— August 9, 2018
It’s all about the commission. The affiliate reps want that percentage to be as high as possible, and the merchants want it to be as low as possible. High commission rates will attract the masses, but cut into your profits. How can you negotiate with affiliates to make sure that you’re getting the best possible deal on your end?
Know your highest commission rate.
Let’s start at the top; literally, the highest commission rate you can afford to pay out to the majority of your affiliates. This is your break-even number, which you can get to having a good grasp of your metrics.
In our previous post on setting your commission rate (recommended reading for this post), we laid out the equation you can use to figure out the Lifetime Value of a new customer:
Average Order Value X Purchase Frequency X Average Lifespan = LTV
Once you have your LTV, this is roughly the highest you can spend to acquire one new customer and break even (give or take some overhead spending). So if a new customer has an LTV of $ 500, technically you could pay $ 500 to your affiliate partner for bringing in the sale.
Of course, it’s unlikely you will ever offer a payout this high, but it gives you your ceiling. Now you know roughly how much wiggle room you have when it comes to offering a rate to an affiliate.
Side Note: You might be thinking “but aren’t I setting commissions on the revenue of each sale?” Yes, and we’ll get to that, but LTV is the best metric for your absolute ceiling. So even if you give 100% commission on a single sale, it’s possible to still be profitable in the long run.
Know the industry average.
When you go in to buy a used car, it’s important you know the general amount one is worth. Or else, you’ll be easily swindled. Before you engage in any negotiations, know what others in your industry are offering.
We’ll again refer you to where we highlighted this topic in our previous post on setting commission rates, but here’s a quick chart of industry averages:
As you can see, in general the recommended commission rate is between 10–20%, average being 15%. But do your due diligence and see what your closest competitors are offering.
Know your target affiliate rep.
Realistically, you won’t be negotiating with the majority of your affiliate partners. You will probably advertise a certain commission rate, and potential affiliates will take it or leave it. If they mostly leave it, you probably need to raise the rate a few percentages.
Negotiations really come into play in two scenarios: 1) you only want to work with a handful of very dedicated reps who will ostensibly be your main sales force; or 2) when you want to work with an Influencer.
Working with an Influencer in your niche can be a boom for your business. In a study by Linqia, 94% of marketers found influencer marketing to be effective. That was in 2016 and the market for good Influencers have continued to grow in nearly every vertical. Which means, to get the best ones, you’ll usually have to pony up.
This is where knowing your target Influencer is important. Track their social media feeds to get clues on what their other commission rates may be. What do they enjoy doing? What are their hobbies? What excites them? Knowing these things could lead to offers of bonuses other than strictly money, and also, you’ll vet them as an actual good Influencer.
Done all that homework? Good! Now you’re ready to negotiate with, and hopefully snag, the Big Fish.
The Do’s & Don’t’s of Affiliate Negotiation
Do start negotiations at the high end of your current commission range. That might be enough for your Influencer and you can call it a day. Also, offering your high end prevents them from eventually finding out that they’re making less commission than another one of your “regular” reps, which can lead to bad feelings.
Don’t ever start negotiations at your ceiling; you’ll have no where to go if they say no. If your absolute ceiling is the LTV, and you start with the high end of your normal commissions, you know what wiggle room you have.
Do make it feel like the affiliate has won. Make them feel like they’re getting a special deal, even if it’s not. Starting the relationship off right is great for morale of the partnership. Even consider some sort of “signing bonus” of a gift card or brand merchandise to welcome them on board.
Don’t be afraid to walk away. Sometimes, a busy Influencer will simply ask for too much. If they’re asking for such a high commission rate that the margins aren’t there, you should gracefully bail out of the negotiation. After all, there are other Influencers in the social media sea. But…
Do offer alternatives to cold hard cash to close the deal.
Alternatives to higher commission rates.
Anything above a 50% commission rate on a sale is usually too high (though it does depend on your sales/marketing goals). If the rep you’re negotiating with is simply asking too much, offer these alternatives:
Tiered Commission — Offer to increase the commission rate as they prove that they can bring in customers. Be it a “hot streak” bonus where you bump up commissions if they bring in X sales in Y amount of time, or a permanent bump to a higher tier if they bring in a goal of X sales. It’s a great way to motivate a rep and to reward consistency and proof-of-effectiveness. Also, another way to do this is with Product-Level Commissions. If your rep sells higher-ticket items, they get a higher commission to match.
Trial Period — Alternately, you can start them off at their preferred higher rate but build in expectations that they need to maintain X sales per month to stay at that rate. So initially, it’ll act as a “trial period” that they will need to work to maintain, or else the commission rate will come down.
Store Credit/Family Discount — Especially if the Influencer is already a fan of your brand, you can offer store credit instead of cold hard cash, which may save you money. Offering them a friends & family discount can also sweeten the deal without you having to shell out ultra high commissions.
And again, that homework you did where you learned all about this specific rep can come in handy for alternative payments. Is your rep a huge Disney fan? Maybe season tickets can sweeten the pot. Get creative before you bite the bullet and agree to a higher commission than you ideally want.
Renegotiating and Tracking
Finally, like all good partnerships, there should be reevaluations as you keep an eye on their metrics. If they’re underperforming, then you should be able to renegotiate a lower commission rate. If they’re overperforming, it might be time for a bonus. Either way, it’s hugely important to keep track of their Key Performance Indicators.
Since your Influencer is probably held to a different standard than your other affiliates, you will want to segment them out in your tracking system so you can easily track their performance separately. This can tell you at-a-glance how effective they are compared to the other affiliate segments you’ve created.
At the end of the day, it’s business but it’s also a relationship. Go in to affiliate negotiations expecting success and expecting to make both sides happy. After all, a good affiliate marketing program is win-win. Never forget that.