You are seriously missing out if you are not currently involved in affiliate marketing.
Affiliate marketing evolved from the simple idea that if another website sends you a visitor who becomes your customer, you should thank them by giving them a small piece of the pie.
Affiliate marketing has grown in complexity, but the fundamentals remain the same. You want as many sites to shout about you to their visitors so that they come and see your wares, and then you pay a suitable reward to that site based on your business profitability and margins.
In this article, I will go over some of the things that a newcomer should think about when establishing an affiliate marketing program:
1) The most effective commission/reward structure for your company
2) The best network/s to work with based on their affiliate base, i.e., the types of affiliates they have and attract.
3) How to gain visibility on key affiliate websites and through the affiliate network.
4) Develop new promotions and incentive schemes to encourage affiliates to promote you instead of your competitors.
Choosing an affiliate compensation structure for your company The first thing to consider is your new customer recruitment costs, for example. If you spend £5000 on marketing in one month and recruit 100 new customers, your new customer recruitment cost is £50. Compare this to your customer lifetime value (if you have one) to determine how much commission you can pay your affiliates.
The following basic explanation of how you could calculate this: Each customer’s average top-line profit is the customer’s lifetime value.
To calculate a customer’s lifetime value, take a group of customers you recruited within a month’s time frame and track their spending over a few years. You will lose some of these customers, but others you will keep, so you need a good sample size for the calculation to be worthwhile.
e.g.
In June 2008, 1000 customers were recruited.
Over the next two years, they spent a total of 1,000,000GBP, giving you a customer lifetime value of 1000GBP, but the cost of goods sold was 700,000GBP.
The company’s fixed costs were 100,000 GBP.
The variable business costs totaled 80,000 GBP.
As a result, the total profit for these 1000 customers is 120,000GBP over two years, with a gain of 120GBP per customer.
This is a very rough cigarette packet example. Still, it is worth doing this exercise to determine the profitability of all of your marketing channels by comparing their cost per new business customer acquired to the customer’s lifetime value.
Anyway, to avoid deviating too far from the point of the post… Using this figure, you can then calculate how much you are willing to spend per customer on affiliate marketing.
You now know that if you spend 120GBP per customer acquisition, you will break even on that customer, so if you plan on making 50% profit and spending 50% of the customer value, you can spend 60GBP per customer acquired.
Now, if you calculate the average number of orders from those 1000 customers over the two years, you can calculate your average order size by dividing total revenue by total charges.
If, for example, the average number of orders was four, the average order size would be 250 GBP.
So, if you can spend 60 GBP per new customer order, your commission level for “new” customers can be slightly less than 25%.
However, not all orders come from “new” customers, so you have two options:
1) Decide to average commission across all sales by claiming that one of every four customers is new so that you can pay a 6% commission overall.
2) Decide to charge a higher commission on new business orders and a lower commission on other orders, for example, 10% and 5%, respectively (although you will need to have the backend website functionality available to track different customer segments).
You must factor in a network cost and the end affiliate’s charge. Generally, this is approximately 25-35% of the commission paid to affiliates. If you pay affiliates £1000/month, you must also pay your network a fee of around £300/month, which must be considered when determining commission levels.
Always set your commission levels slightly lower than you can afford so that you can increase commissions for seasonal promotions and give high-performing affiliates additional incentives, for example.
Which affiliate network is best for me? Your negotiating skills and the potential size of your business for the affiliate networks will determine how much affiliate networks will disclose to you.
Approach all of the major networks – Tradedoubler, Buyat, Linkshare, Commission Junction, Affiliate Future, and Clickbank – and explain that you will establish an affiliate marketing program and would like as much information as possible on why you should choose them.
Inquire of them:
How many affiliates helped them make a sale last month?
So you can compare their size and reach to those of others.
How many affiliates promote merchants in your field?
For you to see their reach in your vertical
Last month, how much revenue did they generate for your entire industry?
To assess the level of bottom-line success in your industry. You should also look at the revenue breakdown by affiliate (if possible), for example, what percentage of revenue is made up by the top 5 affiliates. Is there a lot of opportunity for long-tail/minor affiliates?
How many new affiliates did they bring on board last month?
To assess how actively and proactively they are growing.
How many new merchants did they hire in the previous month?
Likewise, are they an arrogant and slacker network?
