A Better Affiliate Model?

On occasion, I stray from my expertise into the shady world of Affiliate marketing.

Affiliate marketing remains one of the least understood and most valuable marketing opportunities. I’m wrapping up some research now that shows that of all online opportunities, affiliates are leveraged second only to search by customers who buy OFFLINE. (Is the all-caps too much?) I was shocked. A channel in which the publisher only gets paid for sales tracked online is in fact one of the most significant placements any advertiser could leverage to reach their customer.

Where I’m going today though, is to pose a question about commission structures, to solicit your opinion about an option I don’t believe anyone is considering or using now. Typically, advertisers pay affiliates on a revenue share or CPA (cost per acquisition) model with performance incentives. I may pay only 4% for all sales or add a bonus of $1000 or another 1% for new customers, specific products or services sold, etc. That model is easily translated to a CPA as a specific rate per registration.
The more complex model is a tiered commission intended to reward the most important affiliate partners; perhaps, 1% to any affiliate, increasing to 5% for only those that reach a threshold. Let’s use an example (I’m sure you’ve caught on that I always use examples):

• 1% for affiliates driving up to $5k in sales per month
• 2% from $5.1k-15k
• 3% for 15.1k to $50k

This model serves to incent smaller affiliates to drive more business to reach the better payout.

Unfortunately, this model, though better than just a flat rate, is flawed in two ways.

First, loyalty programs (affiliates that give something back to the customer) and search affiliates (those who might buy keywords to promote your store) really require a fixed commission so they can determine what they can pay out to their respective partner (the customers in the loyalty program or the bids to a search engine). If one month, an affiliate earns 3% but, the next, only 1%, how much can they commit to those customers? How much can they plan to spend on search when not only are the sales and respective payout fluctuating, but the percent of the payout is inconsistent.

Second, this doesn’t account for seasonality which implies that during a gift giving holiday, more of your affiliates will sell more, reach the higher rate, increasing your costs when they, in reality, didn’t do anything more to drive that volume.

Is there a better way? (no, that’s not the question I want to ask)
What do you think about a Share of Volume based commission structure?

• 1% for affiliates driving up to 3% of the volume for that month
• 2% for 4-5% of the volume
• 3% for 6-9%

Certainly, a drawback is that you would need to report total sales to affiliates giving them insight to the share for which they are responsible but this would maintain the incentive of a tiered structure, stimulate competition between affiliates, help sell your program to affilites unwilling to promote you, eliminate seasonality, and perhaps, work for loyalty partners.

Let me take one at a time and please, help me find the holes in this AND let me know of other pros/cons.

• Maintain the incentive of tiers: Affiliates are presented with an opportunity to make more by driving more volume.
• Stimulate competition between affiliates: The publishers now see where they fall and can compare that to their insight on their relative share with other advertisers. If they are lower than expected, they’ll know that (and hopefully do something about it). If higher than expected, they wouldn’t likely cease promotion to reduce payout.
• Help sell your program to affiliates unwilling to promote you: Perhaps you have affiliates who favor one brand over another, this would give those affiliates insight to how well you really perform (and could perform for them)
• Eliminate seasonality: Commissions aren’t based on a dollar amount but a share of total volume which wouldn’t change because of the holidays
• Work for loyalty partners: This is where I pause with my own doubt… The commissions would still vary for those affiliates but they would be more stable than a tiered model, assuming that loyalty affiliate site wouldn’t fluctuate on share of volume to the degree dollars fluctuate.

Do me a favor? Poke holes. I think I’m on to something but I imagine I’m not considering everything. Is this a sound idea?