Picking Your Affiliate Programs

Like many of you, a part of my income is from affiliate programs, and a lot of my products are information products, services, or software. An essential (and enjoyable) part of what I do involves participating in various discussion forums, so every day I come across postings from someone who wants to know "does this thing work?", "can I really make money at this?", "is this for real?".

If I'm not already familiar with the program in question, I'll go take a look at the site. Let's face it, I want to know, too!

I find that many of the programs are over-hyped, even though their basic offering is well worth the asking price. That's the result of marketing intangible products to a very crowded niche. It is very difficult to sell the benefits of your product over a competitor's.

It would be great if you could rely on the references given on the sales page, or recommendations made on discussion forums. Unfortunately, there is all too often some benefit to the individual making the recommendation, so they aren't necessarily without prejudice and we don't know when they deserve our trust.

Given that we are not so trusting of this type of recommendation, let's explore how we can evaluate a program, objectively, for ourselves.

Evaluating affiliate programs is not unlike evaluating stocks (although much less complex), in that there are many factors in deciding whether a particular offering is right for you.

The Value of the Product should be your very first consideration. The best way to determine this is to decide if you, as a consumer, would purchase the product for your own use at the price asked. (Similarly, investment advisors will often tell you to buy stock in companies that manufacture products you use in your home everyday, those that you buy for your family.) That doesn't mean that a product you wouldn't buy for yourself should automatically be dismissed, but if in doubt, it is a great disqualifier! All of us are not athletically inclined, but that doesn't mean we couldn't sell sporting goods. On the other hand, understanding and knowledge of your product is one of your best guarantees of success.

If a product doesn't pass this part of the value test, move on to the next. No further evaluation is required.

This second part of the value test will be promptly ignored by many. Is that possible? Can you "promptly ignore" something? Promptly dismissed, maybe. Anyway, the second part of the value test is...

Have you purchased the product? If so, and you still feel the product has value, the product has passed the ultimate value test. If you haven't purchased the product for yourself, don't feel too badly. You will probably just join the ranks of the 95% of affiliate marketers that never manage to make a decent buck at this business. You are not going to be very stiff competition.

Type of Affiliate Program

If the product passes the value test, it is time to evaluate your income potential with the program. You should classify a program into one of two general types, as they will be evaluated differently.

Single Commission Programs
This type of program is characterized by the single delivery of a product or service, and a one-time payment of commissions for the sale.
Recurring/Residual Income Programs
Membership programs and subscriptions are typical of this type of program. While they may include the occasional product that complements the membership, the primary offering will normally be information that changes over time, or a service that is used over and over.

Within these two general classifications, the most important thing for you will be the number of levels on which commissions are paid.

Classic affiliate program - (1 or 2 tier)
Multi-level Marketing programs

Profit Potential

The primary consideration for you (regardless of the type of affiliate program) will be the profit potential in each sale.

Profit Potential = Commission per Sale - Cost per Sale

The difficulty lies in calculating that last variable, Cost per Sale, because it is an aggregated figure. It is your total costs of marketing a product divided by the number of sales of the product. When first evaluating a program, you only have your gut instincts and your past track record in marketing other products to go on. If you have a track record with similar or related products, use that - it will be your most accurate benchmark.

Single Commission Programs

Single commission programs are far and away the easiest to evaluate. Assuming the product has passed the product value test mentioned earlier, all that is really left is to decide if you can sell the product profitably.

While these programs might pay commissions for sales made by other affiliates that you refer to the program (2-tier or multi-level), you should only count on your own sales when evaluating a new program.

The recruiting of other affiliates has its own set of costs and you will have to project the potential profitability of that activity separate from the profitability of direct sales. The simple truth is that you cannot rely on sales made by other affiliates to pay your rent, and any income from this source should initially be considered "gravy". Given this, the advantage of a 2-tier program over a single tier program is non-existent, unless you have very good contacts that allow you to easily market a program to other (successful) affiliates.

So when evaluating a single commission program, ignore the fact that it may pay commissions on multiple levels. For purposes of your evaluation, only your own ability to sell the product directly (and profitably) should be considered.

