You need affiliates to promote your SaaS product. An important factor for partners to decide whether they will promote your product is the affiliate compensation. This makes affiliate marketing compensation models key to the success of your affiliate program .
This article breaks down different types of affiliate marketing compensation models. We’ll also give you some tips on how to decide which model is right for your business.
Different Types of Affiliate Marketing Compensation Models
In the affiliate marketing market, there are different affiliate compensation models. Ultimately, the one you choose depends on your marketing objectives. Here’s a look at some of the most common affiliate compensation models.
Pay-per-sale (PPS)
Pay-per-sale (PPS) is an affiliate commission model where affiliates get paid based on each sale that they generate. This is a popular model for businesses that sell high-ticket items. This model is also a top choice for selling products or services that have a long sales cycle.
Businesses can save money with this model because they only have to pay out affiliate compensation when a sale gets made. This also means that there is less risk for the business since they are not paying for leads that may never convert into customers.
The downside of this model is that it can take longer for affiliates to see results. Also, they need to have a strong understanding of the sales process and be able to generate quality leads.
If you are looking for a commission model that offers high rewards for successful sales, then pay-per-sale is a good option to consider. If you choose this model, offer a competitive commission rate that will attract top affiliates.
Pay-per-lead (PPL)
This model is based on the number of leads that an affiliate generates for the merchant. In this type of agreement, the affiliate gets paid a commission for every lead that they generate. For SaaS businesses, a lead is typically free trial signup, newsletter signup, or a request for more information.
The PPL model is popular as it can save you money if you have a high conversion rate from lead to customer. For example, if 1% of leads turn into customers and you’re selling a $1,000 product, then you would only have to pay out $10 per lead. However, the downside of this model is that it can take a long time to generate a sale. You can learn more about here affiliate conversion tracking (article by Supermetrics).
If you choose the PPL option, you’ll want to define what type of lead qualifies for payment. Leads are not all equal. Some leads are more valuable than others. For example, a lead who’s already familiar with your product is more valuable than a lead who’s never heard of your product. The best way to do this is by using a lead scoring system. This will help you determine which leads are worth paying a affiliate commission for. If this is not in place, you may end up paying for leads that will never convert.
For leads that are easy to generate, consider setting a minimum number of leads that the affiliate must generate before they get paid. This ensures that you’re only paying for results. Also, set a time limit for the affiliate to generate the leads. This ensures that they’re working on generating leads for your product promptly.
Pay-per-action (PPA)
PPA affiliate marketing is a commission model where affiliates get paid based on the actions of users they refer. The action could be a sale, a lead, or even just a click. In order to receive commissions, affiliates must direct users to take specific actions on the advertiser’s site.
Businesses who choose this option get more affiliate marketing power because they only pay for results, rather than clicks or impressions. This means that they are less likely to waste money on ads that don’t perform well. For affiliates, this model allows them to receive commissions even if users don’t make a purchase right away.
For this model to achieve your business objectives, you’ll need to choose the right actions to focus on. You’ll also want to offer a competitive commission rate to attract affiliates. The downside of Pay Per Action is that you still need to monitor quality closely, as you dont want e.g. to pay for many contract form sign ups that are of low quality.
Pay-per-impression (PPI)
Under a pay-per-impression (PPI) model, an affiliate gets paid based on the number of impressions they generate. An impression is an instance where an ad is served to a user. For instance, if an affiliate has a banner ad on their website and that banner ad gets 1,000 views, then the affiliate has generated 1,000 impressions.
SaaS businesses that want to increase brand awareness often use this model. After all, the more views an ad gets, the more likely it is to be noticed by potential customers. As impressions are easier to generate than clicks or sales, so this option can be less risky for businesses. However, the downside is that you may end up paying for a lot of impressions that don’t result in any conversions.
For affiliates, you’ll need to generate a large volume of traffic to earn a significant affiliate commission. So, this model is best suited for affiliates with large audiences. This could pose a challenge to businesses, as people with larger audiences are often harder to attract.
To make this model work for your business, you’ll need to choose the right actions to focus on. Also, ensure that you have a way to track impressions so that you can accurately pay affiliates.
Pay-per-click (PPC)
In pay-per-click (PPC) affiliate marketing model, affiliates get paid based on the number of clicks they generate. This is a very popular model because it’s easy to track clicks. Advertisers can see exactly how many views an ad received and they only have to pay for results.
This model works best for SaaS businesses that have a low cost-per-acquisition (CPA). For example, if your CPA is $50 and you’re willing to pay $0.50 per click, then you can afford to pay affiliates $0.50 per click. As long as the affiliate is able to generate clicks, they will be able to earn a affiliate commission.
The downside of this model is that it’s easy for affiliates to generate a lot of clicks without generating any conversions. So, you’ll need to be careful about the affiliates you select and make sure they are able to deliver quality traffic.
In order to make this model work, you’ll need to offer a competitive commission rate. You’ll also want to carefully monitor the traffic that’s being sent to your site to make sure it’s high quality. PPC usually does not work well for SaaS companies, as the sales cycle is long.
