There was a situation that came up recently with an affiliate manger friend of mine who was told they were out of budget for their affiliate program. In my past life as an affiliate I had some commissions cut in half in December because the merchants said they were running out of marketing budget. I have heard about and seen situations like this happen with many other affiliate programs in the past so it raises the question: “Should you have a budget for an affiliate program?”
The very over-simplified answer: No. If we worked out a deal where I gave you $5 and you gave me $1 back would you be happy with that deal? Would you make a beeline for the bank and get as many $1 bills as you could and play this game all day long? Of course you would. Would you want to limit yourself and only “budget” $10 for this? Of course not. And in a nutshell that is how an affiliate marketing budget should work. You are only paying when you make a sale so the money is already in your pocket when you pay out the commission. You don’t need to spend a lot up front in hopes of making a sale, the sale is already made.
But there is more that goes into that of course. Now it is time for me to throw out a few random thoughts that come to my mind on this question (mostly random since I don’t feel like organizing my thoughts right now).
1. Affiliate marketing differs from other marketing channels like paid search, display, etc. since money is only spent when a sale is made. No money is paid out unless money comes in to the company. With PPC you are spending money in hopes of making a sale. Obviously if you know what you are doing with paid search there is little risk because you have your analytics and stats dialed in. But if you increase bids or increase the number of keywords you are bidding on you won’t necessarily make more money. In the affiliate channel if I pay out more commissions it is because I made more sales. In that sense any merchant should be extremely happy to spend as much as they can in the affiliate channel. If you spent $1000 to generate $10,000 in sales you should happily spend $10,000 in commission to generate $100,000 in sales. The more the merrier.
2. This is assuming that you are running your affiliate channel in a way that is profitable. If your affiliate program is filled with toolbars, low value coupon sites, and other affiliates who are just hijacking sales from other marketing channels the affiliate channel won’t really be of any value to you. But if you have affiliates who are driving incremental sales, bringing in new customers, bringing in high dollar orders, helping you clear out stale inventory, introducing your products to new audiences, and bringing some value you should want to pay as many commissions as possible.
3. Obviously there are fixed costs to thing about like what you are paying your affiliate manager, third party tools being used, travel, etc. that need to be factored in and those should have a budget of course. But when it comes to commissions paid there should really be no limit.
4. When I say “no limit” that doesn’t mean just pay everyone 50% commissions. Figure out what the customers coming in through the affiliate channel are worth to you, figure your profit margins, and pay a reasonable commission based on that. So of course you need to have your commissions set to the proper percentage but once you have that figured out you should want to pay on as many quality sales as you can.
5. Get someone who knows what they are doing to run your affiliate program. An improperly run affiliate program can really hurt a merchant and won’t be a profitable marketing channel but if you hire an experienced affiliate manager or quality outsourced manager they can make sure the affiliate channel is one that benefits your bottom line.
6. Network fees can be a huge drag on affiliate costs. Shop around and look for an affiliate network that makes sense. If they have a large monthly minimum and you have a smaller affiliate program that $500 or $1000 a month you have to pay the network no matter what can really balloon your affiliate marketing costs. This is a discussion that deserves more attention and is for another blog post but basically look for affiliate networks that have smaller monthly minimums (i.e. Shareasale.com).
7. There should be some sort of budget worked in to cover different promotions with affiliates, first sale bonuses, performance bonuses, featured placements, and so on. So if your affiliate program is making $100K a month in sales maybe you earmark 5% of that to be available for bonuses. Maybe you just have a flat amount for the year that your affiliate manager can spend as they see fit. There should be some money available somewhere for incentives like this.
So to wrap it all up, if you have a well run program that is being managed by someone who knows what they are doing, knows how to structure the payments to affiliates to reward them based on their value, and knows how to choose a network that can support all that you really shouldn’t have a standard marketing budget for your affiliate program. Have some COR goals you want to hit but as long as the sales are within a profitable range you should seek to spend as much as you can through the affiliate channel.
Great question, and good write-up, Joe. I remember raising the same issue in 2012 when it resulted in the http://www.tune.com/blog/affiliate-commissions-budget-immune/ post, a number of Tweets, and other reactions… I am eagerly awaiting for comments under this write-up of yours. It would be very interested how things have changed (if any) in people’s perceptions over the past 2-3 years.