Affiliate marketing is an advertising model where you gain more revenue and brand awareness with a low initial investment. When you run an affiliate program, you need to reward your affiliates whenever they bring a conversion.
The commission will be a great motivation for affiliates to keep promoting your brand. However, if you are a newbie, how do you know which commission level is competitive but in your capabilities?
In this article, we will help you to find out the answers to the question. Now, let’s go through how to calculate the proper commission rate with the help of our exclusive features from UpPromote: Affiliate Marketing.
1. Types of commissions
Normally, affiliates get commissions on successful referrals they bring for the brands, it is called standard commission.
There are 3 basic types of standard commission:
- Flat rate per order: A fixed commission credited to the affiliate regardless of order value or any discounts.
- Flat rate per item: A fixed commission on each purchased item credited to the affiliate regardless of order value or any discounts.
- Percent of sale: Commissions by percentage will be calculated based on each order’s total value made thanks to the Affiliate.
Beside the standard commission on conversion, there’s other types of commissions you can offer the team for an effective strategy.
- Performance tiers — the increase in commission to encourage affiliates to demonstrate the best performance.
- First sale bonuses — fixed bonuses or an increased commission on the first sale or for bringing a new customer.
- VIP commissions — not all affiliates drive the same value, some affiliates are more valuable than others so you may consider rewarding them with a higher commission rate.
- Recruitment bonuses— on a multi-level program, affiliates can invite others to join the team, thus, you can incentivize the member for bringing others with a recruitment bonus.
2. Which factors affect your commission rate?
Your product cost
When calculating commission fees, companies will often take into account the cost of products. Product cost or production cost refers to the costs incurred to create a product. You should evaluate all the costs you spend on manufacturing products to determine a proper rate for your affiliates.
In lower-priced products will have higher commission rates, while products with higher prices will have lower commission rates. Digital products normally have higher commissions than physical products because digital products require a lower cost of production in comparison to physical products. For instance, MindValley offers up to 50% rates on their digital courses while Amazon has an average rate of between 3% and 10%.
The industry that you are promoting your products is one of the factors that can affect your commission. As mentioned above, the retail industry has relatively low commission rates, for example, Target offers up to 8% depending on the types of products and the number of sales.
On the other hand, other service industries have a high rate of commission such as Forex, a trading platform, offers up to 30% revenue sharing commissions for each trader that you refer. The health industry even offers higher commission rates, for example, SellHealth and Market Health offer up to 50% on a range of different medications and products.
How about other industries? According to RepHunter.com, commission rates of the apparel industry range from 7% to 15%. Or AWeber, an email marketing service that offers 30% recurring commissions. \
You can look up some research to find out the average e-commerce commission rates in different industries:
Plus, the table below shows the average commission rate for each category (data collected from UpPromote merchants) that can be used to assist you in deciding what rate is best for your offer:
Also, you need to think about your competitors. Are your direct competitors running affiliate programs? If yes, what commission rate they are offering? Is there any add-on profit that they promise for their affiliates? Learning from your competitors is the best way to set an attractive and competitive commission.
Customer lifetime value
After making the first-time purchase, customers possibly come back to your store, so consider giving commission bonuses to affiliates who meet certain lifetime revenue goals. That will encourage your affiliate team to hit sales milestones. As the performance increases, your members earn a higher commission rate.
Otherwise, you can assign the lifetime commission to your affiliates, which puts both customers and affiliates into a long-term relationship with your brand.
Also, you can use this tool to see the actual revenue that you can earn from a sale: https://www.calculatorhut.com/finance/commission.html. You just need to enter your commission rate and the tool helps you to visualize the actual revenue after commission.
3. Commission strategies
Once you’ve considered and evaluated all the factors listed above, you can make final calculations of the proper commission rate for your products or brands. There are several commission strategies that you can consider for your business.
Basic commission strategy
The name of the strategy has already described itself, you just need to pay a basic commission rate of percentage or flat rate for your affiliates when they make a sale. Averagely, commission rates should be somewhere between 5% to 30%.
With UpPromote: Affiliate Marketing app, we create a default program called Standard Affiliate Commission for you with the commission type of Percent of Sales and the commission amount is 10%. You can edit that program or add a new program then set it as Default.
Furthermore, it is recommended to create multiple programs to classify affiliates into different groups. That way you can offer different commission rates with/without special types of commission such as performance tiers or recruitment bonuses,…. Also, VIP affiliates should be offered higher commission rates that are worth their effort while normal affiliates can stay on an average level commission.
Product-based commission strategy
We mentioned above that product cost plays an important role in deciding the proper commission amount. Not every product should offer the same commission value because it could hurt your profit margin if the production cost plus marketing cost make up a larger percentage of total revenue than they should be. Therefore, offering specific commission rates on special products will be an efficient way to maintain a proper cost – revenue ratio.
On the other hand, in case your brand has some special products or collections that you want affiliates to focus on promoting, you can set a higher commission rate for these ones with the Product commission setting to attract the team to pay more attention to promoting these items.
Tiered commission strategy
Next, the tiered commission structure is common in most businesses and provides the business owner a great way to motivate their affiliate team. It helps many merchants to increase affiliate’s overall performance while remaining easy to administer, understand, and communicate.
The most basic sales incentive plan awards a flat rate—X% or $X on every deal or per item. Tiered commissions, on the other hand, would be paid to the affiliates only if they hit a certain total referral order value, total referral order number or total earned commission value. You should consider the auto tier, especially, when you want to reward affiliates who over-perform and, at the same time, motivate the “middle-tier” to increase their performance. You can learn more about how to build an automatic tier structure within UpPromote here .
The basic commission may be attractive to influencers at the first glance, but how can you keep your affiliates or even make them “devoted” to you? This commission strategy can be a pill to solve this pain for you.
Whenever a customer makes a purchase referred by an affiliate, that customer would be automatically connected to the affiliate so the affiliate will get a lifetime commission for further purchases from the same customer. In other words, it can be said that lifetime commissions give affiliates a quite steady earnings even in case they can not refer new customers.
On the other hand, you can consider setting a different commission for the first-time purchase of customers. From the second purchase onwards, the commission rate should be back to the default rate that you have set on your program. This is an interesting tactic to motivate your members with first sale bonuses while you don’t need to worry that high commission rates might hurt your marketing cost.
Every business has its own rules to set up its commission rates, so don’t wonder how your competitors can afford to offer higher rates while you can’t. It is important to have a suitable rate that you can handle with your budget. In fact, there is no answer to a “perfect commission rate”, just apply what you think it’s reasonable to your business strategy, and use a helpful affiliate program with a precise tracking system like UpPromote: Affiliate Marketing.
If you have any questions or want to share something with us and other readers, feel free to leave a comment below, we’d love to hear it!
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