Tiered commission structures can waste money in your affiliate program

Tiered Commissions – The Good, the Bad, and the Wasting Money

Many affiliate programs utilize a tiered commission structure, whereby, different commission rates are offered to affiliates, based on revenue performance, or other metrics being optimized – like new-to-file customers. Usually, these commission structures are automated. For example, if an affiliate generates up to $10,000 they make the baseline 5%. For every additional $5,000 generated, they make an additional percentage point. So, if an affiliate generates $16,000 in a month, the program is set up to pay them 6% on the revenue generated, instead of the baseline 5%.

This sounds like a good idea, right? You want your affiliates to promote your brand more, so offering them more commissions for higher performance seems like a no-brainer. Let’s break this down.

The Good

The good news is that you are placing an emphasis on growing your affiliate channel! This means that you have seen some good results and would like to generate more interest from your affiliates. By setting up a tiered commission structure, and communicating it effectively to your affiliates, you are showing that you value the channel, and are willing to pay more for better performance. Another benefit, mainly for the merchant, is that they are able to pay less for actions that are less ideal, and more for actions that they would like to see more of. For example, paying less for existing customers and more for new-to-file customers.

Unfortunately, this is about as far as I can go in the “good” section. The only other potential benefit lies in increasing EPC (earnings per click). Many affiliate sites will determine site placement through an algorithm which places higher value on merchant links with higher EPCs.

The Bad

Certain types of affiliates are simply unable to work effectively with this model. If you have a tiered commission structure with a baseline of 5%, but pay up to 10% with automatic performance increases, they will be unable to determine how much they will earn each month. It could be 5%, it could be 10%, or it could be 6.8743%. As the loyalty model pays cash back, or rewards of some sort based on commissions earned, it is dependent on them being able to accurately inform their visitors how much rewards are offered for each merchant.

If they don’t know what they will be earning each month, they will default to basing rewards on the lowest possible commission rate available, to avoid upset customers or over-paying. Now, some Loyalty affiliates will closely monitor the situation (usually only for biggest brands) and adjust the cash back based on historical payouts, but this is very RARE.

This not only affects the Loyalty segment, but all affiliates. If they don’t have a solid understanding of what they will earn by referring their hard-won traffic, it makes them less comfortable promoting your program more heavily. Affiliate marketing is relationship driven, and uncertainty can affect this relationship.

Another group that can be negatively affected by this structure is the niche blogger group. When you are working with a top influencer in the space, you want to make the commission structure as easy and simple to understand as possible. These publishers are often only able to work with a handful of merchants in their vertical, due to time constraints and effort involved to work with multiple brands. This means that they are going to make choices on who to work with based on how much the merchant is paying, but also how easy the pay structure is to understand.

If you are working with affiliates on TM+ paid search efforts (you should be – read more here on why you need to allow affiliates to bid on TM+) this type of pay structure can affect them negatively as well. They will need to know exactly what they will earn per transaction to best optimize their efforts. Remember that they are spending their own money on paid search campaigns – and only get paid on conversions. If they don’t know what that payout will be from sale to sale, it will be much harder for them to operate in the space.

Wasting Money

Here is where I really have a problem with the tiered commission structure. Low to NO VALUE for the EXTRA SPEND. In general, I really don’t like spending other people’s money. However, as the manager of my client’s affiliate program, they heavily rely on me to make decisions on how and where to spend their money. The problem with tiered commission structures is that we are giving away extra spend with little-to-no value coming back in return.

The biggest perceived value in running this type of commission structure is that it will motivate affiliates to promote the brand more, to make more money. However, this is a misconception.

Imagine you are a top coupon affiliate (really the only group left to possibly optimize with this strategy, as Loyalty and Niche affiliates are not happy) and work with 1,000s of different merchants. Do you think they have time to review every single merchant that they work with to see if they make an extra point or two that month? NOPE.

With most brands, except for the top percentage of the biggest merchants they have, they are going to promote most brands from a store page. They may not even think about many of these merchants, without a lot of communication with the brand manager. Now, I am one of those managers that highly values my affiliate relationships, and communicates as often as I can.

The best I can hope for though, is that the affiliate site utilizes an algorithm that dictates the placement of certain products or offers. If your EPC (earnings per click) or other metric is higher because you are paying them more, it could positively affect your placement onsite, if an algorithm is deciding you pay more than competitors. This is very difficult to discern and varies wildly from affiliate to affiliate.

So, in this situation, let’s assume that algorithms aren’t helping significantly. You are paying an extra 1-5% commissions to affiliates that don’t even realize it’s happening. In this example, you have a top affiliate in your program generating $50,000, which means that they are topping out at the 10% rate. You will be paying an extra $2,500 to an affiliate that possibly hasn’t thought about your brand for months. They have NO idea that you paid them extra. Now multiply that figure by 10 for bigger brands with affiliates generating more revenue. That’s huge!

Ok, so you agree that spending extra on this structure isn’t achieving the results that you wanted for your extra spend. What now?

If you are willing to pay more for better performance, you would be better served estimating the extra commissions you would be paying to top affiliates and offer that as flat fee spend. In the above example, you have a top affiliate, whose customers clearly resonate with your brand. Most likely, unless you are optimizing via paid placements, this is a result of consumers already knowing about your brand and searching for you on the affiliate site. This will understandably yield a low percentage of new to file customers. However, if you pay that extra $2,500 to secure a newsletter spot that goes out to 5 million subscribers… now you are getting value for your extra spend!

Even if it doesn’t generate an extra $2,500 in revenue (which can sometimes happen initially), at least you got in front of millions of eye-balls for the same amount of money you would have just given to that affiliate. Often, it takes a few tries to determine the best combination of placement and offer (and rewards passed back to consumer if working with a Loyalty affiliate) to hit the sweet spot. Testing, testing, testing!

Other options include a hybrid placement, where a short-term commission increase is paired with a smaller outlay of flat fee funds. Instead of paying the full $2,500, you could try negotiating a 2% increase with $1,500 flat fee. In this case, you are gambling a bit that they won’t generate $75,000 (as opposed to the same $50,000) which would end up costing you $1,500 in extra commissions PLUS the $1,500 in flat fees, totaling $3,000 instead of the $2,500 asking price. The other side of that coin, is that you would pay less if they fell off in revenue, which can sometimes happen due to many factors.

Of course, the least risky (usually) is fully paying for extra exposure with short-term commission increases. This is especially true if you are just starting to test with affiliates. They are often willing to take all the risk to prove their value. As seen in the example above, this can backfire if the affiliate really takes off. You can end up spending more than the actual rate card for that placement if the performance is high enough. This option is RARELY available during the peak retail season. Testing placements, so that you know which are worth paying 3x normal rate card value to secure during Q4 is essential to spending wisely in the affiliate channel.

The bottom line, is that you have much better tactics available to secure the same results. Spend the extra money intentionally, rather than passively hoping that affiliates will promote you more, hoping to make more commissions from the tiered structure.

Here at JEBCommerce, we evaluate every partnership individually and offer the best commission rate for each situation. DATA should be driving these decisions, not gut feelings. If you are optimizing for new-to-file, dive into each affiliate’s performance and pay accordingly. Rather than set up a generic structure that applies to all affiliates, simply adjust the payout for each affiliate AND communicate effectively to them, to make sure they understand exactly what your plans are.

As always, I would love to hear your thoughts! Have you seen success with tiered commission structures? If so, drop me a line and let me know!

Thanks for reading!


Was this article helpful?
This field is for validation purposes and should be left unchanged.