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.
