- How it works
- Pay-Per-Performance (PPP)/Cost-Per-Action (CPA)/Pay-Per-Acquisition (PPA)
- Cost Per Sale (CPS) or Pay Per Sale (PPS)
- Examples of Commission Based Payouts
- Revenue Sharing
- How do revenue share programs work?
- Value-Per-Action (VPA)
- Cost Per Lead And Cost Per Click
- Pay Per Click (PPC)
- Pay Per Mile (PPM)
- Fixed cost
- Void affiliate transactions
- Combined Payment Models
- Diverse Payment Models
- Influencer Recognition
- First Time vs Repeat Purchasers
- Cross-device tracking
Affiliate Marketing is a program between a Merchant/Advertiser and the Affiliate. This sales concept is characterized with a success-based commission that is paid by the Merchant. The amount of the commission is agreed upon between the Merchant and his partner. The Affiliate is responsible for the Affiliate-Portal and runs the advertising space. Affiliate Marketing can be implemented online, but also offline.
How it works
Affiliate Marketing is a method of Online Marketing and how companies can advertise their products and services. Therefore, companies look for Affiliates – sales partners – that place advertisements on their own sites e.g. as links or banners. The advertisement is made by the Merchant, so the Affiliate is the advertising media. The partner gets paid in various ways which are explained in the cost-per-action model in the following text.
Affiliate programs can be created by the Merchant itself in co-operation with the chosen Affiliate. Alternatively, Affiliate networks offer a big range of Affiliates for the merchants for a fee. Such networks often support both partners also with the creation of the campaign and the payment of the commissions.
Affiliate marketing payment methods constitute one of most important aspects you need to sort out before launching your affiliate program.
They determine not only your financial obligations to your affiliates but also how potential affiliates will see your program. These terms are among the main criteria publishers will consider when deciding whether to join your program or not.
Therefore, when defining them, you’ll want to take into account both your interests, as a merchant, and those of your affiliates. As recommended in our previous post on competitive analysis, you should check out what your main competitors do as well. Your potential affiliates will surely compare you with them, so you’ll need a competitive edge here — something to make your program stand out, projecting affiliate-friendliness and attractiveness.
Pay-Per-Performance (PPP)/Cost-Per-Action (CPA)/Pay-Per-Acquisition (PPA)
With the Pay-Per-Performance pricing model, the advertisers compensate affiliates only for visitors that perform an action on their websites and properties.
There are many kinds of actions that generate commissions for the publishers, such as sales, subscriptions, downloads, digital form completions, and other.
This method of compensation almost ensures pure profit for the advertisers where they only pay for the desired results.
For the affiliates is the most rewarding model and the commissions vary depending on the product’s price and other factors. Now the Affiliates (publishers) need their visitors to convert otherwise they won’t get paid. That means publishers have to work harder, compared to other models, in order to send very targeted traffic to the advertisers’ properties that will result in conversions.
This model changes the traditional way of advertisingwhere companies that want to get advertised have to hire advertising or marketing agencies and pay in advance for advertising campaigns without even knowing if these campaigns will bring any results. With the PPP advertising model, companies pay only for results and due to the internet and technology these ad campaigns can be tracked in real-time and ROI can be measured.
This method is also known as Cost-Per-Action or Cost-Per-Acquisition (CPA). This cost can be calculated dividing the total cost of a campaign with the number of acquisitions (or actions). The desired action (acquisition) is set by the merchant (advertiser).
The most popular of PPP models are the Pay-Per-Sale (PPS) and Pay-Per-Lead (PPL).
Cost Per Sale (CPS) or Pay Per Sale (PPS)
The pay-per-sale or PPS, also referred to as, cost-per-sale or CPS payment model pays affiliates a set commission for each sale they refer to the merchant’s products or services.
The commission can be a percentage of the sale or sometimes it’s a flat rate.
Various creatives are provided by the affiliate program, including, banners and text links.
