Just getting started with affiliate marketing? Check out Part One of this series first.
So, you’re ready to recruit some affiliates to promote your product. Good for you! It’s an awesome way to reach a new audience fast.
Before you start raking in the sales, though, you need to do these three things:
- Calculate your financials
- Set up your technology
- Understand payments and taxes
These are the three most important aspects of all affiliate programs, the three things that can make or break your success. Financials and taxes aren’t the sexiest topics in the world, but you’ll be glad you know the basics when it comes time to put your program into action.
Let’s start with #1 – calculate your financials.
We know, this is everybody’s least favorite thing to do. 🙂 But you’ve got to do it if you want to make your business attractive to potential affiliates. Nobody will want to invest their time if you can’t explain how this will be profitable for them in very specific terms.
It’s not enough to say “It’s going to be great! We’re all going to make a lot of money!” You need to have estimates in place to show affiliates what they can expect to earn.
Disclaimer: not all audiences are created equal. The numbers we use as examples throughout are just that – examples. Don’t worry if you don’t have a gigantic list or a low conversion rate. A small and mighty list is a very powerful thing.
For example, let’s say you sell a product called “Shortcuts for Better Abs.” You’ve already sold it on the fitness market, and you’ve discovered that for every 1,000 qualified leads you email, you sell 10 products. That’s a 1% conversion rate.
Your new affiliate in the fitness industry will want to know that when they email their 50k list, they can expect a 1% conversion rate, too. That will come out to around 500 products sold. If you charge $100 per product, and the affiliate gets half, they can anticipate pulling in $25,000.
Not too shabby!
Okay. Get out your calculator, and let’s do some good old-fashioned calculatin’.
First, calculate your launch Conversion Rate (C):
- How many Units (U) did you sell this past year?
(For example: U=10)
- How many new Leads (L) did you have this past year?
(For example: L=1,000)
- Now, calculate your Conversion Rate (C) by dividing Units by Leads [(U) ÷ (L)] .
(For example: 10 Units ÷ 1000 Leads = 1% Conversion Rate)
The Conversion Rate is helpful to share with potential affiliates, but it’s even better to go one step further and answer the all-important question: How many sales can your affiliate expect to make? If you know the size of your affiliate’s email list, you can calculate this number:
- How big is the affiliate’s Email List (E)?
(For example: E=50,000)
- What is your Conversion Rate (C) from above?
(For example: C=1%)
- Calculate the amount of affiliate Estimated Sales (ES) by multiplying Email List (E) by Conversion Rate (C)
(For example: 50,000 Email List x 0.01 Conversion Rate = 500 Estimated Sales)
Awesome! Now you know how many sales your affiliate should send your way.
But, how much money will they make? Let’s go one step further, yet again, and calculate the Affiliate Estimated Income (AEI):
- What is the Commission Percentage (CP) your affiliate will receive for each sale?
(For example: Your affiliate will get 50% of each sale, which means CP=0.50)
- Figure out the total Revenue (R) by multiplying the number of Estimated Sales (ES) by the unit Price (P)
(For example: 500 Sales x $100 Price = $50,000 Revenue)
- Calculate the Affiliate Estimated Income (AEI) by multiplying the Revenue (R) by the affiliate’s Commission Percentage (CP)
(For example: $50,000 Revenue x 0.50 Commission = $25,000 Affiliate Estimated Income)
So, what’s the value of each lead? How much is each email address worth to an affiliate?
- Calculate the Value Per Lead (V) by dividing the Affiliate Estimated Income (AEI) by the number of people on the affiliate’s Email List (E).
(For example: $25k Affiliate Estimated Income ÷ 50k Email List = 50 cents Value Per Lead)
With these numbers in hand, you can confidently approach your affiliate and tell them how much they can expect to sell, AND how much estimated income they can anticipate. This is crucial information every affiliate needs to determine whether a business relationship with you will be worth their time and energy.
Now it’s time to get your technology in order so you can track affiliate leads and sales in relation to your shopping cart and purchase process.
We recommend platforms like Infusionsoft and Ontraport that already have affiliate tracking built in – hallelujah! They offer all sorts of goodies like link generation and sales tracking and helpful reporting to see how things are going with your affiliate program.
