Why Having a Fixed Budget for Affiliate Marketing Makes Zero Sense
If the program was over budget, the cost-centric individuals within the organization would get irritated and the money had to be borrowed from elsewhere – even though it meant that the affiliate program was performing well, that sales were strong and the marketing team was happy.
However, if the program was under budget and didn’t use the spend allocated, the financially-focused individuals were pleased, but the marketing team would be upset that the channel wasn’t driving the revenue they wanted.
Either way, when it came to having a fixed budget for the affiliate program, we just could not win.
Now, granted … that was quite a few years ago. It would be reasonable to presume that, as affiliate marketing strategies, technologies and partnerships have grown more advanced and sophisticated over the years, so would have brands’ approach budgeting for their affiliate programs.
Unfortunately, the sad and confounding fact is that most have not. Too many brands still apply a fixed budget to their affiliate program – and in a COVID-19 economic reality, the consequences of that short-sighted approach has never been more serious.
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Startling Scenarios
Right now, exacerbated by the COVID-19 crisis, we’re seeing two scenarios play out from these “fixed budget” issues:
1. Successful affiliate program goes over budget.
In this scenario, the brand’s affiliate program is doing quite well and driving high-quality revenue. As a result, however, it’s “going over budget” and the cost-centric individuals within the organization are instructing the account managers to set affiliate commissions to zero or shut down the program until the next budget cycle.
Defending this decision is like trying to justify cutting commissions to the sales team because they’ve driven too many sales and made too much money for your business.
It would be laughable to say to them, “Oh, geez …. You’ve exceeded your sales and revenue goals and made a lot of money for our company, so now we need to set your commissions to zero because we’ve gone over our budget for commissions.”
Yet, that’s essentially what’s being done by within many affiliate programs. The recoil from this decision is that it essentially cuts off demand for the brand – at a time when demand is at a record high – and motivates those affiliate partners whose commissions were cut to promote competitive programs.
2. Affiliate commissions cut due to struggling offline business.
Because COVID-19 has required many brands to close their brick-and-mortar stores, their offline business has struggled. However, many brands are seeing their online business do very well, especially those with an affiliate program.
In this scenario, we’re seeing the cost-centric individuals within these businesses – who often don’t understand the affiliate marketing model – put pressure on the affiliate team to cut commissions to affiliates and take money out of the successful, revenue- and profit-driving affiliate program as a way to try and improve the numbers of the company overall and conserve cash.
This “robbing Peter to pay Paul” approach attempts to cover the brand’s offline losses with the gains from their online business. The actual outcome is that it takes money from a profit center and shifts it to a loss leader.
No one wins in either of these scenarios. The brand may look like it’s improving the bottom line by cutting budget, but all that does is disincentivize the partners within the affiliate program, which will almost certainly have negative long-term repercussions.
Inputs vs Outputs
The fact that many brands still require their affiliate programs to have a fixed budget truly astonishes me, primarily because it runs counter to the core value proposition of the channel. By its very nature, a well-designed and properly managed affiliate program produces a profitable sale within a structure that allows brands to defer payment for that sale until after they’ve received the revenue.
The fixed budget mentality is misguided because it only focuses on the inputs – the cost. It completely loses sight of the output – the revenue being driven. Both inputs and outputs need to be looked at – not one or the other.
Instead of asking “what does it cost?” the better question that should be driving budgeting decisions for an affiliate program is “what is the return on ad spend?,” a KPI that should be evaluated on a regular basis.
This isn’t to say that there’s anything wrong with having a budget for your marketing. In fact, the fixed budget approach makes sense for most marketing channels where payment needs to be made in advance of results. For these channels, it’s important for brands to have financial guardrails because the ROI – the outcome – is often not known until much later.
However, because affiliate marketing is a model where you pay your affiliate partners after they’ve driven a conversion (sale, new customer, lead, etc.) and therefore has known outcomes, it makes sense for the affiliate channel to have different guardrails.
Machine Learning
When I recently discussed this incredibly frustrating budgeting matter with a friend of mine, who is also a founder of a marketing agency, he likened the inputs and outputs of various marketing channels – affiliate, paid social, display, paid search, PR, branding, etc. – to machines.
If you have one machine that produces $10 for every $1 dollar you put in and another machine that has unpredictable outputs but needs constant input … it’s logical that you’d want your dollars to be going into the machine with the most predictable output, especially in times of uncertainty and constrained budgets.
This reasoning is certainly followed by the best and brightest brands, which is why they focus on the cost of their affiliate channel as a percentage of revenue – not on what the fixed budget is. They typically evaluate the financial needs of their affiliate program on a quarterly basis and make adjustments based on the quality of their conversions, which is supported by hard data. In other words, they do not “set-and-forget” their program.
Today, affiliate technology makes it possible for brands to see in-depth performance data and the incrementality of the conversions being driven for their business. This allows them to be quite strategic with how they pay their partners and what actions they pay them on. This also help brands ensure that the sales being driven through their affiliate program match their business goals.
In the same way that it would be absurd to cap a salesperson’s commissions and tell them to stop selling, it’s also essential to evaluate the quality of the sales they are driving and whether they justify the commissions being paid.
Assuming the quality of the sales being driven by the affiliate partners are meeting the brand’s standards, you’d think they’d welcome the opportunity to pay those partners a percentage (e.g. 5%) of their revenue. Especially if, at the end of the day, it means that the brand is generating profitable revenue. And it makes even more sense when you’re paying the cost only after you get the sale, like you do with your sales team!
Financial Advice
If you’re an account manager on an affiliate program and have been fighting this battle for years, here’s some advice for how you can help guide both your program and your company through these challenging times:
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- Sit down with the cost-centric, financially-focused individuals within your organization and have a different discussion around what budget looks like for the affiliate channel.
- Educate these individuals about how the affiliate model works, how affiliate partners are paid and why a fixed budget does not make sense for this pay-on-performance channel.
- Back up your education with data and show them the quality of the sales being driven.
- Make the case for moving off of a fixed budget for your program to one that:
- Works within a percentage threshold
- Is evaluated on a quarterly or even monthly basis and
- Looks at both the quantity of conversions as well as the quality of those conversions, not on an arbitrary fixed number.
You might also consider establishing a new reporting cadence with that cost-centric team so that they know how you’re trending with your spending and aren’t caught off guard.
If in one-quarter certain conversions being driven by a select group of affiliate partners have higher customer churn, then a decision could be made to lower the percent of commissions for those select affiliate partners or those products/services. And vice versa if there’s a group of affiliate partners driving high-quality revenue.
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- Help your financially-focused team members see that it’s far more economical to allocate more budget to the affiliate program if it’s driving high-value conversions and generating quality revenue for the business. If they’re amendable to paying 5% of $1, it would seem reasonable that they’d be receptive to paying 5% of $100K or $1M in revenue.
For those within your organization who are cost-sensitive and may be uninformed about how the affiliate model works, it can be challenging for them to see the opportunities that different profit-ratio paths provide; often, all they can focus on is cost.
As an affiliate program account manager, you’re in a unique position to be able to help them have their “lightbulb” moment and see why removing the affiliate program out from under the constraints of a fixed budget has far more upside than pausing programs or setting affiliate commissions to zero.
Questions about how to talk to your internal stakeholders and decision makers about your affiliate program and properly budgeting for it? We’re here to help.