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Starting An Affiliate Program - Part Two

by Greg Shepard

Things to Consider, Payout, Cookies, Thresholds, Payment Types, Tiers...

When setting up an affiliate program there are many things to consider such as the payout, cookie duration, payment threshold, when to send checks, payment types, number of tiers, and what type of campaign to run.

The first thing to consider when establishing an affiliate program is just how much to pay out. Whether the campaign you are running is CPC (cost-per-click), CPS (cost per sale) or CPA (cost-per-action) there are simple computations one can do based on statistics and hard numbers to ensure a return on the investment and a healthy margin. To do this, one must establish an acquisition cost threshold (ACT) to ensure that profit margins remain reasonable. To establish this threshold, one must take the total profit margin per sale and decide how much of this margin they are willing to pass on to affiliates. For example, if the total cost including business expenses for a bottle of vitamins is $6, and it is sold to the customer for $10, then what remains is a $4 profit margin. To establish an ACT, one must figure out just how much of this margin will be shared with the affiliate. Start by establishing the maximum amount that will be given as a commission. For this case, we will say that the merchant splits the margin evenly as the highest payout they are willing to give. In this case, that would be a payout of $2 or 20% and the merchant would receive the same margin. It is important to save the highest threshold for super affiliates, bonuses and second tier sales. Super Affiliates are high producing, reliable affiliates that require less support for the amount of revenue they bring in. It is also highly advisable to reserve a higher payout for super affiliates as a way to entice them to the program and to keep them loyal. Bonuses are also very important for motivating affiliates; so it is important to leave room in the ACT for this purpose as well. Also, if one decides to run a second tier program, it is important that the first and second tier commissions combined do not exceed the ACT. So for this example, a good payout for standard affiliates may be 13% ($1.30), with a second tier payout of 5% of sales ($.50), a super affiliate payout of 18% ($1.80-$2.00), leaving 2% for bonuses and incentives. This would ensure the merchant a 20% margin. As a note, some affiliate tracking software figures the second tier as an additional percentage of the second tier sales, where other tracking software figures the second tier commissions as a percentage of the earned commissions of the second tier affiliate. The preceding example was figuring it as a percentage of the second tier affiliate's sales.

The next factor to take into account is the cookie duration. A cookie refers to a small piece of code that is placed in a visitor's web browser. It stores information about the visitor for tracking purposes or for customizing the web experience. In the case of affiliate programs, a cookie is responsible for determining whether or not an affiliate will be credited with a referral upon the visitor's return to a website after their initial visit, and how long after their initial visit they will be credited. Cookie duration generally ranges from 1-365 days. There are arguments both for shorter cookie durations and longer cookie durations. Through experience, however, the arguments for a longer cookie duration seem to outweigh those for a shorter duration. Some merchants choose a shorter cookie duration because they view an affiliate program as a means to obtain dirt-cheap traffic, and traffic is especially cheap if the affiliate does not get credited when there is a sale. However, one must understand that reliable, quality affiliates are well aware of this, so merchants who have shorter cookie durations generally cannot maintain a base of experienced super affiliates. To keep affiliates happy, and to recruit affiliates who will produce reliable results, one must look at their affiliate program as a way to maintain win-win partnerships, and not as a way of taking advantage of novice webmasters. For this reason, it is highly recommended that merchants set their cookie to 365 days or longer to attract more experienced affiliates who can produce results. Remember that without the affiliate that traffic does not exist, so it is vital to do everything in one's power to maintain a somewhat egalitarian relationship with the affiliate.

