Before selecting an affiliate network, brands should focus on solidifying their commission structure.  Reason being, even though affiliate marketing is entirely performance-based, and nary a nickel gets paid out unless a transaction occurs, there are several different parties taking a cut of that sale.  The affiliate gets a percentage, the affiliate network gets a percentage, and perhaps your affiliate manager takes another percentage.  What initially seemed as a no-risk marketing channel could be one of your least cost-effective marketing vehicles.

That doesn’t need to be the case, however!  Affiliate marketing is indeed one of the most cost efficient marketing channels out there, provided that margins are properly managed.  Here are some points to consider when determining your ideal commission structure:

1) New v.s Existing Customers
New customers traditionally have higher lifetime value than existing customers.  Why?  Because a new customer grows your customer base.  And once you own the customer, once they’re in your existing hopper, you pay less to convert them for future purchases.  They already know your product, they value your service and they trust you, otherwise they wouldn’t have transacted with you in the first place.   It costs more to acquire a new customer because you have to build that credibility and trust from ground zero.  Since new customers are valuable, it makes sense to incentivize your affiliate partners to drive fresh traffic and new customers your way.  Affiliates can help your brand tap into new audiences and re-position your inventory so that it is relevant to them.  For example, perhaps your site is entirely in English and you have no exposure to the Hispanic market.  One of your affiliates may translate your copy into Spanish and target the Spanish-speaking market, thus bringing a new clientele to you.  Such a tactic would involve a lot of heavy lifting, so increased commission for new customers would help offset the affiliate’s initial investment.

2) Product Categories with Varying Margins
If you have a wide variety of products on your site, chances are that your margins on each product vary widely.  Electronics might have a…challenging…margin, while home decor may have more leeway.  If you are looking to establish a flat commission structure, i.e, a set rev-share percentage no matter what item the affiliate sells, then it is best to evaluate what your product mix is.  What percentage of your sales are low margin?  What percentage of sales are high margin?  From here, you can develop a blended commission rate that will be profitable for both you and your affiliate.  However, it is possible to take it a step further and establish commission tiers based on specific product categories.  I.E, you would pay 2% rev share on electronics, and 10% on home decor.  The reason this is beneficial is because you are incentivizing affiliates to drive traffic to higher margin products, and you are protecting your profit on low  margin product lines.

3) Sales Incentives
Definitely structure your commission rates so that you have room to run sales incentives.  These are promotions designed to drive affiliate action.  For example, perhaps you are launching a new product line and you want affiliates to focus their marketing efforts on the new products.  As long as you have room in your commission structure, you can offer a temporary increase in commission, or perhaps sales bonuses for hitting established revenue targets.

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