Getting your affiliate compensation model right is a fundamental step towards success. To motivate your affiliates to promote your products and simultaneously safeguard your profit margins, it's essential to get a perfect balance in determining your affiliate’s compensation.
One of the most common commission models in SaaS and digital product industries is the revenue share model. Here, affiliates earn a percentage of the revenue from the sales they bring in. Its appeal is largely due to the powerful motivation it provides for affiliates to promote high-value products and services, while also helping mitigate common forms of affiliate fraud.
However, multiple other commission models exist that could be more aligned with your business model or what your affiliates are looking for:
Cost Per Acquisition (CPA)
This model compensates affiliates with a fixed fee for every successful conversion they bring.
Cost Per Click (CPC)
While this approach can boost brand exposure and site traffic, it might not necessarily result in direct sales. Under this model, affiliates are paid for every click they generate, irrespective of whether those clicks result in conversions.
Cost Per Lead (CPL)
In the CPL model, affiliates earn a commission for each lead they generate — for instance, for a form submission. This method can be especially effective for enterprise products with complicated sales cycles.
Remember that it's critical to align your payout model with your business objectives. Let's check what key SaaS metrics to consider when choosing the revenue share model.
In SaaS businesses, the standard practice is to pay affiliates through recurring commissions based on the subscription that customers opt for. However, this isn't always the case. Some businesses prefer to pay a one-time fee upfront for customer acquisition, independent of the duration of customer retention. This usually happens when the sale doesn't involve a recurring product, making a one-time commission a more feasible option.
If, on the other hand, your business offers a recurring product or service, your compensation strategy must carefully consider two critical metrics: the Customer Acquisition Cost (CAC) and the Customer Lifetime Value (CLTV). Let’s take a closer look at what these metrics mean.
Customer Acquisition Cost (CAC) is a key metric in SaaS, signifying the total expense of acquiring a new customer. This includes the sum of all marketing and sales expenses over a specific period divided by the number of new customers acquired in that timeframe.
Customer Lifetime Value (CLTV) is a metric that represents the total net profit a company can expect from a single customer throughout their relationship with the business. Understanding CLTV is crucial as it guides strategic decisions, from marketing spend to customer retention initiatives.
An example of defining recurring commission for your affiliate program could be as follows: if your current Customer Acquisition Cost (CAC) equates to 40% of your Customer Lifetime Value (CLTV), offering an affiliate a 25% commission would be immediately beneficial. This arrangement implies that if the affiliate successfully acquires a customer, the business would only need to allocate 25% of the CLTV as a recurring commission, instead of deploying 40% of the CLTV on other customer acquisition strategies. This approach potentially reduces the CAC, making it a financially savvy move.
In SaaS, affiliates usually receive between 20% and 30% in recurring commissions. While this range varies slightly among businesses, an affiliate's readiness to promote your product directly ties to their potential commission. If you're generous with your commissions, your affiliates will likely reciprocate by promoting your products more fervently.
However, it's important to ensure that your commission is set lower than your CAC from other acquisition methods to achieve a reduced CAC. The commission amount hinges on your product's price and the nature of your business model, whether it's B2C or B2B.
When it comes to recurring commissions, affiliates typically receive their share as long as the customer remains subscribed and continues to pay each month. Some merchants, however, cap the duration of these payments, with 12 months being the most common duration.
To ease administrative burdens, consider batching your payments. For instance, all commissions for sales referred in a particular month, say March, could be paid on a predetermined date in the subsequent month, like April 1st or even May 1st. This approach allows enough time for potential refund requests from customers.
Commission rates can differ significantly across various industries. For instance, e-commerce often pays lower commissions due to the associated costs of producing and shipping a physical product, resulting in narrower profit margins compared to SaaS-based businesses.
The price of your product plays a significant role in determining your affiliate commission percentage. For a low-cost product, the commission percentage would likely need to be higher to incentivize affiliates. On the other hand, a high-priced product may allow for a reduced commission percentage.
While one-time commissions are common in industries like web hosting, they come with their share of challenges. Usually, businesses offer generous upfront commissions for customer acquisition. This approach, however, necessitates a higher degree of caution to prevent fraudulent activities. It also requires a clear understanding of your average Customer Acquisition Cost and Customer Lifetime Value.
To sum up, the mechanism of compensating affiliates—whether through a fixed upfront fee, a percentage of your sale, or recurring commissions—requires mindful deliberation. Above all, you must consider the affiliates' motivation to promote your products and the financial implications on your business. It's a delicate dance of balance, one that can significantly influence your business's growth trajectory.
Also, have a look at our Comprehensive Guide to Affiliate Marketing for Businesses.