Some programs, like, eBay and Amazon offer unique creatives in the form of sliders and customized widgets to target relevant products as pictured below.
Examples of Commission Based Payouts
Here are some just a few examples of the commission payment model and how it works.
- Amazon affiliate writes a review of the Kindle Fire tablet on his or her website, and includes affiliate links that takes site visitors to Amazon, when those visitors buy a Kindle Fire, the affiliates makes a commission.
- eBay affiliate places live auction listings of relevant products on their website, and each time their site visitors clicks on one of those listings and make a purchase one eBay the affiliate earns a commission.
- Affiliate builds a website about photography and regularly posts various tips and guides about the topic. In the sidebar of his site they place banner ads promoting Canon cameras as a Best Buy affiliate, each time someone clicks on that banner and makes a purchase on Best Buy, they earn a commission.
- Tech blogger writes a review of the latest Apple MacBook, and places an affiliate link to Apple’s website within the review. Each time someone clicks on that link and buys a MacBook, or anything else at Apple’s store, the affiliate earns a commission.
- Email marketer sends an offer to their list of bloggers for a new premium WordPress theme, each subscriber that clicks on the offer link and purchases the theme earns the affiliate a commission.
Revenue share is when the merchant agrees to share a commission or portion of the conversion with the publisher. This is often used when a customer may be spending money on a product or program more than several times.
This model implies advertisers to share a predefined percent of either product or service price with publishers, when they manage to sell it through their inventory. The feature that differentiates it from CPA commission type is that with Revshare type publishers are paid that percentage on the ongoing basis as long as customers they’ve brought to advertisers continue to pay.
How do revenue share programs work?
Revenue share is a type of percentage commission payment structure, which determines the amount of commission you will receive for achieving sales for a third-party partner whose goods or services you promote and sell.
When you achieve a sale for your partner scheme, you are rewarded with a percentage payout of the total value of the sale, rather than earning a one-off flat fee for making a sale, or gaining a prospect or expression of interest.
Additionally, many revenue share programs offer the added advantage of giving you the potential to earn an ongoing passive income from every acquisition you make, as well as providing a payout for the initial purchase. This means that your revenue share program will continue to return dividends of a percentage reward of future sales too, either for a set time period after each acquisition or for the entire lifespan of your partnership.
The Value-Per-Action model is very similar to the Cost-Per-Action (CPA) model. CPA models involve very little risk for advertisers as they only pay for the desired actions.
The Value-Per-Action (VPA) model extends that model to add revenue sharing with the consumer.
Using the VPA model, advertisers don’t incur advertising/marketing costs until a sale takes place, and can increase the likelihood of a sale by increasing the advertising budget which is shared between the marketer and the consumer.
The amount of advertising budget becomes a direct incentive to the consumer. Two sellers may offer the same product at the same price, but provide different incentives to consumers through advertising expenditures.
With the addition of transparent revenue sharing to the CPA model, VPA becomes a consumer-friendly approach in which the seller’s ad spend provides a direct benefit to the consumer effectively driving down the net price. Placed in a comparison-shopping marketplace, the competition between sellers to provide better revenue provides additional downward pressure on the net price paid by consumers.
Cost Per Lead And Cost Per Click
Another alternative some choose is cost per lead (CPL) – with commission paid per lead rather than per sale. This method works best, says Patel, in areas such as car test drives. “CPA wouldn’t work here as people usually take a while to consider what car to buy and are unlikely to buy a car online,” he says. But again advertisers need to set the right incentive level according to the likelihood of conversion. “Advertisers should assess the percentage of leads likely to convert when setting a CPL value and take into account the quality of the leads they are paying for,” says Vicky Bruce, account director at affilinet.
In some instances where CPA is not appropriate then more generic measures such as cost per click (CPC) where a fee is paid literally on each impression or an even more generic measure of cost per mile (CPM) are used. In these less action needs to be taken with CPC simply depending on a customer clicking on an ad or link for the publisher to get a commission – something that is particularly common for fashion or travel sites – and CPM simply on the cost per set number of impressions or views.