Recurring/Residual Income Programs

These programs allow you to sell a renewable service or subscription and in recognition of the fact that you allow them to build a loyal customer base, the Merchant will pay you ongoing commissions for as long as the customer renews their membership/subscription/service. These programs can be very lucrative over time, but can be a little more difficult to evaluate when you are first trying to decide whether to represent them.

The "product" for this type of program typically requires that the customer commit to using the product over a period of time. This may not be a contractual commitment, but the set up on the service, or canceling prior agreements or some other logistical roadblock means that the customer is at least required to make a mental commitment to use the product for some period of time.

This type of sale is usually more difficult (read that as time-consuming and costly) because in asking a customer to make this commitment, you are also asking for a long-term relationship between the customer and your Merchant. Because of the increased difficulty, your conversion ratio will probably be lower than with simple product sales.

Can you see where this would make the calculation of the Cost per Sale much more difficult?

Your income is also spread over a long period of time, so to really understand the profit potential of a program like this, you need to project the life-time profitability of the average sale. Your Cost per Sale is probably higher than the simple sale of a product, and your income is spread out over time. You have to make an investment in time and advertising dollars today, for payback down the road.

The value of the product is more important than ever in this sort of program. If you have projected your Cost per Sale to make each sale profitable after 6 months revenue, and the customer cancels the service after 3 months, your costs will be twice your revenue on that sale and the sale was not profitable.

I saved the discussion of Multi-Level commission structures to now because it is more likely you will find these in this Recurring/Residual Income category of programs.

The most obvious difference in the Classic Affiliate Program and MLM is the number of levels on which commissions are paid. That, of course, gives rise to the second major difference - which is the size of the individual commissions paid at each level.

For any product, the Merchant is willing to pay out some fixed amount for selling expense (that's where your commission comes from). No matter what that amount is, when you spread the commission dollars over more levels, the amount per level (affiliate salesman) must be less to keep from exceeding that fixed amount of selling expense.

Here's a simplified example.

A product with an $100 sales price, paying 50% in commissions would mean that $50 has been budgeted for selling expense.

If these selling expenses were spread evenly across 5 levels, the affiliate (or member) on each level from the direct seller up 5 levels would receive $10 in commission.
If these selling expenses were spread evenly across 10 levels, the affiliate (or member) on each level from the direct seller up 10 levels would receive $5 in commission.

Note - payments are not typically equal at all levels, but this makes the example easier to visualize.

It is pretty easy to understand from this that the more levels on which commissions are paid, the more sales must be made for anyone at any given level to make the same amount.

Because this revenue sharing (or commission override, if you prefer) with your sponsors reduces the amount you can make on a direct sale, the inclination is to recruit other affiliates from whose sales you can "earn" overrides. In fact, if the product is a membership, your recruiting of affiliates and sales of memberships are one and the same - so it is not just an inclination, but a requirement to make any commissions at all. Of course if you recruit non-producing affiliates, there will be no sales, and therefore no overrides. Your down-line stops growing.

To evaluate a program using this model, you still have to make sure that the product passes the value test, and determine what your profit potential is with the program (don't forget that you are considering lifetime profitability here). In addition, you have to decide:

Can I recruit sufficient numbers of affiliates (my direct sales)?
Will they be productive affiliates (Can I count on them to recruit more members)?
How much additional effort (and cost) is required to insure that my down-line will become (and continue to be) a decent source of income for me?

Final Assessment

I have occasionally seen guidelines on how much you should spend on advertising for a given commission dollar, but you are the only one who knows what your overhead costs are, or what your time is worth. What is an acceptable gross profit margin for you?

Only you can decide what you are willing to invest to accomplish a sale.

Some products will be more profitable for you than others. You have to constantly monitor the profitability of each product. You will discover new products all the time. Every once in a while, evaluate a few more products (using the thought process above) and add one or two to your promotions.

If a new program proves to be more profitable than something else you are promoting, maybe it is time to re-evaluate the less profitable offering.

About the Author:
Sid Hale is the founder of ad-CLiX, publisher of the iMarketing iNsight, and has been satisfying client needs as an Information Technology Consultant for decades. As a consultant, he constantly experiments with "bleeding edge" technology to maximize value to his clients.. He most recently authored the Insider's Guide to Affiliate Showcase to help guide Affiliate Showcase site owners in setting up their sites to maximize their effectiveness and to take full advantage of the viral marketing techniques available with that program.