If you are not currently doing affiliate marketing then you are really missing a trick.
Affiliate marketing evolved from the simple concept that if another website sends you a visitor and that person becomes a customer of yours then you should say thanks to the other website by giving them a small piece of the pie.
Affiliate marketing has now become a lot more complex but the basics are still the same. You want as many sites as possible to be shouting about you to their visitors so that they come and see your wares, and then in return you pay a suitable reward to that site based on your business profitability and margins.
In this article I will go through a few of the things that a newcomer should consider when setting up an affiliate marketing programme:
1) The best commission/reward structure for your business
2) The best network/s to work with based on their affiliate base e.g. the kinds of affiliates that are with them and that they tend to attract.
3) How to get visibility on the key affiliates websites and with the affiliate network.
4) Working on new promotions and incentive schemes to motivate affiliates to promote you rather than your competitors.
Deciding on an affiliate reward structure for your business The first thing to look at is your new customer recruitment costs, e.g. If over one month you spend £5000 on marketing and you recruit 100 new customers then your new customer recruitment cost is £50. Cross reference this with your customer lifetime value(if you know it) to work out how much commission you can pay your affiliates.
A Basic explanation of how you could calculate this is as follows: The customer lifetime value will be the average top line profit that each customer brings you over their lifetime.
To calculate a customers life time value the best way maybe to take a group of customers that you recruited within a months date range and to track their spend over a few years, you will lose some of these customers, but others you will maintain so you need to have a good sample size for the calculation to be worthy. affiliate marketing business
1000 customers recruited in June 2008.
- Over the following 2 years they spent an accumulative 1,000,000GBP therefore you have a customer lifetime value of 1000GBP
- Cost of goods sold were 700,000GBP
- Business fixed costs were 100,000GBP
- Variable business costs were 80,000GBP
Therefore a total profit for these 1000 customers of 120,000GBP over 2 years, and a per customer profit of 120GBP/customer.
This is obviously a very rough fag packet example but it is worth doing this exercise so that you can then determine the profitability of all of your marketing channels through looking at what their cost per new business customer acquired is and comparing it to the customer lifetime value.
Anyway, to keep from steering too wide form the point of the post… From this figure you can then determine how much you are willing to spend per customer on your affiliate marketing.
You now know that if you spend 120GBP per customer acquisition then you will break even on that customer so if you build in that you want to make 50% profit and spend 50% of the customer value then you can spend 60GBP per customer acquired.
Now, if you work out the average number of orders of those 1000 customers over the 2 years then you will know your average order size through dividing total revenue by total orders.
Say for example that the average number of orders was 4 then you will have an average order size of 250GBP.
So based on this if you can spend 60GBP per new customer order then your commission level for “new” customers can be just under 25%.
However, not all orders are from “new” customers so you could do one of 2 things:
1) Decide to average out commission across all sales by saying that every 1 in 4 customers is new therefore you can pay 6% commission overall
2) Decide to have a higher level of commission on new business orders and a lower level on other orders e.g. 10% and 5% respectively (although you will need to have the backend website functionality available to track different customer segments).
As well as the cost to the end affiliate you will need to figure in a network cost. As a basic guide this is about 25-35% of the commission paid to the affiliates. Therefore if you pay affiliates £1000/month then you will also need to pay your network a fee of around £300/month so this needs to be factored in when determining commission levels.
Always set your commission levels slightly lower than you can afford so that you have the option of increasing commissions for seasonal promotions and for giving high performing affiliates added incentives etc.