“As the industry has grown other methods like CPL and CPC have become increasingly popular and are now frequently used with specific products and services,” says Patel. Trip Advisor for example deploys a CPC model across its properties with a fixed amount when a booking is made. Similar models operate across energy and media switching sites.
CPM however is one of the industry’s riskiest models, according to Dan Lancioni, account director of affilinet. “People will see the ad but won’t necessarily click on it,” he notes. CPC is a little less risky since a click is driven but there is still no guarantee that a sale will be made so again advertisers have to decide if it’s a model that suits them.
Bruce says the CPC payment model is particularly effective for affiliates that contribute to a sale higher up the purchasing funnel. “Whilst this offers a more attractive commercial incentive to affiliates who will have more control over their revenues advertisers offering a CPC commission model need to ensure this is monitored closely to ensure their final business KPIs are still being met,” she says. And, as with the last click model CPC and CPM should follow the same principles around fairness and margins, adds Bruce.
Pay Per Click (PPC)
This compensation model is a payment model which is typical for search engine marketing (SEM), but it is a model that can also be used in affiliate marketing. The idea behind this model is to mark a click on the link as the desired action. Every time a user clicks on that link, the affiliate is contributed this action and commission is issued by the merchant.
With this type of compensation model, it is irrelevant how many times the link is displayed and what happens after the click (whether the user buys, signs up, downloads, etc.). It is all about generating clicks.
Like with pay per action, there is no direct revenue for the merchant with this model, which means that the merchants undertake the risk of converting the visitors once the click is generated.
Pay Per Mile (PPM)
Pay per mile, or pay per thousand impressions is not as popular in affiliate marketing, but some merchants do offer this option through affiliate networks. It is another payment model mostly associated with search engine marketing. This concept includes payment based on a thousand views.
Based on the concepts of each of these compensation models, it is evident that merchants see most benefits in the first model (pay per sale) because there is no investment or risk of losing the investment and failing to achieve conversion. It is the safest way for the merchants to pay only based on the performance they see, from the revenue they make. For affiliates, this might be a challenge, but if they have success at using their online influence and referring the right visitors, affiliates will increase their chance for successfully converting the visitors and getting the commission with each of these models.
Another option is a fixed cost or tenancy payment. “The price of a tenancy package should depend on the reach that you will gain, factoring in the number of unique users that will be exposed to your placement, the duration and the relevancy of each publisher,” says Bruce.
“As more advertisers begin to look outside the last-click model within the affiliate channel, different payment metrics are beginning to emerge,” explains Bruce. “Rewarding an affiliate for driving a user that spends a certain length of time on site, or who browses a certain number of pages, is an excellent way to ensure you are only paying for traffic deemed to be valuable whilst still rewarding affiliate higher up the purchase funnel.”
Void affiliate transactions
Affiliates earn the percentage of the sale which means that their commission is issued at the moment of sale. However, there are situations when this transaction becomes void, and the affiliates cannot claim their profit. For example, if the sale is canceled or the product is returned, the affiliate will not be issued the commission if the pay per sale compensation model is being used.
This is why it is important to understand the concepts of valid and void transactions and how each of them affects the commission eligibility.
To make sure to regulate the transaction properly, a merchant has to clearly define what a valid transaction is and when the transaction can become valid. If the merchant offers 14-day free trial period or no-questions-asked return policy, the commission is usually held during this period. It means that the affiliate is attributed the commission at the moment of sale, but this commission cannot be claimed until this trial period is over. Only after the period is over can the merchant be sure that the sale is finalized and that the transaction is really valid as stipulated by the terms of service.
