Affiliate marketing has grown in numbers and revenue since it started in 1989. The current estimated value is more than $12 billion, and statistics show an expected exponential growth over the next decade.
These statistics have led to increased interest in affiliate marketing.
Commonly asked questions include: "Can you make money from it?" "Are affiliate marketers trustworthy?" and "How can I know if my affiliate program is working or not?". These questions highlight the importance of usable metrics.
To assess the efficacy of affiliate marketing, you first need to establish the measures to use and its impact on the program's success. The need for accurate measurements on the value of affiliate marketing is the same for existing and prospective affiliates and companies.
ROI - Is There a Magical Number:
The short answer is no.
While it’s critical to measure Return On Investment (ROI), there’s no ideal percentage goal. Metrics include budget but also have non-financial factors. Similarly, affiliate marketing investments vary from commission structures to rewards and incentives.
These factors make calculating ROI difficult but not impossible. It’s not easy to adapt existing equations for measuring marketing ROI to this sector.
To better understand these measurements, we need to look from both sides of the affiliate arrangement.
“If you can’t measure it, you can’t improve it.” Peter Drucker
What’s in it for Affiliates?
In this strange and uncertain year, the need for a “side-hustle” has increased, and many people see affiliate marketing as an excellent opportunity.
Do a quick Google search of affiliate marketing opportunities and you’ll get 133,000,000 return results. Websites range from lists of the top affiliate marketing programs, highest commission payments, and trendy network sites to big brands and self startups.
So how do you choose what’s right for you while making sure it’s also financially viable?
Dispel the Myths
- You’ll not get rich overnight.
- It’ll not become a passive income without putting in the hard work upfront.
- Affiliate marketing doesn’t manage itself or grow on its own. Success requires significant time and effort.
- There’s no ‘one size fits all.’ Affiliate programs differ in focus, types of payment, terms, and conditions. Doing some research would help to see what’s right for you.
Input vs. Output
- You know what you need put in - effort, time, resources.
- The company will measure your output based on your results: clicks, leads, sales.
- Remember, “effort in, rewards out.”
- Decide upfront what you want to get out in earnings. Your goals determine the amount of effort and focus you put in.
Knowledge vs. Interests & Hobbies
- It’s not enough to have a passionate interest. It’s best to have more than a basic understanding or knowledge of the product or service you wish to market.
- People trust people. If it appears that you don’t know what you’re talking about, you won’t get enough attention. Without adequate followers, you won't get an increase in traffic. Without engagement and traffic, you cannot earn a realistic amount.
- Social media = likes; followers, hearts, comments, and shares.
- Assess the extent of your social reach.
- Look at your social base. How many would be interested in the product/service you want to market.
- How do you plan on growing your followers?
Calculate your ROI
- Commission earned / Time (hours) = rate per hour.
- Identify your ideal hourly rate.
- Calculate how many clicks/leads/sales you need to earn that rate.
- The answer will give you the number of hours you’ll need to invest in getting that result.
- Establish the measurement criteria used by the company.
- What is commission based on - clicks, leads, or sales?
- How many affiliate marketers do they have, and how successful are they?
- What do they consider to be an ‘active’ affiliate?
- Where do you feature in the top affiliate list?
- Keeping track of your performance and comparing it to the above metrics will give you your affiliate ROI to the company.
What’s in it for Companies?
According to Mediakix, 81% of brands rely on affiliate marketing. According to the Interactive Advertising Bureau (IAB), 2017 recorded more than 5 billion clicks, with some 170 million transactions carried out.
With figures like these, can companies afford not to have an affiliate marketing program? But, for any program to be successful, it must be able to be measured. So it’s critical to design and implement metrics to assess the effectiveness of the affiliate marketing program.
Measuring Your Affiliates
Key Performance Indicators (KPIs) are mainly associated with organizations, staff, and contractors. However, it’s crucial to establish KPIs for your affiliate marketers as well. KPIs set a clear framework for the marketer's requirements and provide metrics to evaluate the overall program's success.
Affiliate Marketing KPIs:
- Each affiliate has a unique link, making it easier to measure their traffic to your site and against other promotions.
- Increased traffic is an obvious measure and, if your company has rewards and incentives, this should be one of the main criteria.
- A decrease in traffic could mean demotivation, more attractive programs, or a decline in interest. This information allows you to engage with the affiliates, emphasize rewards, and monitor their general mood and behavior.
- Significant traffic increases could also be cause for alarm. Unscrupulous affiliates will do anything to increase their statistics and performance to improve their income.
- Rerouting a client through their link to your site is done in various ways, mostly through creative coding, which implants software containing their information into your company’s website.
- This rerouting skews the revenue metrics and leads to higher, though fraudulent, commission payouts.
- Customer Value
- Once you’ve identified the estimated optimal lifespan of a single customer, it can attribute these referrals’ value.
- This value is the number of estimated transactions you should receive during this period.
- To calculate this value, you’ll need a report of retention rates, churn rates, average revenue per user (ARPU), and, of course, profit margins for a specified period.
- ARPU / churn rate x profit margin = customer lifetime value
- Conversion Rate
- This rate should ideally be above 10%
- Reversal Rate
- How many canceled transactions after processing the order - this should be less than 10%
- If this rate is higher than 10%, you need to compare quality traffic to correct audience selection and the advertising's correctness.
- Click rates
- Whether it is ‘click-through’ or ‘pay per click,’ measuring the various rates are integral when assessing performance.
- The number of clicks to your platforms via the affiliates highlights what works and what needs attention.
- The cost per click/lead/sale information provides the average price paid for each. This makes analyzing marketing spend and effort against your affiliate programs, advertising, and other promotional activities easier.
- Active Affiliates
- It’s essential to define the company’s expectations of its affiliates, precisely what you consider an acceptable activity level.
- The apparent metric would be the number of leads/sales within a specific time frame.
- If the percentage of active affiliates is low, you may need to revisit your recruitment strategy or incentives and rewards.
- While it is not always possible to assign a value to affiliate recruitment, it is nevertheless time-consuming.
- Conversion rates are, therefore, not enough when measuring marketing effectiveness.
- Incremental Revenue
- Incremental revenue is revenue generated from the new customers referred by the affiliate.
- You can use this figure to compare the effectiveness of other affiliates and marketing channels.
- Recurring Sales
- The number of recurring purchases made by their customers needs to increase to reduce the cost of acquiring one customer.
- Conversely, recurring sales made by the affiliates customers increases the average product value.
- Result = increased profit.
- You can also calculate the affiliate contribution margin by subtracting the affiliate recruitment costs from the affiliate's average sales revenue.
ROI remains one of the crucial measures of any marketing activity. Using any of the numbers of equations and calculations available can give near accurate figures on which to base ROI.
As we’ve mentioned, though, several additional factors affect this calculation. Most notably, the human element. The correct or incorrect choice of affiliate can adversely affect even the biggest of brands.
Therefore, to measure social media ROI in affiliate marketing, one would first need to measure the affiliate's value and contribution to the final ROI figures.
In closing, I refer to the words of marketing guru Seth Godin:
“People do not buy goods and services. They buy relations, stories, and magic.”