An outdoor gear retailer keeps $33.32 of every $100 in regular-price affiliate sales, about a third, before salaries, rent, and software. Discounts, refunds, a 12% commission, product and fulfillment, and processing and support take the other $66.68. The share also changes from one affiliate to the next.
The true cost of an affiliate sale is more than the commission. An outdoor gear retailer’s owner had only a rough guess at profit per affiliate sale, so I took $100 in regular-price merchandise and walked it down one line at a time.
The retailer is unnamed, and the discount and cost figures are averages from that walkthrough. Treat the $33.32 as one retailer’s numbers. Your discount, refund, and cost lines will differ.
| Line | Amount | Left after this line |
|---|---|---|
| Regular-price sale | $100.00 | $100.00 |
| Promotional discounts | -$15.00 | $85.00 |
| Refunds | -$8.50 | $76.50 |
| Affiliate commission (12% of $76.50) | -$9.18 | $67.32 |
| Product and fulfillment | -$29.00 | $38.32 |
| Processing and support | -$5.00 | $33.32 |
| Kept before overhead | $33.32 |
The owner looked at the bottom line and asked, “So we’re keeping about a third?” I said, “Before overhead, yes.”
Overhead means salaries, rent, software, and the other fixed costs that don’t change with each order. The business pays those out of the $33.32, so $33.32 is the amount available to cover them.
As a profit margin, $33.32 is 33.32% of the regular price. Measured against the $76.50 of retained revenue, it’s about 44%. Pick one denominator and use it whenever you compare an affiliate sale with a direct sale, or the two numbers won’t line up.
Discounts take about $15 of every $100 before the affiliate earns anything
Promotional discounts averaged about $15 for each $100 of regular-price merchandise in the retailer’s numbers. That money stays in the customer’s pocket, so the sale starts at $85 before anything else comes out.
Discounts also set the affiliate’s pay. The retailer paid commission on what remained after discounts and refunds, so a deeper discount cut the commission along with the revenue. If your terms use list price instead, a 30% commission on a $200 product costs $60 when the customer pays $100 after a half-price sale. I walk through that math in my post on how to price your product when you have an affiliate program.
Refunds take another $8.50 and shrink the commission with them
Refunds took $8.50 from each $100 of regular-price merchandise, which left $76.50 of revenue the retailer kept. The commission fell with the refunds because the retailer paid on the $76.50 and skipped the original $100.
Your software has to do that math for you. If it doesn’t reverse commissions when a customer refunds, you pay affiliates on money you already gave back. My post on what happens to an affiliate’s commission when a customer refunds shows the reversal from the affiliate’s side, which helps when you write your terms.
Your own refund rate matters more than any benchmark, but a benchmark tells you where to start looking. What Is a Normal Affiliate Commission Reversal Rate? gives ranges for digital products, physical products, and subscriptions.
A 12% commission costs $9.18 when the retailer pays it on $76.50
The retailer paid affiliates 12% of the $76.50 left after discounts and refunds, which comes to $9.18. The same 12% on the full $100 would cost $12.00, so paying on the net amount saves the retailer $2.82 per $100.
Your terms decide which amount you pay on, so read yours before you trust any per-sale math, including mine. If you’re still choosing the rate, my post on what a good affiliate commission rate looks like covers rates by product type.
The commission line and the price both feed the per-sale math above. The Book on Affiliate Management is my 300-plus page guide to building a program that reaches $1 million a month in under two years, including how commission structure and product price work together.
Product and fulfillment take $29, the largest of the five deductions
Product cost and fulfillment averaged $29 for each $100 of regular-price merchandise. No commission rate touches that line, so it stays put whether the sale came from an affiliate, an ad, or a customer typing in your URL.
Thin margins make this line hurt more. My post on setting affiliate commissions on physical products with thin margins runs a $48 product through a similar subtraction and ends with about 8 cents on the dollar before support, returns, or overhead.
Processing and support take $5, the last deduction before overhead
Payment processing and customer support came to $5 for each $100 of regular-price merchandise, and the walkthrough carries them as one line. That leaves the $33.32.
Salaries, rent, software, and other fixed costs come out of that $33.32 next. None of them show up in a per-sale view, which is why the per-sale number looks healthier than your bank balance feels.
Of the five deductions, only the $9.18 commission depends on the affiliate arrangement itself
Product and fulfillment, and processing and support, come out of any sale, whether an affiliate, an ad, or a repeat customer sent it. Discounts and refunds sit in between, because they vary with who sends the customer.
