How to Set Up an Affiliate Marketing Program – Small Business Guide
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.
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.
What is the best affiliate network for me? The amount that the affiliate networks are willing to disclose to you will depend on your skills as a negotiator and also the potential size of your business for the affiliate networks.
Approach all of the big networks – Tradedoubler, Buyat, Linkshare, Commission Junction, Affiliate Future and Clickbank, explain that you are going to be setting up an affiliate marketing program and that you want as much information as possible on why you should go with them.
- How many affiliates drove a sale for them last month?
- So that you can compare their size and reach with others
- How many affiliates are promoting merchants in your industry?
- So that you can see their reach in your vertical
- How much revenue did they drive for your entire industry last month?
- To judge the level of bottom line success in your vertical. You should also look (if possible) at the % breakdown of the revenue by affiliate e.g. what % of revenue is made up by the top 5 affiliates? Is there a lot of long tail/small affiliate opportunity?
- How many new affiliates did they recruit last month?
- To judge how actively they are growing and how proactive they are.
- How many new merchants did they recruit last month?
- Ditto, are they an arrogant and lazy network?
- How many merchants from your industry are with them? (good to go with the bulk as there will be a good affiiate base ready to promote you if they are already promoting your competitors).
- Who are the biggest 5 affiliates working with them?
- Who are the biggest 5 affiliates with them for your industry?
- How much commission will they charge on sales?
- Can they run multiple commission rates?
- Can they do lead generation on a fee per lead basis?
- What does their management fee include? How much support and help can you expect from them with affiliate recruitment/reporting/problem shooting/industry updates?
- What technology do they offer that is unique to them?
If you can get a fair bit of detail on all of these questions then you should be in a good position to approach the negotiating stage and play them off against each other. Obviously the amount of leverage you have and how far you can go will largely depend on the size of your business and what kind of revenue you will bring the affiliate networks. Make the networks excited about your marketing and growth plans. Explain your past performance and what your plans are for the next year – if they see you as an expanding and growing brand then they will stretch further to meet your needs.
By the time you have got to this stage you will have your preferences, go with the data, the best deal and your gut feel. If you like and get on with the people on a genuine level and trust that they will take your business seriously and will spend time promoting you then go with them, but only if the commercials and their business proposition stack up too. Getting visibility with the key affiliates for your market Once you have your account set up and you are ready to go the first thing to do is to put together a target list of affiliates that you want promoting you. Rank the affiliates on the list by potential and then work with the networks on getting the best real estate possible on the affiliates sites.
Get the affiliate network to give you a list of every affiliate who has driven a sale for any competitor of yours (that is in their network) within the past 6 months. Ask the affiliate network to rank the affiliates in order of revenue driven (obviously without the sensitive data) if they mess up and give you the sensitive data (unlikely) then all the better. Put together a promotional plan for the first 3 months and make sure that your offers blow the competition out of the water. Affiliates are businesses in their own right so are just interested in promoting the merchant who can earn them the most cash, so if you give them a better % commission and your conversion rate is as good as your competitors or better then you will quickly win them over. Check out the top affiliates EPC (earnings per click). You then need to work out how you can give them the opportunity to earn over this with you – basically calculate: (site conversion rate x (commission rate per sale X Average order size).
Ensure that the affiliate network have agreed to give you featured merchant status for the first month and that you are featured all over their website/blog/twitter/facebook etc and emails.
Email all of the other affiliates straight away introducing yourself as their support at your company, explain your proposition, affiliate program terms (commission rate etc) and explain that you have an unbeatable offer for the first month that is going to have sky high conversion rates.
Save some fat in the promotional spend plan for the top affiliates so that you can offer them something special for a great location on their site.
Once you have the top 10 on board and are recruiting the long tail through the email then get on the phone and work your way down the list getting more and more affiliates on board, there will be many that you cannot get hold of and/or who do not reply; do not be disheartened as this is normal, affiliates are busy people. Just try to think of good ways to grab their attention and leverage all contacts at the network to aid you in getting in contact with the affiliates.
Keep in close contact with the network – let them know that you will make them work for their commission, be thankful and complimentary when they are good but beware of them being more lazy after the initial flurry – you need to hold the pace for at least the first 3 months and then it should start to get easier as you have some secure relationships that do not need too much maintenance. This applies to both affiliates and the networks.
New affiliate promotions to get the affiliates promoting you instead of your competitors This is obviously a tricky one with no clear right/wrong way. There are a few rules that I would stick to though:
Keep things fairly simple – as mentioned above affiliates are busy so if you come up with a highly complex (however fun) promotional idea they may just switch off before you sell it in to them.
Keep things fresh – do not just dole out the same old promos every month to the affiliates, there will be no real incentive for them to keep promoting you and trying new things for you if they already know how it will perform on their site.
If possible base your promotions for the top affiliates around their site and what works well for them e.g. if you sell T-shirts and cushions and one site is flying on the cushions then give them special offers around cushions.
Use the data you have after each promo – see what works for who and try to understand their site use profile so that you can meet their needs.
Show your face at affiliate events, make friends in the industry, do people favours and just generally enjoy yourself as if people see you being fun and positive socially then it will impact the business relationship you have with them.
If anyone has anything that they think could be added to this post then just let me know and I will add it in. All the best with your affiliate marketing!