A lot of people make affiliate marketing sound like rocket science. This is why some don’t bother to do their research; they think it’s only for the internet-marketing-savvy. This is unfortunate because affiliate marketing really isn’t that hard. Even with just basic knowledge of how it works can get you an affiliate site running within 24 hours!
If you’re someone who wants to become an affiliate marketer, or already are but want to know why other people are succeeding at it and you aren’t, this is for you.
Successful Affiliate Marketing Requires Patience
First off, I’d like to make one thing clear: Affiliate Marketing is NOT easy money.
You won’t succeed at it overnight. It’s a money-making strategy for the patient and determined. And if you really want to get it right, you’ll need to learn a little math.
Numbers are your best friend. Numbers tell you if you’re getting closer or further away from your goal. In affiliate marketing, numbers will keep you on the road to a steady income flow. But before we teach you the math that will help create and multiply your profits, you’ll need to know the different payment terms offered by affiliate programs.
The 3 Types of Payment Terms
Whichever payment term you have with a merchant, you can still make plenty of money. The key is to optimise your site to produce the results you need. Here are the three terms you’ll come across when you register to affiliate programs:
Pay per Sale: You are paid a percentage of the product sale price after every successful purchase.
Pay per Click: You are paid depending on how many visitors you redirect from your affiliate site to the merchant’s website, regardless if they buy or not.
Pay per Lead: You are paid for every contact form a visitor fills out, turning them into leads for merchants to use for their marketing.
Know the Metrics
Before you get in on the math, let’s learn first the different metrics:
- Commission Rate – Merchants have a specific commission rate for their products. E-products usually have the highest commission rate while physical products tend to have the lowest. They can range from single digits to more than 50% of the product price.
- Click-through Rate (CTR) – The total number of clicks your affiliate links or ads get divided by the number of times they were delivered (called impressions).
- Earnings per 100 Clicks (EPC) – Affiliate programs may share their EPC so affiliate marketers have something to analyse. While it shouldn’t be used as the only criteria to gauge a program’s earning potential, it’s still good to know.
- Average Order Value (AOV) – An average ticket is the sum total of the orders made from an affiliate program over a period of time. This number is then divided by the number of orders to give the average order value.
- Reversal Rate (RR) – The reversal rate is the percentage of transactions that get reversed by the merchant over a given period. This isn’t always provided but some networks (like ShareASale) do show it prior to registering.
- Conversion Rate (CR) – For many affiliate marketers, this is the most exciting to track. It can be a click-to-lead or click-to-sale CR depending on the affiliate program. The conversion rate is calculated based on the number of site visits and the number of successful purchases, which are called conversions.
Example Scenario to Calculate Earnings
Let’s assume your affiliate site gets around 200,000 page views a month and your merchant pays a 12% commission on all sales. For our calculations, we’ll also assume the following values for each metric:
CTR = 1%
EPC = $50
AOV = $125
CR = 5%
RR = 10%
Using the values above, we can now get the traffic, sales, and earnings by using the following formulas:
200,000 * 1% (CTR) = 2,000
2,000 * 5% (CR) = 100
100 * $125 (AOV) * 12% (commission) – 10% (RR) = $1,350
And to get your personal projected EPC, use the following formula:
$1,350 (Earnings) / 2,000 (Traffic) * 100 = $67.50
Note: The formulas above will differ from affiliate program to affiliate program. It’s recommended that you do your research first so you can produce a clear estimation of your earnings.
How Merchants Earn
If affiliate marketing is profitable for publishers, it’s even more profitable for the merchants. Look at the formula below:
Revenue – Cost – Affiliate Payment = Profit
Revenue is the gross income, or “top line” figure, from which costs need to be subtracted from.
Costs is everything and anything the merchant spends on to produce and market the product.
Affiliate Payment is the commission they pay publishers. Since publishers like you are the one doing the promotion for the company, they don’t have to pay for marketing. That’s why they pay out commissions instead.
Here’s a quick example to show you how much merchants earn from every sale you make for them:
Revenue = $315
Cost = $90
Affiliate Payment = $37.8 (12%)
Using the above values, we get:
$315 (Revenue) – $90 (Cost) – $37.8 (Affiliate Payment) = $187.2
Companies spend millions of dollars on marketing and advertising every year. Affiliate marketing offers them an opportunity to save on their marketing cost while providing the public with the opportunity to earn. It’s Win-Win.
And That’s It!
You now know the math and you can compute your projected earnings. Your success in affiliate marketing will depend heavily on your ability to set and meet your profit goals. The essential point is this: affiliate marketing does work. It has turned many average internet marketers into millionaires. You can make it work for you, too, if you don’t mind diving into the math.