Building an Affiliate Flywheel: Incentive Alignment #19

This week we're going into Incentive Alignment for Affiliate Partners! This is Part 3 in the 6-part series: Building an Affiliate Flywheel.

We go very deep on the types of placements and fee structures you should be putting in place to ensure that your affiliates are aligned and feeling taken care of.

Excited for you to check it out and if you want to discuss any of this more, message me!

Best,

Tye 🤠

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Economic Alignment

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“Show me the incentives and I will show you the outcome”
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[[— Charlie Munger] author]

Building and maintaining an affiliate marketing flywheel for your business requires a very important element…

Ensuring incentive alignment ✔️

TLDR: When setting up payouts to affiliate partners you need to have done the math on your actions, enable payment for as many actions as possible, selected the right type of payout, allowed for future increases, aligned with agreed-upon programs terms and conditions, and ensure you commissions and payouts are mutually beneficial for your partners based on their segment and incremental value to your program.

(Let's take a breath)

Since affiliate partners are willing to promote your brand on a payout per desired action only, often with their resources and taking on their own risk, you must have a well-thought-out approach to ensuring that payout per action is valuable to your brand and the partner.

There are more levers than you realize to pay partners and incentivize them to promote your brand.

These options might surprise you 😳

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1. Flat fee placement - to secure placement with a partner it might require a flat fee to guarantee placement

- A large prominent publication, a media platform, or with a large following, or high engagement influencer you might need to pay a flat fee to secure a placement at all. $5k secures x number of posts with given engagement and follower count

- $25k secures placement on the homepage and several write-ups on a popular technology blog/network of content sites for technology reviews and enthusiasts and those looking to make better tech purchase decisions

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2.Commission Rate - this is the most common.

- For example, 10% of the sale (e-commerce cart amount)

- Public Rate - This is the rate displayed publicly to all partners interested in applying to your program

- Private Rate - the commission rate available to select partners based on their partner type, where they typically deliver customers into the marketing funnel (awareness, consideration, conversion),

- VIPs - top partners need to be taken care of just like top talent at your company

- Segments:

1. New Partners
2. Content Partners
3. Partners when they activate
4. Influencers
5. Media Buyers - an often overlooked category enabling brands to pay per action to high-quality media buyers that have interest time and desire for more income on platforms like
6. Google
7. Meta (FB & IG)
8. TikTok
9. More like it
10. Coupon/Deal
11. Gated offers for particular audiences
12. Loyalty Cash Back Points
13. Card Linked Offers
14. Emerging Partners

- Temporary increases to improve performance

- Increases if certain goals/metrics are reached by the partner

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3. Flat fee per action

1. $5 per valid lead (lead = website form submission often name, email, etc.)
2. $45 per sale
3. $5 per mobile app download

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4. Cost Per Click

- Yes it sounds weird but some programs for whatever reason might require a Cost Per Click Model.

- We have seen this before with unique brand advertiser requirements e.g. health-related limitations and in shopping comparison partners

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There are the types of payments.

But what about paying for various types of actions?

Far too many brands think of this in a very close-minded way. ❌

As you evolve your affiliate program, what if you rewarded partners?

What if you rewarded them for every possible action a user took on your site, just priced appropriately?

Have you worked with your data science, finance, product, or growth team to assign a value to each action?

If you have not, it is not the end of the world. You can take a look at your existing performance marketing mix and price it similarly. Yes, each channel performs differently and at times needs a different price per action.

But what if you were paying $6.50 per download across: App Store Paid Ads, Google UAC, Mobile Programmatic, Meta Ads, TikTok ads?

Why would you not also incentivize affiliate partners to deliver that action?

If your Key Performance Indicators are not accurate and well defined than it is very difficult to manage your performance marketing at all, affiliate marketing included!