There are multiple situations when the transaction is void, in which case the affiliate is not eligible for the commission. Some of the reasons when the transaction becomes void include the following:
- Payment authorization failure (the payment cannot be processed due to the expired credit card or low balance)
- Canceled order
- Duplicate order
- Returned product
- Unclaimed shipping
- Fraudulent sale
- Self-referral (some merchants choose not to allows self-referrals, which is defined in the terms of service of the affiliate program)
- Non-qualified lead (for PPL compensation model)
It is also advisable to let the affiliate know about void transactions because they might not be aware of an issue and they might be expecting a payment.
Combined Payment Models
Many merchants reach the conclusion that they want to reward more than onetype of action. Some, like the ones below, find it easy to turn leads and calls into sales, so it makes sense for them to reward those as well. One example of such merchant is Amazon. They reward both qualifying purchases (sales) and bounty actions (leads). For National Debt Relief, calls and leads are the ones that count, since they have no ready-to-sell products. As you can see in the screenshot below, they also reward affiliates who refer new affiliates. This brings us to another decision you will have to make for your affiliate program payment terms:
Diverse Payment Models
Based on the advertisers priorities and what they want to get out of their affiliate programme there are a number of options you can explore:
Some of the most influential affiliates can be found at the top of the purchase funnel, with early funnel contributors tending to be blogger or rich content sites. Consumers use these sites to fuel their interest, and they therefore play a vital role in influencing the consumer to eventually go on to complete a purchase.
ROI (Return on Investment) is a key metric for any advertiser operating within a performance marketing channel. Understanding each of the individual touch points involved in a customer’s journey from first click through to conversion as they interact with the brand can help ensure budgets are invested effectively to maximise ROI.
A multi-attribution model can be used to split the commission offered for a conversion based on where the customer interacted with the brand across the different touch points. For example, if there are four affiliate touchpoints within a conversion, the commission split can be weighted to reward the affiliates at touch point 1 and 4 with 30% of the commission and the middle two affiliates with 20% each.
To optimise this strategy, attribution should be considered across all digital channels rather than exclusively within affiliates. Some considerations to take into account are the different payment models used across multiple channels as affiliates are compensated post conversion and PPC, for example, is compensated regardless of a conversion. Some affiliate types, such as cashback or loyalty sites, need to know the commission they will earn prior to the conversion taking place so that this information can be passed onto their members.
First Time vs Repeat Purchasers
For advertisers who have targets measured towards whether or not a customer is a repeat buyer or a first time shopper, monitoring this split will enable them to identify which affiliates they should be investing more in.
A key consideration here is the lifetime value of the customer. Lowering the commission for loyal existing customers should generally be deterred, as it’s likely to drive away the customers you’ve worked so hard to gain the trust of.
Instead, consider maintaining your standard commission for repeat customers but increasing the commission for consumers who are new to the brand and converting these into loyal patrons through the quality of your product and service.
With the rise in access to multiple devices, consumers can find themselves always ‘online’. Customer journeys have become more complex, spanning across both multiple channels and multiple devices.
Advertisers have valuable insights into the behaviour and intent of their customers depending on where they are in purchase path, the device the brand is being engaged on, and which affiliate is influencing the customer’s journey. This gives the advertiser the opportunity to adjust their strategy to improve user experience.
Choosing the best model is vital to getting the most out of an affiliate marketing programme. “The number one consideration when deciding on a payment model is what do you want to achieve,” advises Patel. “Is it data collection? – in which case you should consider a CPL model. Or are you trying to get people to buy your products? – then CPA is the best option.”
Deciding which boils down to a number of key decisions. “The type of advertiser you are or the KPIs you are trying to achieve can have a big say in deciding which payment model to operate on,” says Limpenny.
Essentially however when considering what affiliate commission model to use five key factors should be taken into account, according to Bruce. These include fairness, feasibility, competitiveness, measurement and simplicity. “By offering all of these attributes within their payment model and being flexible with different commission structures advertisers can ensure that their affiliate channel is working to its full potential, driving value to all stages of the user purchase journey,” she says.