The Commission Splitting Conundrum
To split or not, that is the question. There are lots of things you should consider before going down the commission splitting path, and there may be a simpler way to reward your affiliates and drive more revenue.
I get asked about the idea of splitting or sharing commissions across more than one affiliate enough that I thought I would write up a blog post to detail my thoughts and go over a few things that advertisers need to consider before attempting to split commissions.
So what is commission splitting? Historically, affiliates have been credited on a last click crediting logic. This means if three affiliates refer the same customer, the affiliate that drove the last visit/click is awarded the commission. The other two affiliates are not paid anything for their efforts. Some advertisers feel that this isn’t fair and that more than the last affiliate should get (some) credit for the conversion.
For example, bloggers are often further up the referral funnel and might not always earn commissions based on last click. So if two affiliates refer the same customer, an advertiser might want to pay the last click affiliate 60% and the other affiliate involved 40% of the commission. In this case a $100 order with a 10% commission would pay $6 and $4 respectively.
Splitting commissions, on paper, sounds like a fair and decent thing to do. But if you look under the hood (or bonnet depending on your location), you’ll see that it isn’t as easy as it sounds and may not work out as you expected.
Below are some questions to answer prior to setting up a commission splitting scheme.
How is the order ID treated?
For a given conversion there is always a unique ID generated by the advertiser so they can reference it later and, if necessary, reverse it for fraud or a cancelled order. If a commission is split, who gets credit for the order? Is the order divided up between the affiliates involved? How can the order get referenced, modified, or returned? Does the last click affiliate get credit with the order ID and the other affiliates only see a random commission without an order ID?
How is the order value treated?
When more than one affiliate earns a commission what happens to the total order value? Is it proportionally distributed based on the commission split? Is the whole order value associated with one affiliate? For my example above, do both affiliates show partial revenue numbers ($60/$40) or is all of the order value associated with just one affiliate ($100)?
How is the affiliate commission split calculated?
What are the rules for crediting more than one affiliate involved in a conversion? Do you look at the number involved and split depending on how many were involved?
For example: 3 affiliates were involved – pay last click 50%, pay second-to-last 30% and third-to-last 20%. What if the third-to-last affiliate’s click was 30 days ago? Do you still want to pay them 20%?
What if five affiliates were involved? Do you only pay the last three or the first and last?
What about the marketing messaging? Does a promotion get a higher commission than a small logo ad that was last click? There are so many ‘what if’ scenarios when setting up commission splitting rules that it is impossible to accurately account for them all.
How is the data reported?
When running reports, how are revenues and commissions attributed to individual affiliates, ads, conversions, promotions, etc.? For example, what if two affiliates were involved and both used two different ads? Do the revenues associated with the ads both show the total order value and overstate the total sales revenues or are they split as well?
How are the terms for splitting commissions agreed upon between affiliates and the advertiser?
If you have commission splitting rules, how are they expressed in the affiliate agreement? Can you accurately and easily convey your multiple splitting scenarios in your affiliate agreement? If you were an affiliate, would you agree to be paid a variable commission based on activities you have no control or insights into?
How are loyalty affiliate commissions handled?
When working with cashback or loyalty affiliates, they are making promises to reward their members a specific amount of the order value (ex. 5% cashback on all sales). If you have an agreement that pays 10% commission, but due to commission splits the affiliate only earns 4%, how can they pay their member 5%?
What about other marketing channels?
In my above examples, we are only assuming that multiple affiliates were involved in a given conversion, but how does the commission splitting formula change when there are also three other paid marketing channels involved?
For example, consider this click path: Email > Paid Search > Affiliate A > Facebook > Affiliate B > Paid Search > Affiliate C > Conversion
As you can see, there are so many factors that can make the simple idea of splitting commissions seem impossible to implement.
Let’s step back and ask ourselves what we are trying to achieve with commission splitting. The most common reason I hear is that advertisers want to make sure that affiliates that are involved in lots of conversions (but don’t always earn a commission) are rewarded for their efforts.
Is there a simpler way to solve this problem? First, let’s start with our goals:
- We want a simple, easy to understand crediting rule (ex. last click).
- We want to make sure that affiliates do not cost us more than 10% of revenues.
- We want to reward all affiliates supporting conversions, not just for winning based on last click.
— Okay, now let’s solve for this!
If your company is using a marketing attribution solution, you can solve this very easily.
Take the credited revenues based on last click and compare them to the attributed revenues from your attribution model. I like to use at least 60 – 90 days of data when doing the analysis.
If the credited revenues are higher than the attributed revenues, you are overvaluing that affiliate and should adjust their commission lower. If their attributed revenues are higher than what they were credited based on last click, you are undervaluing this affiliate and should adjust the commission higher.
If you don’t have an attribution solution in place, you can still solve for this by following these steps:
- Run a report for the past 90 days that shows the credited revenues and commissions for each affiliate based on last click.
- Run a report that accounts for all conversions the affiliate assisted but didn’t earn a commission on across all channels.
- What you would pay for an assisted conversion? You can set this differently for each affiliate if you want. My model below assumes each affiliate is paid 10% of credited revenues and 5% of assisted revenues.
- Create a table like the one below. Hint: your credited plus assisted revenues equals participated revenues. If you only have access to participated revenues, just subtract credited from participated to get assisted revenues.
- For Affiliate A, you should adjust their last click commission rate from 10% to 11.66%. Their effective commission rate for participated revenues is 8.75%.
- For Affiliate B, you should adjust their last click commission rate from 10% to 27.50%. Their effective commission rate for participated revenues is 7.86%.
In both of my models above, you end up creating a single commission rate based on last click wins that factors in non-winning clicks (assists). This commission structure is far simpler to understand for your affiliates. It is also much easier and more accurate for you, the affiliate manager, when running reports and analyzing performance.
When considering commission splitting, it is better to keep it simple and try to not over complicate things, as that can lead to confused affiliates and, more often than not, more confusing data.
For additional information about marketing attribution please view our webinar titled “Are Your Ready for Marketing Attribution?” – co-hosted with Forrester Research.
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