How many merchants from your industry are they bringing? (It’s a good idea to go with the bulk because a large affiliate base will be ready to promote you if they’re already promoting your competitors).
Who are their top five affiliate partners?
Who are their top five affiliates in your industry?
How much will they charge in sales commission?
Can they use different commission rates?
Can they generate leads for a fee per lead?
What is included in their management fee? How much assistance and support can you expect from them regarding affiliate recruitment/reporting/problem-solving/industry updates?
What distinguishing technology do they provide?
If you can get enough information on these questions, you should be able to approach the negotiating stage and pit them against each other. The amount of leverage you have and how far you can go will be determined by the size of your business and the type of revenue you bring to the affiliate networks. Make the networks enthusiastic about your marketing and expansion plans. Explain your past performance and plans for the coming year; if they see you as an expanding and growing brand, they will go out of their way to meet your needs.
You will have your preferences by this point, so go with the data, the best deal, and your gut instinct. If you genuinely like and trust the people and believe they will take your business seriously and spend time promoting you, then go with them, but only if the commercials and their business proposition are also vital. Increasing your market’s visibility with critical affiliates Once you have your account set up and ready to go, you should first compile a list of affiliates you want to promote you. Rank the fellows on the list regarding potential, and then collaborate with the networks to secure the best real estate on the affiliates’ sites.
Request a list from the affiliate network of every affiliate who has driven a sale for any competitor of yours (who is in their network) in the last six months. Request that the affiliate network rank the affiliates in order of revenue generated (obviously without the sensitive data); if they make a mistake and give you the sensitive data (unlikely), that’s great. Make a promotional plan for the first three months and ensure your offers outperform the competition. Affiliates are businesses in their own right, so they are only interested in promoting the merchant who will earn them the most money; so if you offer a higher percentage commission and your conversion rate is as good as or better than your competitors, you will quickly win them over. Check out the top EPC affiliates (earnings per click). You must then figure out how to allow them to earn more with you – basically, calculate: (site conversion rate x (commission rate per sale X Average order size).
Ensure that the affiliate network has agreed to give you featured merchant status for the first month and that you are prominently displayed on their website/blog/Twitter/Facebook, etc., and in their emails.
Please email all of the other affiliates immediately, introducing yourself as their support at your company, explaining your proposition, affiliate program terms (commission rate, etc.), and that you have an unbeatable offer for the first month that will have sky-high conversion rates.
Save some money in your promotional budget for the top affiliates so you can give them something special in exchange for a prominent placement on their site.
Once you have the top ten affiliates on board and are recruiting the long tail via email, get on the phone and work your way down the list, getting more and more affiliates on board. There will be many you cannot reach and do not respond to; do not be discouraged, as this is normal; affiliates are busy people. Simply think of creative ways to get their attention and use all of the network’s contacts to help you contact the affiliates.
Keep in close contact with the network – inform them that you will make them work for their commission, be thankful and complimentary when they are good, but be wary of them becoming lazy after the initial flurry – you must maintain the pace for at least the first three months, after which it should become easier because you have some secure relationships that do not require too much maintenance. This is true for both affiliates and networks.
New affiliate promotions to get affiliates to promote you rather than your competitors. This is a complex question with no straightforward right or wrong answer. But there are a few ground rules I would follow:
As previously stated, affiliates are busy, so if you develop a highly complex (however fun) promotional idea, they may switch off before you sell it to them.
Keep things interesting – don’t just give out the same old promotions to affiliates every month; there will be no real incentive for them to keep promoting you and trying new things if they know how it will perform on their site.
If possible, base your promotions for the top affiliates on their site and what works well for them. For example, if you sell T-shirts and cushions and one place is flying on the pillows, give them special offers centered on cushions.
Use the data you collect after each promotion to determine what works best for whom and to understand their site usage profile better so that you can meet their needs.
Show up at affiliate events, make industry friends, do people favors, and have fun because if people see you being fun and positive socially, it will affect your business relationship with them.
If anyone has any suggestions for additions to this post, please let me know, and I will include them. Best wishes for your affiliate marketing!
Joel Chudleigh is the Director of Deep Foot Prints Online Marketing Ltd, a UK-based Online Marketing Consultancy that specializes in assisting small and medium-sized businesses to succeed online. I’m interested in affiliate marketing and want to share my experiences with others, so I use EzineArticles. Please click on this link to learn more about my business as an affiliate marketing consultant.
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