The commission is generally the percentage of a sale that is paid to the affiliate for referring a customer. The commission percentage can range from the low single digits to more than 50%. (E-products generally have the highest commissions since the margins are close to 100%.)

Though commission rates are obviously important, this number definitely needs to be considered in connection with the type of offer. A merchant offer that pays 50% commission seems very attractive in a vacuum, but if the product offered isn’t relevant to your audience and the creative is no good the results will probably be uninspiring.

In other words, the equation for affiliate marketing revenue has several variables:

  • Revenue = Visitors x Click Rate x Conversion Rate x Average Sale Price x Commission

In many cases, offers with the highest commission may result in sub-optimal click or conversion rates. The commission percentage only comes into play if you actually generate sales.

Some offers will feature unique wrinkles in the commission structure:

Multi-Tiers: While most commissions are a flat fee, some offers will pay out different percentages depending on sales volume.

Bonuses: Some merchants will offer bonuses for reaching certain sales thresholds, creating another opportunity to generate revenue for major affiliates. For example, a company may offer a $500 bonus to affiliates that generate $25,000 in sales in any given month. While only a very small percentage of affiliates will ever hit this target, it can translate to a higher effective commission rate (the extra $500 on $25,000 in sales is effectively an additional 2% commission). Here’s an example of a bonus commission offer (in this case, $625 for hitting the $25,000 mark and $1,250 for generating $50,000 in monthly sales):

The presence of multi-tier pricing and bonuses can obviously increase the overall attractiveness of an offer.

Choose Your Commission Pay-Out Level

Pay-out levels have got to be looked at frequently and you should look to pay out as much as you can and make it lucrative for your affiliate/publishers. You should also look to throw in some kind of incentives and say, “if you make 50 sales this month or even 10 sales this month, we are going to give you a $100 bonus,” or we are going to give you an iPad or an iPod or pay more commissions. Pay as much as you can initially and then you can reserve a couple of percentage points for people who can produce serious amounts of volume. You should never pay al of your affiliates the same rate because there are many different types of affiliates and they should be paid based on the value they are bringing the company.

Don’t be Cheap with your Affiliates and Partners – this is one of the biggest mistakes companies make. They really just don’t reward people well enough and they kind of look at it as just another channel and say, “I really don’t need to payout much because it’s just…I don’t know what it’s going to do.” Wrong attitude! You really should look at it as a real sales force as your online “feet on the street” so to speak and you need to make it lucrative for people to work with you.

Understand Reversal Rates

Reversals refer to completed sales for which the commission is cancelled and returned. This can happen for a number of different reasons:

  • The order was cancelled by customer (and refunded by merchant);
  • The transaction was a duplicate (i.e., customer card charged twice);
  • The transaction was fraudulent;
  • A violation of the merchant’s affiliate policy was committed.

Reversal rates are generally in the low single digits; it’s standard for about 1% of transactions to be reversed. If you see offers with extremely high reversal rates, that could be a red flag. It doesn’t mean you should necessarily stay away, but it’s worth understanding why so many transactions are returned. For example, there’s something strange going on with this merchant:

A lower reversal rate equates to higher revenues.