What are the different affiliate payment methods – and which is best for you?
For businesses looking to generate cost-effective business leads, the effectiveness of affiliate marketing is obvious. Since leads or sales are received via a third party network route advertisers pay only on the results of goals that they have set – whether that is a sign of interest, a lead or a full sale.
But when deciding which payment model to choose and what goals to set, there needs to be a careful consideration of the needs of both advertiser and affiliate. “Whilst the advertiser needs to work everything back to a cost per sale to ensure they are spending within their margins, the affiliate needs to ensure that they are making the most revenue possible for the traffic they receive on their website. The key to a harmonious commercial model is finding a balance that meets both parties’ objectives,” says Vicky Bruce, account director at affilinet.
Cost per acquisition
Of all the payment models, it is cost per acquisition (CPA) that is the most popular and also the most established. “The entire affiliate industry was built on this method,” notes Kunal Patel, affiliate strategist and digital marketing firm iCrossing.
In this instance, the fee is payable upon the completed sale – however that may be defined by the advertiser. In most instances it is measured on the last click before purchase since that is the simplest method to define.
This is a model preferred by many, particularly since that is what the publisher base is most used to and is acknowledged as being amongst the least risky. “As an affiliate network our core commission model is CPA due to the low risk element for advertisers,” says Victoria Limpenny, account direct at Affiliate Window. “If the publisher doesn’t drive a sale then an advertiser has no obligation to reward them for it. It also incentivises publishers to push your brand and provide decent exposure in order to secure the conversion,” she says.
The level of commission however will vary according to the business involved. “Individual advertisers (or merchants) operating through networks will compete for affiliates through variable CPA rates,” explains Clare O’Brien, senior industry programmes manager of the Internet Advertising Bureau. “Large advertisers will often have a lower CPA rate such as 4% than smaller advertisers where a 10% of higher rate is not unusual.”
Whilst CPA may be the most popular model, in some instances it is the least appropriate since it can be hard to validate a sale to activation or purchase. One way around it could be by rewarding the final click to conversion on a CPA basis but also providing an incentive in the form of a flat payment for those (normally content) publishers who have been involved in the customer journey but not received the final click, according to Limpenny.
Cost per lead and cost per click
Another alternative some choose is cost per lead (CPL) - with commission paid per lead rather than per sale. This method works best, says Patel, in areas such as car test drives. “CPA wouldn’t work here as people usually take a while to consider what car to buy and are unlikely to buy a car online,” he says. But again advertisers need to set the right incentive level according to the likelihood of conversion. “Advertisers should assess the percentage of leads likely to convert when setting a CPL value and take into account the quality of the leads they are paying for,” says Bruce.
In some instances where CPA is not appropriate then more generic measures such as cost per click (CPC) where a fee is paid literally on each impression or an even more generic measure of cost per mile (CPM) are used. In these less action needs to be taken with CPC simply depending on a customer clicking on an ad or link for the publisher to get a commission – something that is particularly common for fashion or travel sites – and CPM simply on the cost per set number of impressions or views.
“As the industry has grown other methods like CPL and CPC have become increasingly popular and are now frequently used with specific products and services,” says Patel. Trip Advisor for example deploys a CPC model across its properties with a fixed amount when a booking is made. Similar models operate across energy and media switching sites.
CPM however is one of the industry’s riskiest models, according to Dan Lancioni, account director of affilinet. “People will see the ad but won’t necessarily click on it,” he notes. CPC is a little less risky since a click is driven but there is still no guarantee that a sale will be made so again advertisers have to decide if it’s a model that suits them.
Bruce says the CPC payment model is particularly effective for affiliates that contribute to a sale higher up the purchasing funnel. “Whilst this offers a more attractive commercial incentive to affiliates who will have more control over their revenues advertisers offering a CPC commission model need to ensure this is monitored closely to ensure their final business KPIs are still being met,” she says. And, as with the last click model CPC and CPM should follow the same principles around fairness and margins, adds Bruce.
Another option is a fixed cost or tenancy payment. “The price of a tenancy package should depend on the reach that you will gain, factoring in the number of unique users that will be exposed to your placement, the duration and the relevancy of each publisher,” says Bruce.
“As more advertisers begin to look outside the last-click model within the affiliate channel, different payment metrics are beginning to emerge,” explains Bruce. “Rewarding an affiliate for driving a user that spends a certain length of time on site, or who browses a certain number of pages, is an excellent way to ensure you are only paying for traffic deemed to be valuable whilst still rewarding affiliate higher up the purchase funnel.”
Choosing the best model is vital to getting the most out of an affiliate marketing programme. “The number one consideration when deciding on a payment model is what do you want to achieve,” advises Patel. “Is it data collection? – in which case you should consider a CPL model. Or are you trying to get people to buy your products? – then CPA is the best option."
Deciding which boils down to a number of key decisions. “The type of advertiser you are or the KPIs you are trying to achieve can have a big say in deciding which payment model to operate on,” says Limpenny.
Essentially however when considering what affiliate commission model to use five key factors should be taken into account, according to Bruce. These include fairness, feasibility, competitiveness, measurement and simplicity. “By offering all of these attributes within their payment model and being flexible with different commission structures advertisers can ensure that their affiliate channel is working to its full potential, driving value to all stages of the user purchase journey,” she says.
Liz Morrell is a retail and technology features journalist, web content creator and blogger.