Affiliate Manager extraordinaire, Geno Prussakov, tweeted a screen capture of an advertiser email announcing an affiliate commission reduction to 1% for the remainder of 2012 in order to “maintain budgets.” Geno paired the picture with “Isn’t the very idea of performance-based marketing to be budget-immune?!”
It’s great to see performance marketers thinking about the affiliate channel in relation to budget because the same budget challenges apply in all channels. As an affiliate, I used to get angry every time I got an email telling me an affiliate commission was reduced. Nobody likes being told they are getting less per sale, but I started asking why. Often the answers were incredibly fair. The reality is, there are plenty of valid reasons an affiliate commission isn’t a static number.
Affiliate marketing doesn’t happen in a vacuum. It’s typically one of several marketing strategies a company is executing in concert. If you look at how each channel plays a role in customer sales, you get a fairly clear picture of which channels should be attributed to each sale. By resolving which channels create a higher cost of customer acquisition, you can optimize to help reduce those customer acquisition costs over time.
Analyzing how each marketing channel is involved in customer acquisition helps determine your overall marketing budget allocation. Affiliates are not immune to this analysis.
Sometimes the affiliate marketing channel is the only marketing channel involved in a purchase. Sales that never touch another channel are the gold of affiliate marketing, because they are the sales you would miss out on without affiliates.
More frequently, the affiliate channel is one of two or more channels involved in the purchase process. To further complicate matters, when the affiliate channel is one of several channels, it can either be the last click or an earlier step in the multi-attribution funnel.
In some cases, the purchaser arrives at a page where the affiliate cookie gets set, then leaves and makes a purchase via the PPC channel sometime before the affiliate cookie expires. Other times, the purchaser may click a PPC link, fail to make a purchase, but later purchase via an affiliate link. In both scenarios, the affiliate marketing channel played a part in the sale, but the role was different.
Regardless of whether the affiliate channel delivered the first, second, fifth or last click, the affiliate channel is just part of the marketing cost in a multi-touch scenario.
If you are starting from scratch with a brand new product, you may have to guess at what the marketing cost per customer should be. For an established product, you can take historical data and arrive at acceptable marketing costs for each acquired customer. Either way the total cost of marketing involved in the acquisition of a single customer is the sum of all marketing dollars spent acquiring the customer.
If the affiliate channel is the only marketing channel influencing a purchase, the math to calculate the marketing costs per sale is simple:
If there are more marketing channels involved in the transaction, the marketing cost is the combined total of all channels. For the sake of simplicity, I’ll use just two channels, PPC and Affiliate.
Affiliate + PPC
Keeping the numbers in line with the referenced tweet, if you have a $100 product with a 2% commission, formula A becomes:
When you add PPC to the mix, you need to know the price per click. Typically you would need an average of all clicks to find the average dollars spent in PPC to acquire a customer, but to keep the math simple, I’m going to assume that each click results in a sale. Clicks cost $1.
In formula B the costs break down like this:
In this example, when a purchase involves both the affiliate marketing channel and the PPC channel, the total marketing cost is 50% higher.
What if the commission is reduced to 1%, while the PPC costs remain the same?
By reducing the affiliate commission, the company brings their per-sale marketing cost back in line.
While I don’t know the specifics of the affiliate program referenced in the tweet that inspired this article, the timing matches something I’ve seen in past years – when companies increase spending in other marketing channels during the holiday shopping season, they often temporarily decrease affiliate commissions.
In the past, I asked a few affiliate managers why they were decreasing commissions during the holidays. The answer was fairly consistent. The affiliate managers decreased affiliate commissions during periods of increased marketing expenses across all channels because the total cost of acquiring a customer went up significantly if they didn’t.
The general view being that affiliates benefited from the additional advertising happening in PPC channels, via social media, and through various display campaigns. Affiliate were generating more sales, but they were also receiving benefits from the company advertising campaigns.
In one specific case, I generated almost exactly the same revenue with a reduced commission as I had the previous month when I had a 30% higher commission rate. While one instance is certainly too small a sample size to validate the claim, it was refreshing to see that the company hadn’t simply cut my commission for their own gain.
There are other alternatives to reducing the affiliate commission. It’s possible to shorten the cookie life, so that the only channel credited with the sale is the last click. The company could opt to only payout the last click, so that an affiliate cookie set prior to the last click receives no credit. A better solution may be to establish weighted payouts to reflect the proximity between the purchase and the affiliate click, but honestly I’m not entirely convinced any of these options is better than reducing the commission. How would you approach the challenges of balancing the marketing budget?