October 16, 2007
So You Think You Have Kick-Ass Program Terms
If you're new here, please subscribe to my RSS feed. And follow me on twitter. Thanks for visiting!
This is an old subject, but I recently found a few affiliate program terms that made my head spin, so I thought it might be time to raise this again.
But first, let me say this…
I Run a Business
It’s very simple. I get traffic and I ultimately send it away (after hopefully doing something useful to or for it). The idea is to send it somewhere that the user will get what they’re looking for, in the form of a purchase.
I get something for that referral. Pretty simple.
To me, every click I send out has a value. I live and die by Earnings Per Click (EPC) statistics. EPC is the equalizer between competing merchants so I know where to send my traffic, and it tells me how much I can afford to pay for traffic, if I choose do do so.
I look at EPC as a product of three factors: Commission, Conversion Rate, and Average Order Size. Many affiliates will look at a commission rate alone to make a decision on whether to promote a merchant. This can be a big mistake. If a merchant is particularly good at converting sales and/or upselling, a lower commission rate can be part of a much larger average earnings per click. Likewise, the best commissions are worthless with zero conversion or tiny sales.
So we test out many different options for where to send our traffic. In the end, the best EPC generally wins.
Now that I’ve set the stage…
I just saw the second program with this exact bonus program (one must have copied the other because it looked cool.)
Base commission 12% with the following bonus program.
$1,000-$2,499——->BONUS=$25
$2,500-$4,999——->BONUS=$75
$5,000-$9,999——->BONUS=$200
$10,000-$49,999—->BONUS=$500
$50,000-$99,999—->BONUS=$3,000
$100,000+———–>BONUS=$7,500
Wow, these bonuses do look cool! But they’re awful. Here’s why.
They’re Unpredictable
If we reach $50k, there’s a $3000 bonus. That’s effectively a 6% commission increase at $50k, but beyond $50k, the effective commission drops with every sale. Likewise, at $100k, it’s effectively a 7.5% increase and then drops again with every sale beyond that.
So if we sell $50k, our effective commission rate will be 18%. At $70k, it’s 17.3%. At $90k it is 16.3%.
But if I miss by $1, at $49,999, my effective rate is only 14%.
Here’s a graph of what happens to the effective commission levels with each increase in sales by $1000. It’s a saw function! I haven’t seen a graph like this since electrical engineering in college.
The funniest part about all this is if you carry this graph out far enough, the asymptote is 12%. Not funny? sorry, math humor.
I mentioned before that I run on EPCs. If the effective commission rate is changing with every sale, how can I run my business based on these numbers? I can’t.
If I cannot count on reaching a bonus, I must operate on what I’m getting as a base commission.
Unless I’ve been running a program for a long time and I know the traffic and the earnings potential, I cannot count on reaching any bonus.
What’s ironic here is that if I’m capable of driving big sales, the commissions are quite high. But this merchant gets none of the benefit of those higher commissions.
It doesn’t take a crazy saw function to take the lustre out of affiliate program terms. Even if there’s a single performance tier, say 25% more commissions (from 8% to 10%) at $10,000 in sales, if I don’t know that I’ll reach that 10%, I have to assume I’ll get 8%. That’s 25% more budget I would have had to use to promote your program.
Here’s what I tell just about every merchant I talk to
Eliminate the bonuses and tiers and give us a flat commission rate at a level that’s a reasonable replacement given the levels we both expect us to reach. Give your EPC a good chance to shine so you can win out over other merchants and get some of my business.
Once we’re working well together and we start to see some patterns and trends, let’s talk about how we can do more. If you want to offer incentives to do so, I’m all for it.
You want to know what the most kick-ass program terms are?
It’s a reasonable flat rate for our partnership with maybe some incentives later based on some real data.
[...] write more about that later, but this post from Scott is worth a read simply to see how a successful affiliate makes business decisions. [...]
Good article, and I concur exactly. When I see poorly constructed tiers, with too many inflection points, I’m demotivated to some extent. Seems weird that someone who wants volume would construct things this way.
Additionally, when I consider what their profit curve looks like, knowing that my marginal sales increases cost them no new fixed costs, marketing or management or otherwise, I’m equally baffled. To set goals for people that sell for you, make them consistent with your own goals - that will generally motivate your affs well because it’ll reward what both partners want.
I’m also left wondering when I see structures like these, if the merchant understands that when I push harder, my margins generally decrease - if you want astounding volume, just talk to me about what it takes to push more volume. And that’s always a margin discussion, not a bonus spike.
Graph was genius Scott, thanks.
Thanks Vlad.
You cannot go by CJ’s EPC any more than a rough guideline.
First of all, that number is an average. There may be 1000 people getting an EPC of 10
and one huge affiliate getting an EPC of 100 causing the displayed average might be somewhere near 50, which nobody is getting.
That’s an extreme example, but the point is, you need to test and discover your own EPC numbers.
I love the “saw” par of it- go ahead cut yourself a deal…..lol
When it comes to EPC- I find it difficult to judge (CJ) about the merchants, particularly for new merchants- first two months EPC figure can be very deceiving.
I like new theme by the way.
[...] Do You Have An Amazing Affiliate Program?- Scott lays it out for every one for easy understanding that some affiliate programs along with their incentives a are bunch of crap. If you are an affiliate manager this is definitely one of those articles you can not afford to miss. [...]
Excellent analysis and explanation! I love the saw graph, as it brutally illustrates the point. I’ve long been opposed to tiers for this exact reason. I’ve never been quite as close as the “miss by $1″, but I did miss a tier by $100 once and that miss resulted in $800 less in commissions.
I’m not opposed to a tiered structure that’s attainable and fairly narrow (for instance, a base of 8% and a bump to 9% with $100 in sales and 10% with $1000 in sales). When the top tier is several times as high as the bottom tier, however, it’s highly DEMOTIVATING. Many merchants have top tiers set high enough that no affiliate has ever reached the tier.
What amazes me is how many affiliates actually LIKE tiers. The question was asked at Think Tank, and about half of the affiliates preferred tiers.
Thanks Michael and Pat.
I was in a similar situation, Michael, where I was about one $150 annual subscription short of a tier that would earn me $500 more.
So I bought one.
Those games shouldn’t be necessary and you’re right, totally demotivating.
You don’t get graphs like that in statistics (my background) but I can read enough to know the the ECR pits after he third none zero peak to below the starting value. Is it me or that a punishment? Shouldn’t the ideal graph for such a progression be an S shape? (I’ve livebookmarked your blog BTW as I don’t want to miss out on anything else).
Good observation, Matt, but it’s not really a punishment.
I started the chart at $1000. Had I started it at zero, it would have started at 12%.
The ideal graph for me is a horizontal straight line with a fair rate. that’s the most predictable.
Or, if there are bonuses involved, it should be a straight change in commission and a simple step up. The reason we get the curves here are because there’s a flat monetary bonus at certain milestones and I’m applying them to the overall earnings to get an effective percentage rate.
[...] look quiet attractive too. Should we consider those incentives? Absolutely not. Many of the incentives truly suck- Scot Jangro did a great job explaining why. Tip of the hat to Scot for pointing out to me that my [...]
Thanks for your candidness with this subject matter. I think sometimes people try to play the martyr and not acknowledge the fact that they are trying to make some money.
Wow thanks for being so upfront about this matter as you are in the top 1% this is a topic people are afraid to talk about Thank Vlad