The payment threshold is another indicator for affiliates as to whether or not the merchant is trustworthy and views the affiliate relationship as a win-win partnership. A high payment threshold will deter new affiliates. Quite simply, the sooner they are paid for their efforts, the sooner they will trust the merchant and give their loyalty to the program. High payment thresholds single out smaller affiliates and act as a red flag for more experienced super affiliates who will see this as a merchant finding ways to squeeze more money for themselves out of the relationship. Some merchants believe that it is the quality of the affiliate that matters, rather than the quantity. Truthfully, both quantity and quality are important, and the only way to ensure that you retain both super affiliates and smaller producing affiliates is by treating them fairly and giving them no reason to believe they are being taken advantage of. For this reason, it is advised that merchants set this threshold as low as possible while still taking into account the costs incurred to pay the affiliates such as check cutting fees and postage. Thresholds should be set at no more than $50 and preferably at $10 or less. The faster affiliates receive a check, the faster they will produce.

Most programs send out checks monthly. However, a bi-weekly or weekly payout will certainly attract more affiliates. It will, however, increase management costs, which may have to be figured into your ACT. Offer as many payment methods as possible so long as they are easy to implement.

The next thing to decide is how many tiers one would like their affiliate program to have. Most programs have one or two tiers. The first tier represents a direct referral from an affiliate to the merchants website where a purchase takes place. This is the main commission or first tier. A second tier commission refers to when an affiliate refers another affiliate to signup for the program. After this referral, the affiliate who referred the new signup will get a percentage of all of the sales the new affiliate accrues. For example, if the second tier payout is 5% this means that the original affiliate earns an additional 5% of the sales earned by the new affiliate whom they referred. As stressed before, some affiliate marketing software figures the second tier as an additional percentage of the second tier sales, where other tracking software figures the second tier commissions as a percentage of the earned commissions of the second tier affiliate. Obviously, the latter would be a much higher number than the former when promoting one's program. Merchants must be sure to gain a firm understanding of how their affiliate software figures this number. Additionally, some programs have more than two tiers. However, this poses a problem. The more tiers that are produced, the less can be paid to each affiliate, making the relationship much less lucrative for the affiliate and the merchant. Frequently, this hurts the affiliates who directly promote your offer. It is best to offer two tiers so that the first tier affiliate earns 25% of the total commissions accrued by the affiliate in his/her second tier.

The payout type (cost-per-action, cost-per-sale or cost-per-click) depends on several factors. Though CPC (cost-per-click) campaigns do have their place, there is tremendously high probability of fraud, requiring constant monitoring. The great majority of affiliate programs now do not offer a CPC options for this reason unless they have robust fraud control available to them.

CPA (cost-per-action) programs are useful to obtain visitor information for future promotional use. For example, if a merchant wanted to create a list of customers interested in arthritis medication, a good approach may be to create an HTML based advertisement for affiliates offering a free eBook on arthritis tips. The visitor then would be required to enter their information to receive this eBook and would then opt-in for more information. As long as this visitor is aware that they are opting in for more information about arthritis, and the site privacy policy allows the sharing of this information, it can then be sold as a lead, or used to promote the merchants products in the future.

Another good use of CPA campaigns is when the purchase requires a great deal of financial commitment, or if the product is too complex to explain without a two way dialogue. A merchant can set up a form to give a free consultation and may also choose to include additional incentives such as a free offer. The lead produced by this form can then be followed up with a live phone call to instill trust in the visitor and to ensure a two-way dialogue, which will increase the possibility of a sale. However, if one chooses to use this approach, the costs of having a call-center must be figured into the ACT. Also, the merchant must find a way to match the phone call with the lead, to ensure the affiliate is credited properly. This can be accomplished by the affiliate ID being passed through code to the database where the lead information is stored. Usually the affiliate ID can be obtained from the affiliate linking URL and passed on.

In contrast to the high maintenance and fraud potential of CPC and CPA campaigns, CPS programs are the most straightforward and cost effective campaigns for low financial commitment impulse buys or purchases where the visitor will fee comfortable purchasing online. The majority of offers are of this nature. CPS campaigns have the lowest level of maintenance, fraud and additional costs.

- By Greg Shepard
Greg Shepard writes and speaks about all facets of affiliate marketing including design, conversion, online advertising, and e-commerce. Greg is the CEO for NetTraction.com and AffiliateTraction.com. He can be reached at greg@NetTraction.com.

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