If you already use Infusionsoft or Ontraport, fantastic, and if you don’t, you might want to consider an upgrade…especially if you don’t have the technological savvy to hack together a system of your own. Of course, there are independent solutions out there, and lots of other platforms like LeadDyno, iDevAffiliate, Post Affiliate Pro, ClickInc, HasOffers, Zferral and ReferralCandy, just to name a few.
The main thing to take away here is that it’s hard to change your affiliate system once you’ve gotten started, so if you’re going to move forward with affiliate marketing, make sure you do it right. Honestly, you’ll be a bit screwed if you ever decide you want to do a major overhaul. Our advice is: invest in the best system you can afford from the very beginning.
You might also decide at this point that you want to use sites like ClickBank or JVZoo, which are online marketplaces with built-in commission platforms where you can sell your product. If you go this route, you’ll have a bit less control over your affiliate program, because it’s handled outside of the world of your system. The upside is that these sites take care of some of the nitty gritty details that you don’t want to deal with (like taxes – more on that in a bit).
Whatever technology or partners you decide to use, the important thing is to make sure your system is set up for the long haul. This is not the time or the place to skimp. Trust us, you don’t want your launch to come to an end and you have no idea who has sold what and how much you owe them. It’s a nightmare that you don’t have time to deal with.
There’s one more big component to a successful affiliate program.
After your sellers are on board, and your tech is in place, and you have a killer launch, you’re going to have to figure out how to actually pay your people.
Important things to know about payment:
1. Don’t pay under the table!
Yes, your affiliates will need to pay taxes from the income they earn through you. Yes, it’s up to you to make them fill out W-9 forms before they begin promoting your product. Yes, you’ll have to issue them 10-99 forms when tax season rolls around. Taxes suck, but DON’T ignore them. Don’t look for a workaround. Do it legally. And always check with the IRS to make sure you’re doing it right. Online courses and products are becoming big business, and the IRS has started watching them more closely. Make sure all your ducks are in a row, in case you get audited!
2. Get your paperwork finished before you hand over any money.
We’ve seen it a hundred times…an affiliate who’s super responsive at first, but once they get their check, they disappear off the face of the earth. That’s not good when you’re trying to run a business. So before you send a single penny, have your affiliates return their W-9s and agree to your terms and conditions.
3. Speaking of terms and conditions… you should have terms and conditions!
We’re not lawyers, but you can find solid legal representation to help you draft your T&C the right way. You can always check out other entrepreneurs’ T&C as a guide, but at the end of the day, you’re the one who’s responsible for protecting yourself and your business. A good attorney is worth every penny that you invest in solid legal advice.
4. Make sure you know who gets the commission.
When a lead converts, are you required to pay the first referrer or the last referrer? This is all part of your terms, which is why you need to hammer this out in advance and have your affiliates agree to it. Otherwise, you can expect trouble when it’s time to get paid: “That’s my commission!” “No, it’s mine!”
5. Figure out the payment method that works for you.
You can pay your affiliates by check, money transfer, PayPal, etc. Each has its pros and cons. For example, if you’re paying a small amount to a lot of people, it might not be worth it to spend the money on processing and cutting all of those paper checks. But, if you pay via PayPal, you’ll have to eat the processing fees. Work the numbers and see what makes the most sense for you.
6. Pay your affiliates at the end of your refund period.
If someone makes 100 sales, and 25% of those sales ask for a refund, it would be insane to still pay that affiliate their full commission for all 100 sales. You’d be losing money out the nose. Instead, wait until your 30 day refund window closes before you pay out to anyone. (Infusionsoft calls it a clawback when an affiliate commission refunds. Good to know!)
7. Know what to do if a customer issues a chargeback.
What’s a chargeback? It’s when a customer goes to their credit card company and tells them they want their money back from a particular vendor (like you). It’s different from a refund because anyone can request a chargeback, usually within six months of a purchase, and credit cards are usually happy to oblige. This isn’t great news for you, because at six months, your affiliates will already be paid. Your terms and conditions should address what happens in this situation, although likely, you’ll have to eat that loss.
This is a lot of info to absorb, we know. Don’t sweat it. Affiliate marketing seems intimidating if it’s your first time, but once you do it, it gets easier. You’ll be hooked!
The important thing to remember is that affiliate marketing only works when you do it with integrity. Behind every email address is a person. It’s up to you and your affiliates to treat them as respectfully as you’d treat any customer. Stay classy…not spammy…and you’ll reap the benefits of your new audience.
And you’ll be an affiliate rock star in no time.
Now get out there and sell!