Traditional Budgeting in the Affiliate Marketing Channel
One of the questions I most often encounter from customers revolves around budgets. Companies are continuously engaged in budgeting with finance very keen to stick to those budgets. As part of this, they want to set a monthly budget for their affiliate channel. Just like there is a budget for Google Search, Social Media ads and so on. But should you set a budget for the affiliate channel? And what issues will you run into if you choose to do so?
Drivers of Affiliate Spending
Affiliate spending is not primarily driven by budgets. Rather, it is driven by sales. As such, you cannot arbitrarily set a level of spending as an advertiser, the way you can with other paid channels. It all depends on the actual sales. That brings about two immediate issues. If your spending on commissions for one or more months is below budget, then finance complaints as you are not meeting targets. The tendency is then to lower your budget. If, on the other hand, you are above budget, then finance is even madder, because now you are breaking the budget. As affiliate sales is driven by sales rather than spending, you will inevitably end up in one of those positions almost every month. Which is not exactly an ideal way to operate.
Setting Budget Limitations in Affiliate Marketing
One way some companies deal with this issue is to limit the availability of their program. They will run the program from the beginning of every month until budget runs out. They then close the program for sales until budget is available again the next month. I think few things are more detrimental to a program than doing that. It basically equals telling your sales team there is no more commissions, because they have sold too much and made you too much money. As with any sales team, publishers are not happy to only be paid for their efforts on some parts of the month. They also do not want to edit each and every link twice a month, to make sure they are linking to a program that actually pays. Instead, they will very quickly find a program that pays them consistently for their work and the value they bring. Once they have left, they will be hard to lure back. As such, setting up and sticking hard to a budget for the affiliate channel can quickly ruin the program itself.
Should you set a budget for the affiliate channel?
Which leads us back to the question of whether or not budgets even make sense in the affiliate channel? The special feature of the affiliate channel is exactly the ability to deliver a consistently positive ROI, after all. So why would you want to limit sales? If you could spend $1 to get $2, then you would not limit your month budget to only spend a total of $10. You would spend as much as possible, knowing that every time you did so, you got more back. If your channel has a positive ROI, and the affiliate channel allows you to set your own ROI, then you should scale it as much as possible. This is why budgets make so little sense in the affiliate channel. As you make money on every sale, you should want as many as possible. And given that you only pay for sales, scaling is straight forward.
Affiliate Marketing and Cash Flow
Furthermore, as affiliate commissions are not paid out until the sale is finalized, long after payment has been made, there is no cash flow issue. You are not paying anything upfront. Rather, you receive the money, await delivery and confirmation, and then pay a part of it in commission. As such, the channel is 100% cash flow positive. This is another thing that sets the channel apart from media buys and most other paid channels. You actually get the money before you need to pay anyone.
The More You Sell, The More You Make
Taken together, the conclusions are pretty clear. As you control your own ROI in the affiliate channel, you should set a positive ROI. With this in place, you should drive as many sales as possible. You should not use a budget to limit sales in the affiliate channel. The more sales you get, the more money you make. On top, the finance department will receive the money from the sales long before they need to pay the publishers. As such, there is no issue with financing the marketing. So don’t limit your affiliate sales with spending budgets. It hamstrings your business, your sales and potentially your whole program. Instead, let her rip and get as many ROI positive sales as you can manage, for fun and profits!
Are you looking to setup or manage your affiliate program? Then get in touch with us at Lodestar Marketing