Changing the commission rate of your affiliate program.

I recently wrote an article for FeedFront magazine titled “7 Essentials When Making Affiliate Program Changes” where I outlined a few things merchants/advertisers should consider when they need to make changes to the structure or finances of their affiliate program.  One of the most common things that merchants/advertisers need to alter as economies, markets and their situations fluctuate, is their commission rate. Often times, when handled incorrectly, this can lead to the downfall of an affiliate program, affiliates leaving in droves or simply a reduction in performance.

I think everyone understands that nothing is constant, change always happens and many aspects of an affiliate program fluctuate, adjust or need to be altered for the program to remain healthy and at times, to remain at all.  The commission rate is the first thing looked at by the controllers, directors and executives of a company when the economy takes a hit, or the company’s performance slides.  “How can we control costs?”  “How can we become more profitable?”  “Are we paying our affiliates too much?”

I’ve been in many conversations like this many times before and know I’ll be in many conversations like this in the future.  It’s inevitable, and honestly good business to evaluate all your cost structures annually to ensure the health of your program and company.  It’s a reality.

The first two items I listed in the Feedfront article are below:

• Accurate data: When making changes to commission rates, for example, be sure to know the lifetime value of affiliate customers and look at the profitability of each partner before making a decision. Accurate data will guide you in your decisions.

• Proven assumptions: Are your theories supported by data or simply the thoughts of someone outside of the marketing department? Good analysis will often stop bad decisions from being made.

These two items are the most important – data and assumptions.  I’ve seen tens of programs make changes to the commission rate based on NO data other than commission rate, and driven by assumptions that were never questioned, supported or thoroughly thought out.   Sales volume and the cost of those sales are only the beginning of the data you should be looking at.

You should also be looking at:

• lifetime value of affiliate driven customers compared to lifetime value of all customers
• how many times do affiliate driven customers purchase during a year compared to the rest
• what is the average order size of affiliate driven customers compared to the rest
• what is the cost of orders from other channels

I’m putting together a worksheet to help you through this process and will make it available at MyAffiliateCoach.net in the next week or so.

The biggest issue I have seen is how these changes are  communicated to affiliates.  Too often affiliates are looked at as faceless entities that drive sales and act more like a mathematic formula and not like true business partners.  Would you change the invoice amount of a “partner” and only tell them when the invoice is sent?  Or, would you contact a partner as soon as you know the financials of the relationship need to change and involve them in the process?  Which way is going to re-confirm your committment to each other, build trust with your partner and ensure the greatest chance of success for both of you?

That is how we need to fundamentally change the way we look at our affiliate programs and how we communicate with our partners.  Involve your partners in the process.  Call your producing affiliates as soon as you know you need to make a change.  They are driving thousands, sometimes hundreds of thousands of dollars in transactions for you and know the business, sometimes as well as you do.  So not only will you gain their trust, prep them for the coming change, but you may find some interesting and new ways to reward them, or avoid the need for change in the firstplace.

The economy is stumbling and you need every advantage you can get to be successful, don’t underestimate the value of your relationships with your partners, and don’t undersestimate their ability to help you innovate and come up with ideas to get through this tumultuous time.

I asked a well known affiliate to weigh in on the issue, Christian Gordun – CEO of Coupon Craze :

“After being in this industry for nearly 10 years I have seen my fair share of comission changes. I absolutely understand that they are at times necessary for a program to continue success because we must all realize that in this ecosystem we need to support each other. That is why I have never found myself to be an abuser of comission rates. I find that I am very flexible and fair with merchants in understanding their needs.There are profit margins and bottom lines to think about.

I would much rather have a lower comission rate and keep a program alive than have a program entirely close themselves down. Yet, before such measures are taken it is important to communicate with affiliates why changes are happening. Often times it appears willy-nilly such as a program starts at 10% then drops to 5% because of profit issues then goes to 12% months later in an effort to attract affiliates. That is just poor business. The more transparent you are with the needs the better affiliates will understand. We are not fools!

Most affiliates get the concepts that a program must maintain above the line. Therefore, I usually ask that merchants give us options such as: if they want to lower comissions with coupon affiliates to explain that it impacts their margins and that they still want to work with us. Not just drop them because they don’t take the time to figure out how to work with them. Also, it never hurts to ask affiliates – we can come up with solutions.

I had a merchant that wanted to lower the rate but we worked out a nice bonus structure. Therefore, if we achieved selected goals we would then be able to get back to certain rates. This is a performance based industry after all and therefore that to me is quite a fair exchange.

Lastly, this one might apply mostly to coupon affiliates but before closing a program entirely why not talk to us about options that we would be willing to accept. Perhaps a slightly lower rate but the ability to have access to exclusive coupons. Merchants very well should know who are their valuable affiliates are and find ways to work with us. I myself have always been very proactive in understanding the merchants needs and do not get mad when a merchant changes their terms. All I ever ask is to understand what created the change and talk with them in figuring out what to do. I might also add, bumping comissions up are obviously another option to get affiliates incentivized. It can be short term runs such as during Q4 or create bonus programs. All of these are very effective tools. Merchants must remember we are a resource and tool for their companies, help us help you bring better results!”

Great input Christian, thanks for putting that together.  There are ways to work through these issues and I hope that the above has helped you walk through this difficult area.

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