How do I determine an affiliate commission rate?

So you've already chosen which Shopify affiliate app to use for your store and now you're wondering how much to offer your affiliates. It's something you'll want to put thought into before you begin to advertise your affiliate program. Here's some advice to get you started on determining how much to offer.

Determining your commission takes into account 4 main factors: 1) margins, 2) customer acquisition cost, 3) competitor's affiliate rates, and 4) discounts & promotions.

1) Gross Profit Margin – This is the first place I start. Clearly you can't offer 50% commissions on items that you only have a 20% profit margin or you'd be out of business fast (and probably in debt). So start by determining your minimum, median, and average gross profit margins on items in your store. You may also want to determine these numbers separately for each category or product type since it's possible to offer different commission rates for each product category, depending on how complex you'd like to make your program. In my experience, the simpler the better when it comes to commission structure, but technically anything's possible.

Additionally, you'll want to take a look at your average return rate, discounts offered (like your 10% off for new customers pop-up), processing fees, etc, because you'll need to leave room for these costs in your net profit margin.

2) Customer Acquisition Cost – What are you currently spending to acquire new customers? Whatever that amount is, assuming you're profitable, you could technically offer up to that amount to your affiliates for generating new customers. If you can safely spend 10% to acquire new customers through your ad channels, you could afford to offer that rate to your affiliates. (But it doesn't mean you have to. It might just mean you need to optimize your ad spend because you're leaving money on the table.)

Determining what you can afford to acquire a new customer is important for your business in general, but especially when deciding on an affiliate commission rate. You don't want to make your affiliate program your most expensive customer acquisition channel if you don't need to.

3) Competitor Affiliate Rates – In the business of selling physical items, affiliate commission rates average from 3-15% but I've seen as low as 1% and as high as 50% depending on the industry and product markup. For digital products, it's not uncommon to offer 25-75% commissions, but I've seen as high as 90% (or even 100%) and as low as 3%. As you can see, there's no universal standard affiliate commission. But there will be trends within particular industries.

Check out what competitors are offering and how they structure their affiliate programs because that'll be a good place to start. It's also what your affiliates are going to be comparing you to when deciding whether to endorse you or someone else. Remember, your affiliates have many options of products/services to represent so they're going to want to choose products that convert well and offer a decent payout.

Established brands can offer a smaller commission because they've got name recognition and usually a solid conversion rate. Whereas new brands sometimes need to offer a higher commission rate to stay attractive to potential affiliates.

4) Promotions & Discounts – Don't forget to consider your current and future promotions into your equation when determining your affiliate commission rate. Otherwise you'll quickly discount and commission yourself out of business. Do you offer first time customers 10% off their first purchase for signing up to your newsletter? Do you run weekly buy one get one deals? Do you often have flash sales? Think about your history of promotions and also what you'd like to do in the future so that you can afford to offer an affiliate commission on sale items or in conjunction with your other promotions.

Don't start too high with your affiliate commission rate.

You're not going to upset your affiliates if you INCREASE their commissions later on, but certainly doing the opposite will lose you some affiliates and cause ill will towards your brand.

Starting lower will leave you some wiggle room (and extra profit). This allows you to experiment with different affiliate incentives. For example, you could give them a branded discount code for their audience (ie: Enter promo code “SHOPAFFILIATEAPPS” to save 10% on your next purchase.”)

It also leaves you room to offer higher commissions in the form of bonuses or contests. (ie: For the month of December, we're offering a $100 bonus to all affiliates who reach $1000 in commissions.) That way you're not stuck offering a high commission all the time – but it's something you can offer as a bonus to really get your affiliate's attention and ramp up sales during certain times of the year.

Lastly, starting with a lower rate allows you to offer your most valuable partners a higher rate if you'd like, without having to give it to everyone.

Remember the lifetime value of a new customer

Once you acquire a new customer through one of your affiliate partners, they've entered your ecosystem and you can direct market to that customer without going through your affiliates. Remember to consider that long term value of your customers into the equation when deciding your commission structure. For many businesses, I wouldn't care if I broke-even on affiliate sales – so long as I had a way to maximize the long term value of each new customer they brought me. As you probably know from experience, breaking even on acquiring customers to your sales funnel is nothing to sneeze at in e-commerce. There are many circumstances where I'd literally do that unlimited times if given the option!

What other factors do you take into consideration when determining your store's affiliate commission rate? Leave your advice or questions below in the comments section.

And if you haven't already chosen an affiliate app to use for your, start by checking out our Shopify affiliate app comparison chart. We also offer a number of free and paid services for Shopify store owners.

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