission rate, your cookie settings should also be competitive with competitor programs in your niche. A reliable affiliate program software will help you set up cookies in your chosen time frame.
Step 7. Regularly review and adjust
Youraffiliate marketing commission rateis not obligated to stay fixed. In fact, you should periodically review and adjust this rate to keep affiliates motivated and engaged.
Checking on your commission is also essential to ensure you are ahead of some competitors. If a competitor program offers a more attractive commission rate, your affiliates might choose to work with them instead. Set up a regular plan to check out their programs.
Also, any change in your commission rate needn’t be permanent. Spice up your commission by choosing a specific period to offer a temporary bonus that may boost sales to the max.
In case you experience a slower month, this bonus will be an effective tool to drive more sales. It can be a flat rate commission (e.g., a $300 bonus for all affiliates making $1,500 worth of sales in August). Or a temporary boost (e.g., an extra 3% commission for November sales).
What to Consider for Setting an Affiliate Marketing Commission Rate?
Now that you have understood the basics of setting anaffiliate marketing commission ratefor your program. What else is there to take into account?
Structuring the right commission rate is not a straightforward, simple task in creating an affiliate program. It depends on various factors, including the products sold, the current market competition level, and your program’s particulars.
Sadly, no universal solution can be applied to this case. However, generally, a good commission rate is competitive and reasonable. Yet, it still makes room for your business to have profits.
For example, a 10-20% commission is common for most sectors, but some brands may give larger commission rates for specific items or high-performing affiliates. All in all, the commission rate that benefits both the affiliate and your business is the ideal one.
FAQs
Q: Who pays the commission in affiliate marketing?
In a standard affiliate network or program, the merchant pays an amount of commission to their affiliates whenever a customer successfully purchases via the affiliate link.
Q: What is the difference between affiliate and referral?
Affiliates get paid a commission for sales, subscriptions, and other consumers’ actions using their affiliate link. Referral programs usually distribute rewards and incentives through discounts, cashback, a free service subscription, or store credit.
Q: What is a good commission rate for affiliates?
In general, the averageaffiliate marketing commission ratelies between 5 and 30%. Most businesses will start on the lower end and increase this rate as the brand grows. This rate should be attractive to your affiliates and affordable within your payment ability.
Conclusion
Follow our detailed guide, and you will be able to structure youraffiliate marketing commission ratesand conditions that best benefit your business. A good commission rate is both inciting to attract potential affiliates and suitable for your long-term payment budget.
To truly motivate your affiliates and build trust, remember to pay out their commissions in a timely manner. You can try some convenient affiliate software programs with automatic payouts to ensure your partners are paid on time.