How to determine your affiliate commission model for your SaaS product
Not all affiliate marketing compensation models are created equal. The model you choose should be based on your business goals and the type of product or service you offer. Here are some factors to consider when deciding which affiliate marketing compensation model is right for your SaaS business.
Profit Margin
How much you choose to pay eats into your profits. So, to make sure you don’t lose money on the deal, you need to consider your profit margins when determining which affiliate marketing compensation model is right for you.
To estimate how much profit you get from affiliate sales, you need to know your:
- Conversion rate – the percentage of visitors to your site who buy your product.
- Average order value – the amount of money each customer spends on your product.
- Gross margin – the difference between your product’s selling price and its cost of goods sold.
You can calculate your estimated profit from affiliate sales using this formula:
Profit = (Conversion rate x Average order value) x Gross margin
For example, let’s say your conversion rate is 1%, your average order value is $100, and your gross margin is 50%. Your estimated profit from affiliate sales would be: ($100 x 1%) x 50% = $0.50.
As you can see, even a small increase in conversion rate or average order value can have a big impact on your profits.
Marketing goals and budget for affiliate marketing compensation models
If your goal is to generate leads, you need a commission rate that incentivizes affiliates to generate leads. A higher commission rate will generally result in more leads. On the other hand, if your goal is to generate sales, you need a commission rate that incentivizes affiliates to generate sales. A lower commission rate will generally result in more sales.
However, this all depends on your budget. After all, you’ll need to be able to pay your affiliate while still making a decent profit. If you have a limited budget, a model that requires less upfront investment could be a better option. For example, pay per sale may be a good option if you have a limited budget.
Type of product or service you sell
If you’re SaaS product or service is easy to sell, you can afford to pay a lower commission rate. For example, if you’re selling a low-cost item that has a high conversion rate. On the other hand, if what you’re selling is expensive or has a low conversion rate, you’ll need to pay a higher commission rate to incentivize affiliates. More work for affiliates means a higher commission.
Average order value (AOV) of your product or service
If your product has a high AOV, you can afford to pay a lower commission rate because each sale will generate more revenue.
For example, if your product has an AOV of $1,000 and you’re paying a 10% commission, you’ll make a $100 profit per sale. But if your product has an AOV of $100 and you’re paying a 10% commission, you’ll only make a $10 profit per sale.
Lifetime value (LTV) of a customer
The lifetime value (LTV) of a customer refers to the total amount of revenue a customer will generate over the life of their relationship with your company.
If you have a high LTV, you can afford to pay a higher affiliate commission rate because each customer will generate more revenue. For example, if your LTV is $1,000 and you’re paying a 10% commission, you’ll make a $100 profit per customer. But if your LTV is $100 and you’re paying a 10% commission, you’ll only make a $10 profit per customer.
The average affiliate commission rate for your product or service category
To stand out from the competition and get affiliates to promote your product or service, you need to offer a competitive commission rate. One way to know if your affiliate commission rate is competitive is to look at the average commission rates for your product or service category.
The average commission rate for your industry and product or service changes over time. It’s important to stay up-to-date on the latest commission rates to ensure you’re offering a competitive rate.
Payment terms for affiliate marketing compensation models
You need to offer terms that are favorable to both you and your affiliates. There are a couple of options you may consider.
- Weekly, bi-weekly or monthly payouts. Paying out frequently is often prefered by affiliates. However make sure your refund window and affiliate fraud detection is done before pay out. You can learn more about fraud detection for affiliate marketing, in this article. So you can keep your program save. You also need the cash flow to support paying our more often.
- Net 30 or 60 – With this option, affiliates get paid based on the sales they generate within a certain time frame. For example, they may receive a payment 30 or 60 days after a sale closes. This option is common with high-ticket items.
- Monthly – This is may be necessary if you have a longer sales cycle and is common for SaaS. If you choose this plan, consider setting a minimum amount that needs to be reached before a payout is made. For example, you could set a $100 minimum. This way, you’re not making small payouts each month.
- Quarterly Pay out – Less common and can be used with a higher commissions treshold.
Incentives of affiliate marketing compensation models
In addition to offering a competitive commission rate, you also need to offer incentives that are attractive to affiliates. For example, you could offer a bonus for each sale generated, or exclusive access to certain products or services.
To avoid incentives eating into profits, make sure the total cost of the incentive doesn’t exceed the expected value of the sale. Some ways to keep the cost manageable are to:
- Structure the incentive as a percentage of the sale.
- Set a minimum spending threshold, or have a time limit. For example, you could offer a 10% bonus for each sale generated within the first month. This would incentivize affiliates to generate sales quickly while still keeping the cost manageable.
- Offer a tiered incentive structure. For example, you could offer a 5% bonus for each sale generated, 10% for each sale over $1,000, and 15% for each sale over $5,000. This would incentivize affiliates to generate high-value sales while still keeping the cost manageable.
What is the best affiliate marketing compensation model for your SaaS business?
Ultimately, this depends on your products or services, sales cycle, and margins. So, be sure to consider all the above factors when choosing a model. And remember, you can always adjust your approach as needed. After all, what works today may not work tomorrow.
SaaS companies often choose Pay Per Sales and monthly pay outs with an average commission percentage for their product category. We created a full guide on running an in-house affiliate program for SaaS, which you can find here.