Compensation models or pricing models are present in several areas of online marketing, including affiliate marketing. What is typical for affiliate marketing is that its achievement is based on the performance, which means that desired action must be completed for the compensation to be issued. Only when the affiliate succeeds in converting the visitors, based on the agreed compensation model, will the commission be issued. Of course, there is always the risk of not being able to convert the visitors in which case the affiliate will not receive the commission.
One of the main things a merchant and an affiliate will have to agree upon is the compensation model they will use. Merchants usually offer one compensation model for the program, but some of them might offer several. If there is a choice, an affiliate will choose the affiliate model that is most likely to be efficient and thus generate the highest profit. For merchants, the selection of a compensation model is determined by the type of conversions they want to achieve through the affiliate program.
It is helpful for both, merchants and affiliates to learn about different compensation models and what they entail.
This is the most commonly used compensation model. In fact, some studies state that over 80% affiliate programs online are using PPS compensation model.
An affiliate program using this payment compensation is focused on increasing sales through affiliate links. The process goes like this. The affiliate shares an affiliate link featuring a product or service. The affiliate links directly to the product page on the merchant’s website, from which the product can be bought. The click on the buy button and the actual sale are recorded due to cookies even days after the original click on the link happens. Once the sale is complete, the affiliate receives the compensation, i.e. a percentage of the sale.
This is a form of revenue-sharing compensation model. Merchants have no additional costs, but instead, the revenue collected from the sale is shared with the affiliate. Moreover, this compensation model enjoys great popularity because there are no additional costs before the sale is complete.
Even though this method is far less popular than the previous one, it still is ahead of all other compensation models in affiliate marketing. With pay per action method, the merchants issue a payment to the affiliates for every visitor who completed a desired action. This action can be to create an account, to sign up for a newsletter, to download an e-book, to fill out a form, etc. Basically, any action that a merchant see value in can be awarded when being promoted by the affiliate. The best way for affiliates to earn their commission is to send targeted traffic, i.e. online visitors who are most likely to perform the desired action.
This compensation model is also known as pay per lead, pay per acquisition or pay per conversion. All of these are desired actions, hence the name variations.
When using this compensation model, merchants are likely to have additional costs. Unlike with the previous method, when the revenue is earned and then shared, with PPA there is not a direct revenue for the merchant in that given moment. Still, the merchant issues a payment for each desired action being completed because they see a particular value in this action and they award the affiliates who achieve this kind of a conversion.
For example, if lead generation is the goal the merchant wants to achieve, he would pay a fixed commission to the affiliate who would generate leads. There could be no percentage of revenue, like with PPS, because the sale is not the goal in this case. The potential of using a lead later in email marketing is the motive for merchants to invest in this type of affiliate marketing even if there is no sale completed initially. Since there is no revenue at the moment of the conversion, the merchants will have to assign a budget for paying the commissions to the affiliates who participate in this kind of affiliate program.
Pay per action includes two distinctive types of compensation models that can occur with affiliate marketing. Those include:
Just like clicks are tracked, calls can also be tracked using technology that creates a connection. Some merchants have click-to-call service which allows users to quickly click on the button and get in touch with the merchant, regardless if it is through a representative, customer service, etc. This feature is particularly handy for mobile users, which is why it is growing in popularity as the number of mobile users rising each year.
Another way merchants can promote their business and increase exposure is by encouraging their app installs. In this case, the affiliate uses the affiliate link to refer the online users to install the app. The affiliate is paid per installation, as this is the desired action for the merchant.
This compensation model is a payment model which is typical for search engine marketing (SEM), but it is a model that can also be used in affiliate marketing. The idea behind this model is to mark a click on the link as the desired action. Every time a user clicks on that link, the affiliate is contributed this action and commission is issued by the merchant.
With this type of compensation model, it is irrelevant how many times the link is displayed and what happens after the click (whether the user buys, signs up, downloads, etc.). It is all about generating clicks.
Like with pay per action, there is no direct revenue for the merchant with this model, which means that the merchants undertake the risk of converting the visitors once the click is generated.
Pay per mile, or pay per thousand impressions is not as popular in affiliate marketing, but some merchants do offer this option through affiliate networks. It is another payment model mostly associated with search engine marketing. This concept includes payment based on a thousand views.
Based on the concepts of each of these compensation models, it is evident that merchants see most benefits in the first model (pay per sale) because there is no investment or risk of losing the investment and failing to achieve conversion. It is the safest way for the merchants to pay only based on the performance they see, from the revenue they make. For affiliates, this might be a challenge, but if they have success at using their online influence and referring the right visitors, affiliates will increase their chance for successfully converting the visitors and getting the commission with each of these models.
Affiliates earn the percentage of the sale which means that their commission is issued at the moment of sale. However, there are situations when this transaction becomes void, and the affiliates cannot claim their profit. For example, if the sale is canceled or the product is returned, the affiliate will not be issued the commission if the pay per sale compensation model is being used.
This is why it is important to understand the concepts of valid and void transactions and how each of them affects the commission eligibility.
To make sure to regulate the transaction properly, a merchant has to clearly define what a valid transaction is and when the transaction can become valid. If the merchant offers 14-day free trial period or no-questions-asked return policy, the commission is usually held during this period. It means that the affiliate is attributed the commission at the moment of sale, but this commission cannot be claimed until this trial period is over. Only after the period is over can the merchant be sure that the sale is finalized and that the transaction is really valid as stipulated by the terms of service.
There are multiple situations when the transaction is void, in which case the affiliate is not eligible for the commission. Some of the reasons when the transaction becomes void include the following:
- Payment authorization failure (the payment cannot be processed due to the expired credit card or low balance)
- Canceled order
- Duplicate order
- Returned product
- Unclaimed shipping
- Fraudulent sale
- Self-referral (some merchants choose not to allows self-referrals, which is defined in the terms of service of the affiliate program)
- Non-qualified lead (for PPL compensation model)
It is also advisable to let the affiliate know about void transactions because they might not be aware of an issue and they might be expecting a payment.
Payments and transactions are a crucial part of affiliate marketing, which is why merchants are advisable to create the terms of service to regulate all of the circumstances that can occur when the transaction is being made. Not only does this give credibility to the affiliate program, but it makes program management and monitoring much easier. From affiliate’s side, it is necessary to acknowledge the existence of such document and to explore the conditions it regulates before joining.