How to develop an affiliate commission strategy for your brand

An effective affiliate commission strategy is a vital factor in the success of your affiliate program. Today’s affiliate partnership industry allows brands to forge strong relationships with mutually beneficial commission terms. 

To develop an affiliate commission strategy, program managers need to understand how affiliate commissions work, study the market, and what rates will be profitable and competitive. Follow this guide as part of your affiliate program management journey. 

How affiliate commissions work

Affiliate is a performance-based channel, which means that affiliates receive a commission from a brand only when they deliver results (a purchase, a download, or anything else that the brand deems a conversion). 

Commission rates vary from partnership to partnership, but the overall model remains the same for most affiliate programs:

1. An affiliate partner joins a brand’s affiliate program. They sign an agreement that outlines the terms of their partnership. 
2. The brand supplies the affiliate partner with the necessary resources to promote its products or services. 
3. The affiliate partner uses a trackable link to promote the brand’s products or services to its audiences.
4. The affiliate partner’s audience clicks the trackable link to convert (make a purchase, download an app, or any other qualifying action)
5. The partnership management software attributes the conversion to the affiliate partner, who receives a commission in line with the agreement in step 1. 

Brands use Partnership Management Platform to manage their affiliate programs and process commission payouts. It allows advertisers to automate their affiliate program processes, gather and analyze data, and scale their programs to get more revenue. In addition, SaaS partnership platforms like impact.com help brands automate their payments to affiliate partners, which is especially useful when your program reaches hundreds of partners. 

Step 1: Determine your affiliate partnership program goals and KPIs.

One of the first things requires you to determine your program goals and how you will measure them. 

You must align program goals with your company’s high-level goals. Otherwise, you may risk launching a program and incentivizing your partners for the wrong reasons. 

For example, if your company’s overarching goal is to increase its customer base, you can also measure how many new customers your affiliate partners refer to you. If your company wants to decrease customer costs, you can set goals for a certain percentage of returning customers from your affiliate partners. 

Set your affiliate partnership KPIs first. KPIs are measurable, quantifiable metrics that are easy to monitor. Some examples of affiliate program KPIs are:

• Revenue
• New customers 
• Conversion rate
• Average order size
• Number of sales-producing publishers 
• Number of non-coupon/loyalty publishers
• Percentage of returning customers
• Margin on your average order

Step 2: Assess your competitors and the market.

Look at your competitors’ commission rates and the overall affiliate market to ensure your affiliate commissions remain competitive. Start by registering for a few affiliate programs as a publisher and exploring their terms and program setup. As you browse through your competitors’ program offers, note these essential commission-related features for your program:

• Baseline commission rates before negotiation
• Cookie duration
• Special terms (coupon usage, gift card commissions, etc.)
• Placement opportunities for top publishers

Next, switch roles and look at your potential partners (or competitors’ partners). What are they asking for? What can they offer you in exchange? Note how much large affiliates charge vs. more niche ones. This knowledge will help you determine your commission structure in the following step.

Step 3: Determine your affiliate commission strategy.

After completing your market research, establish your baseline commission based on what you’ve seen in the market. The most important points to consider are:

• Channel and company cost per customer (if your Customer acquisition cost (CAC) comes in at around 17 percent, your affiliate commission should be lower for you to make a profit)
• Competitor and “like” brand baseline rates (if your competitors pay 4 to 8 percent commissions, you’ll need to keep that in mind to be competitive)
• Commission rates and how they support business goals 
• Margin and how much room for negotiation you can leave to make a profit

You may want to set different commission rates for partner segments or customer types depending on your program goals. For example, suppose your goal is to increase your returning customer base. In that case, you can set an 8 percent commission for new customers and a 10 percent commission for returning customers (motivating affiliate partners to bring in previous shoppers).

Another critical factor is your industry. The retail affiliate program commission strategy can differ from that of the finance industry. Instead of paying commissions for each purchase, a credit card company can reward affiliates for each credit card approval and first and ongoing purchases made with that credit card. These affiliate commission strategies must also be aligned with the high-level company goals.

Finalizing your affiliate commission strategy

It doesn’t need to be complicated. However, it must align with your company’s business goals, be transparent enough for your affiliate partners, and be flexible for negotiations. 

Remember to consider all possible scenarios for your program and outline the terms in your partnership agreement templates. You can tweak individual rates depending on the partnership. 

Lastly, check that your affiliate partnership platform supports payment automation. Keeping your commissions organized in an affiliate platform helps brands have the most control over their affiliate partnership programs, access data, and make educated decisions.

If you want to discuss your affiliate commission strategy, setup, or technology, visit impact.com or talk to a growth technologist at grow@impact.com.

Want to know more about affiliate marketing? Check out these impact.com resources:

• Ultimate guide to affiliate marketing [ebook] 
• What is an affiliate marketing program, and how does it work for brands? [blog]
• How an affiliate program works — from first click to payout [ebook]
• 10 best practices for a perfect affiliate partnership flight [infographic]
• Ultimate affiliate program starter pack [worksheet]