Would you like to know how much the affiliate channel can increase incremental revenue?
JEBCommerce made an affiliate revenue calculator to show exactly that.
The incremental benchmarking tool is a 7-step assessment that will send you a detailed report highlighting the areas you are well positioned for affiliate channel profitability and the areas you are not.
In this article JEB outlines how to calculate incremental affiliate revenue.
How is Incremental Revenue Calculated?
I truly wish there was one simple formula that all advertisers used all the time. There isn’t.
Incremental is defined differently across industries and companies. Every company I have worked with in this regard has been completely different.
Some start and end with first click vs last click. Others care for nothing more than new vs existing users.
Still others follow the customer across all marketing channels and attempt to apply certain assumptions and models to determine what touch point(s) added value to their path to purchase and which ones did not.
Incremental revenue is not a simple formula and it usually starts with the inquirer’s marketing world view and the executives current sales and marketing push.
Typically, if you grew up through the Search Marketing channel, you look at first click vs all other clicks.
If a purchase is made on a first click, it’s incremental, if not it isn’t.
Other companies are driven by new customers and so they place a higher value on acquiring new customers above all others.
What is a new customer?
If a customer has not completed a purchase for 2 years and a typical customer shops with you every 6 months, is that returning customer considered new?
Is that sale considered incremental?
What about a customer who hasn’t shopped in 9 months, received an email last week from you and then purchased through their favorite affiliate today – incremental?
I bet for every 5 people that read this, each one has a different answer.
Each individual advertiser has to determine their own definition of what is an incremental sale.
The multi-channel retailers that JEBCommerce works with looks at catalogs delivered, aging of the customer, last retail purchase, email activity and more.
Incremental Revenue Formula
Most often I have seen a metric titled Margin Contribution that attempts to solve this issue.
This formula basically divides sales into two categories: New Customers and Existing Customers.
Then it assumes a percentage of each category as incremental and not incremental.
Assumptions based on factual data we were able to gather or by following the customers’ path to purchase, and other times completely out of thin air.
Actually, a lot of times out of thin air. I don’t necessarily recommend that, but I have seen people’s gut feeling be way more on target than any formula.
Incremental Revenue Formula using Margin Contribution
Margin Contribution = ((New Customer Revenue - COGS) * Incremental Percentage) + ((Existing Customer Revenue - COGS) * Incremental Percentage) - Affiliate Channel Costs
Margin Contribution attempts to get to the true bottom line of what was added to the bank account from this channel that would not have happened otherwise.
Now, I am definitely not saying that margin contribution is the way to calculate incremental revenue in every circumstance.
The major flaw with the margin contribution formula, in my opinion, is that the marketing channel is 100% saddled with the costs of the sale (affiliate channel costs) but only gets a portion of the revenue credit.
If another channel is accredited the revenue from a particular order, shouldn’t that channel also bear the costs?
One of myriad good questions to ask throughout this process.
And as a note, we are only talking about profit rationalization, analysis – determining if the channel, and individual affiliates are profitable.
Each advertiser has terms & conditions with their affiliates and has agreed upon payment terms.
We aren’t talking about changing that at this point.
We are talking about determining which channels are incremental and which affiliate partnerships bring the most incremental revenue.
You most likely will be looking at the value of each partnership and adjusting your payout based on the greater or lesser the value.
If you are wanting to add at least $10M in revenue over the next 3 years dialing-in and measuring incremental sales is a must.