That split tells you where to look first. You can change a commission rate in one conversation. Changing the discount and refund pattern of an affiliate’s audience takes longer, and it can be worth more.
The same $100 leaves between $12.64 and $43.66 depending on the affiliate
Affiliates who send the same $100 in regular-price sales can send widely different discount and refund loads. In this hypothetical, I held the retailer’s other costs steady, $29 for product and fulfillment, $5 for processing and support, and a 12% commission on the net, and changed only discounts and refunds.
| Hypothetical affiliate | Discounts | Refunds | Commission | Kept before overhead |
|---|---|---|---|---|
| Half the retailer’s discounts and refunds | $7.50 | $4.25 | $10.59 | $43.66 |
| The retailer’s averages | $15.00 | $8.50 | $9.18 | $33.32 |
| Double the retailer’s discounts and refunds | $30.00 | $17.00 | $6.36 | $12.64 |
These affiliates aren’t real. I built them from the retailer’s numbers and picked half and double because they’re easy to follow. The affiliate on the bottom row earns the smallest commission, $6.36, and leaves the business the least, $12.64.
Two points of commission move the result $1.53, and the affiliate mix moves it $31.02
On the retailer’s $76.50 of retained revenue, each 2 points of commission is worth $1.53. Cutting the rate to 10% would leave $34.85 of the $100, and raising it to 14% would leave $31.79.
The spread between the top and bottom rows of the table above is $31.02, about 20 times larger. In this hypothetical, a debate over a half-point of commission, worth about 38 cents, is aimed at the smaller number while one affiliate sends double the discounts and refunds.
Three things separate one affiliate’s $100 from another’s
Discount reliance changes the first line. An affiliate whose audience shows up hunting for a code sends sales that carry more discount, and the retailer’s retained revenue per sale falls with it.
Refund rate changes the second line. An affiliate who oversells sends buyers who send the product back. The reversal rate post linked above covers how to tell a refund-heavy product from a few affiliates whose buyers refund far more than the rest.
Customer mix changes what the commission buys. A first-time customer may reorder, while a returning customer who would have bought anyway turns the $9.18 into a cost with nothing behind it. Check lifetime value before you cut an affiliate who brings new buyers at a deeper discount. My post on paying affiliate commissions on lifetime value covers how repeat purchases change what a referral is worth.
If one affiliate’s numbers look worse than the rest, find out whether their sales were incremental. Should You Allow Coupon Sites in Your Affiliate Program? covers when coupon and loyalty affiliates add revenue and when they take credit for sales you were going to make anyway.
Four steps give you the same number for your own business
Four steps reproduce the retailer’s walkthrough on your own books, using one affiliate’s orders from the last quarter or your whole program’s.
- Add up the regular-price total of the orders, before any discount.
- Subtract the discounts, then the refunds. The result is your retained revenue.
- Multiply the retained revenue by your commission rate, or the regular-price total if your terms pay on that, and subtract the commission.
- Subtract product and fulfillment, then processing and support, using your own per-order averages. The remainder is what you keep before overhead, and dividing it by the regular-price total gives you your own percentage.
Your accountant can tell you which costs belong in each line. Once you have the per-sale number, my post on how to measure what your affiliate program is worth rolls it up to the program level. The cost to launch a program is a separate number, and my post on how much it costs to start an affiliate program covers it.
If you’d like a second set of eyes on your numbers, Your Affiliate Launch Coach offers a free 20-minute coaching call. On the call, we review your program and build a 30 to 60 day action plan.
Three things to do this week
- Run the four steps on your top affiliate and on your whole program, then compare the two percentages.
- Read your terms to see whether you pay commission on list price, the amount charged, or the amount left after refunds.
- Look at the gap between your best and worst affiliates and check whether discounts, refunds, or sales you would have made anyway explain it.
If you haven’t launched yet and want the setup done for you, the Affiliate Program Kickstarter Package is a done-for-you launch. It includes tech setup, your first 30 affiliates recruited, email and promo plan templates, and courses, for $2,497.
Matt McWilliams is a four-time Affiliate Manager of the Year, twice at the Affiliate Summit Pinnacle Awards and twice at the AbestWeb Affiliate Awards. He has driven more than $1.8 billion in affiliate revenue and recruited more than 330,000 affiliates. About Matt.