No incentive alignment for YOU! 🙈

Some Key Metrics you will need to be aware of in building an incentive structure that rewards your partners but is also financially feasible based on real metrics:

1. LTV: Life Time Value (of your customer) - this is often misunderstood but if you have this measured effectively it can be an important barometer to determine what your CAC / CPA target should be

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2. ROAS - Return on Ad Spend = Revenue delivered from ad spend / Ad spend

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3. MER - Marketing Efficiency Ratio - widely adopted by DTC E-Commerce. This is a variant of ROAS (Return On Ad Spend) = Total Sales / Total Spend on Advertising

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4. CAC - Cost Aquire Customer - Total Spend /Customers acquired

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5. AOV - Average Order Value - on the average amount spent by your customers

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6. CVR - Conversion Rate - Purchases on your site / clicks

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7. Pay Back Period - This is something that often is replacing LTV for Consumer brands. Knowing how long it takes for a brand to recoup the cost to acquire a customer e.g. we have a 3-month payback period

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8. Commissioning - the exercise of setting affiliate partner payouts and maintaining and optimizing those over time

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9. Dynamic Commissioning - paying affiliate partners based on quality, incrementality, AOV, new/existing customers, and product type. This can be sliced in many ways but it's a smarter and more nuanced way to pay partners - something few brands do well.

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10. Competitive Analysis - how can you pay your partners well if you do not know what other brands in the market are paying?

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11. Forecasting - this is an important exercise to ensure that

- You are on track with your goals

- You monitor your spending to reach those goals

- You list your assumptions to ensure that your financial estimates are clear and you know what inputs are driving them

- This will help you get to a place where you can better align the incentives for your partners to get better results

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70% of brands DO NOT partner with affiliates appropriately and their incentives are MISALIGNED in the following ways:

• They pay non-valuable partners more than valuable partners
• E.g. we see so many coupon, deal, loyalty, and toolbar partners overpaid
• They throw out coupon deal and loyalty points card partners together without proper analysis
• They retroactively “value” partners less - cutting commissions (breach of affiliate agreement) giving advertisers a bad name without an upfront agreement in place. Keep in mind advertisers can certainly back out non-bona fide transactions or fraud but not valid ones unless a violation of their agreement happened.
• They do not offer sufficient upside to high-quality, growing, long-term partners,
• They do not look at data by partner ID or partner type over time. Data points you should be looking at via cohort analysis
• Revenue
• AOV
• New customer / existing customer
• Returned items
• Repeat purchases
• Products/SKUs purchased

The bar is, candidly, not high enough on the network, agency, and advertiser side.

Don’t get me wrong there are some really smart, really hard-working, well-intentioned practitioners but the % getting it wrong is STILL TOO HIGH 🤢.

The good news is if you can do the RIGHT THING!

You can RISE ABOVE your competitors!

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WHAT CAN YOU DO NOW?

1. Accurate ROI / ROAS / MER: Are your people agency network and all fees included in your ROI calculation?

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2. Assumptions: Do you have assumptions in your financial model and estimate for your affiliate program?

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3. KPIs accurate: Have you done the math with rigor to define each of the metrics shared in this post?

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4. Competitive Analysis: Have you done some competitive analysis to see what

1. Your competitors are paying partners
2. Keep in mind you will need to consider factors like
3. Conversion Rate
4. Purchase Frequency/velocity
5. Brand value - customer recall, desire to purchase
6. Content alignment
7. SKUS - the volume of product options can help make promoting a brand even more lucrative for a partner. Marketplaces like eBay and Amazon are great examples of this and point to the strength of their affiliate programs which are well-established and well over 20 years old.
8. All of these things matter and are often reflected in an affiliate advertiser's EPC ( Earnings Per 100 clicks). This can tell a prospective affiliate partner/publisher the overall value estimate of taking the time energy and resource to promote the brand. A reminder this metric only takes into consideration Earnings paid out per 100 clicks.
9. However, the ancillary metrics that feed into EPC are lengthy

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5. Work your way UP! Are you able to go up in your commissions and payouts over time to award high performers and offer one-time bonuses to partners

1. Cutting payouts is really hard to do and should be avoided for quality incremental long-term partners
2. It is easier to increase payout than decrease

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6. Lead time on bad news: When decreases happen provide a reason and a fair heads up that aligns with your terms and conditions and is as early as possible (not unlike working with an employee, contractor, or vendor on your team)

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I hope this gives you some good intel to chew on to ensure that your

Incentives are aligned!

And you can be more thoughtful and predictive in driving even better outcomes!

You have heard me say it a TON...

Affiliate Marketing is the most misunderstood and underrated performance marketing lever.

If you can apply these mutually beneficial principles your program and eventually the entire affiliate, partner, influencer marketing ecosystem will be EVEN BETTER!

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Why Does This All Matter?

Beat 70% of existing affiliate programs that don't DO THE RIGHT THING.