Practical Ecommerce

Affiliate Marketing Metrics: A Primer

One of the benefits of online marketing is all the data we have access to. Unlike brick-and-mortar establishments, an online retailer can determine product interest and then forecast sales based on how many people viewed a product. Take it a step further, and the online retailer can also predict what the consumer might buy next based on what they looked at in previous sessions. This type of data is simply unavailable to the offline retailer; it’s just a few keystrokes away for the online retailer.

Raw Data vs. Derived Data

Affiliate marketing uses many of the same metrics that you might see in traditional online marketing campaigns. I explained the basics of affiliate marketing, including the benefits to ecommerce merchants, at “Understanding Affiliate Marketing,” my previous article.

At the very basic level, you have a set of raw data, and a set of derived data. The raw data is discrete, unaltered values. Raw data examples include:

  • Impressions. The number of times an ad banner is viewed.
  • Clicks. The number of times a consumer clicks through an ad banner.
  • Number of Sales. The number of transactions that occur.
  • Sales Revenue. The dollar amount of sales.
  • Commissions Paid. The dollar amount of commissions paid to affiliates.

Derived data is metrics that are drawn from the raw data. These numbers provide a sense of performance. Derived data examples include:

  • Click-through Rate (CTR). The number of clicks divided by the number impressions.
  • Conversion Rate. The number of sales divided by the number of clicks.
  • Average Order Value (AOV). Sales revenue divided by the number of sales.
  • Earnings Per Click (EPC). Commissions paid divided by clicks.

The EPC is an interesting metric, because it can show the cost-effectiveness of multiple elements. For example, a retailer can calculate the EPC of various ad banners to rank the creative ads in terms of overall performance. Likewise, the retailer can also calculate the EPC of each individual affiliate to determine cost-effective partnerships. Typically, the EPC is calculated per 100 clicks. So if you paid out $5,000 in commissions, and got 600 clicks, the calculation would be:

($5,000/100) ÷ (600/100) = $8.33 paid out in commissions for every 100 clicks

Measuring Affiliate Programs

However, there are a lot of other metrics that marketing managers should track when determining the effectiveness of their affiliate channels. A lot of managers focus on the number of affiliates in their affiliate program. But, the number of affiliates is often misleading, because it gives no indication of performance. A better metric is the number of affiliates actually driving traffic. A healthy, active affiliate program generally has about 30 percent of their affiliates driving traffic at any given time. This percentage should hold true no matter how large the program. The ultimate goal is to maintain that 30 percent activation ratio as the program scales. A similar metric to track is the number of sales-generating affiliates. This metric will vary company by company, as conversion rates differ by industry.

Kevin Webster is a web analyst and analytics writer at KevinWebster.us. One of the data points he emphasizes is the percentage of new visitors driven by the affiliate channel. “Percentage of new visits is a critical metric for affiliate programs. It’s a great indicator of whether your program is really giving you growth opportunities, or if it’s simply reinforcing your brand,” Webster explains. “Either could be fine, but it’s good information to know if you have growth goals for your customer base as well as your revenue.” At Groupon, where I serve as affiliate marketing manager, we track the number of new customers driven by various categories of affiliates. So for example, at any given time, we’ll know how many new customers are being driven by bloggers, or by coupon and deal sites. It helps us have a better understanding of which types of affiliates bring in new customers.

The Lifetime Value of a Customer

Tied in with the percentage of new customers is another metric called “Lifetime Customer Value” (LTV), which is the net present value of a customer’s future spending. The marketer would essentially forecast how much revenue a customer will generate over his or her lifetime, subtract the cost spent to acquire the customer, and then divide the resulting by a discount rate to get present value. LTV calculations can get pretty deep, the retailer can also add in the number of referred customers generated by a single customer. Customers who refer other customers would of course have a higher lifetime value than a customer who does not refer new business. Here’s an example of a simple lifetime value table that takes referrals into account.

Acquisition
Year
Second
Year
Third
Year
Referral Rate 3% 3% 3%
Referrals 0 3,000 1,890
Subscribers 100,000 63,000 42,840
Retention Rate 60.00% 65.00% 70.00%
Orders per Year 5 6 8
Avg Order Size $20.00 $25.00 $30.00
Total Revenue $10,000,000 $9,450,000 $10,281,600
Cost Percentage 70.00% 65.00% 60.00%
Direct Costs $7,000,000 $6,142,500 $6,168,960
Acquisition Cost $50 $5,500,000 $0 $0
Total Costs $12,500,000 $6,142,500 $6,168,960
Profit ($2,500,000) $3,307,500 $4,112,640
Discount Rate 1.00 1.16 1.35
NPV Profit ($2,500,000) $2,851,293 $3,046,400
Cumulative NPV Profit ($2,500,000) $351,293 $3,397,693
Lifetime Value ($25.00) $3.51 $33.98

Do Affiliates Place Products in the Shopping Cart?

Another metric that Webster suggests tracking is how many affiliate-referred customers add products to their carts. “’Add To Cart’ rates are very important for the affiliate channel. If your program isn’t performing as well as you’d like, you might find your cart abandonment rate is high for your affiliate traffic,” Webster says.

Webster advises that if the affiliate Add-to-Cart rate differs significantly from the site wide average, that it is indicative that something is amiss. “If it differs a lot, it’s time to dig deeper into the landing pages your affiliate creative directs to, or look to see if your data feed accurately represents your current prices or stock levels.”

It is also important to track your top 10 affiliates. However, don’t just focus on who they are. Focus on what percentage of revenue they bring to you. If you are over-dependent on your top 10 affiliates, and your competitor lures them away from you with a better offer, you end up losing a good percentage of revenue.

Finally, it’s a best practice to spend the time to build a customized dashboard for yourself so that you can see all these metrics in one place at one time. It’s easy enough to import your data from your affiliate platform into an Excel workbook, and get insight into week-over-week performance. By doing so, you’ll be able to have a better grasp of seasonality within your affiliate program, as well as have deeper insight into what’s driving your affiliate sales.

Carolyn Kmet

Carolyn Kmet

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Comments ( 3 )

  1. Al October 26, 2014 Reply

    Thanks for the breakdown here. I have a question: If there is a high EPC of say $200 and an average commission of $15, how can I forecast my earnings from this? Is this a good program on the surface?

    (also average sales is $98 if that helps)

  2. Carolyn Kmet October 27, 2014 Reply

    Hi Al,
    From an EPC of $200, that tells me that for the past 1000 clicks, you’ve paid out $200 in commissions. $200 in commissions, with an average commission of $15 is about 13 sales for 1000 clicks (assuming that you’re saying EPC is per 1000 clicks, not per 100 clicks). So, 13 sales at an average of $98 per sale is $1274 in gross revenue for every 1000 clicks. Or thereabouts. You can forecast the rest based on the rate at which you get traffic. Hope that helps! :)

  3. Alexandra January 26, 2016 Reply

    Thank you for the valuable information. Well-written post.