How Much Should I Pay My Affiliates?

Lately, my email box has been brimming with too many unanswered reader queries. One that seems to keep rising to the top: How much should I pay my affiliates? If only it were that simple. The answer, unfortunately, is: It depends. So, I’m going to take a stab at demonstrating how some merchants have answered this question. Hopefully in the process, we’ll all learn a bit more about how to pay our affiliates.

If you have another burning question waiting to be answered, another great resource is the ClickZ archive of past columns by both myself and Shawn Collins. In many cases you may find that just what you need has already been covered. If not, please continue to email your questions and comments.

What Do Others Pay?

Payouts are quite varied. Dell and IBM both pay one percent on hardware, while Hifi.com pays five percent on consumer electronics. Competitor 800.com offers the same five percent.

A direct link at Amazon is worth 15 percent, while BN pays just seven percent. The outlook for textbooks is even worse; VarsityBooks pays a slim five percent. Ditto Textbooks.com. My colleagues at Half.com pay a healthy $5 for every new customer sent by an affiliate. Tower Records pays only three percent. Affiliates in the video realm fare a bit better with an eight percent commission from Real.com.

Clothing brings anywhere from $.02 a click at teen favorite American Eagle Outfitters to $5 per sale at Atomic Living. Dirt world retailer JCPenney pays four percent, while Lands’ End makes it six. The latest Birkenstock sandals are good for only two percent, but logo merchandise from ProTeam pays eight percent. Check out the latest Big Dog apparel at ten percent. Lingerie from Henry and June pays 12 percent.

What About Conspicuous Consumption?

Wine.com offers eight percent (never mind that my own liquor control state of Pennsylvania forbids such “imported” wine shipments). Sending Easter flowers produces six percent commissions via both FTD and 1-800-Flowers. Sprucing up your walls with Art.com pays ten percent or 18 percent if you don’t mind shopping at 123posters.com. Furniture.com pays only five percent, but its average sale may stretch to $1,000 (it also pays $4.75 per registered user).

In the financial services space Capital One pays $25 per new card member, while CarLender.com pays $7 per completed auto loan application. Sending CreditNow credit card apps from those with less-than-perfect credit is good for $20. BestRate takes a different tack, paying $.05 a click; ebank pays $.03.

Virtual Pays More

Services often have a different model, sometimes paying seemingly large sums. Dating site SinglesNet pays 20 percent while competitor We Meet pays 30 percent. Want more? Kiss.com pays 40 percent of monthly fees to affiliates on a recurring basis. Considering subscriptions to the online personals service run $15/month or $80/year, the payout can be meaningful. Better still, Career.com offers $45 for every job listing. AOL is currently paying $50 per new member. Wow! And last month’s AffiliateForce paid $100 per conference registration.

Web services are also lucrative. Earn $20 for every domain registration from dot.fm. Hosting firm Verio pays $50 per domain name registered and $60 for each new hosting account. E-Commerce Exchange pays an amazing $200 for each new merchant credit card account.

Margins Lead the Way

The point to all this: Payouts are all over the map because several forces are at work. For many companies, margins wield the greatest influence. That’s why commissions are relatively low on items like PCs, consumer electronics, books, CDs and so forth. There simply is very little gross margin on which to pay affiliates. Even within this space you see differences, though. While Dell and IBM both pay just one percent on hardware, IBM pays four percent on software. However, Dell holds the line at one percent even for software and accessories, despite the obviously higher margins on software and peripherals.

Understanding Lifetime Value

Likewise, Amazon pays out 15 percent versus seven percent at Barnes & Noble. While the margins on any given book are basically the same, Amazon is able to afford the higher payout because of other factors, including the number of other product categories it can cross-sell and the longer lifespan of its customers. The same holds true for BN’s seven percent versus the five percent offered by VarsityBooks and Textbooks.com. By selling more than just books and getting more repeat business from its customers, Amazon can attach a great lifetime value to each new customer. In effect, Amazon pays out this lifetime value upfront to its affiliate partners.

The story is similar at Capital One. It recognizes the entire customer value at day one, rewarding affiliates $25. This can certainly simplify accounting. Others like Verio, E-Commerce Exchange and dot.fm have taken a similar lump sum payment approach. Even Half.com comes right out with a $5 payment the first time a purchase is made.

Recurring Revenues

Another trend is starting to emerge: recurring commissions based on the actual ongoing behavior of individual customers. Consider Kiss.com, which pays an incredible 40 percent commission on all revenues accrued during the lifespan of an affiliate-referred customer. This is really the synthesis of a high-margin business that seeks to recognize affiliates for sending quality referrals.

Paying Affiliates As Much As Other Partners

After finally come to terms with business models, margins, lifetime value, and recurring revenue streams, many businesses still make a grave mistake. For some reason they treat affiliates like second-string partners. I’m amazed by the logic sometimes used. My advice is: What you pay a premier portal partner is what you should pay affiliates.

Recently I had a conversation with an obviously bright entrepreneur in the midst of launching a new start-up. He had arrived at a payout range for his large partners various portals and the like but when it came to affiliate commissions, he proposed paying out half the amount. When pressed, he responded something like “We just don’t think affiliates can generate as much business.”

Maybe they can, maybe they can’t. Who cares? When you pay based on performance, you’re not solving for how many widgets get sold. You’re solving for the price you’ll pay for each sale. And if you hold back, you’ll never know just how many widgets you could have sold.

The key to affiliate payouts is to treat affiliates the same way you would want to be treated. Scope out the competition. Know your own margins and customer values. Think about ways to offer recurring revenue streams where appropriate. And most importantly, don’t hold something back from your affiliates. Offer affiliates the chance to earn the same rewards as larger partners. You never know; they just might surprise you…