Do the Affiliate Program Math

Getting to grips with clickthroughs, conversion rates and other bugbears of the serious affiliate...

Many affiliate programs go out of their way to hype the potential returns you could make, while glossing over - or at the very least, obscuring - the fundamental math that makes these returns purest fantasy.

By understanding the math behind affiliate programs, you'll be able to compare e.g. a $0.02 click-through program with a $20 flat-fee program and a 5% commission program and work out how to win!

The following example should help you get up to speed...

Let's imagine that 4 pages on your site each instantantly received 100,000 visits from 100,000 separate visitors (If only generating real visits was that easy!)

After you recover from the surprise at seeing your web counter blur itself into a frenzy, you take a closer look at the affiliate programs you were running on those 4 pages.

On page 1, you were running a click-through program that paid you $0.03 per click (to the first page) and 5% of all visitors to the page clicked on the link. In other words, 2,000 visitors clicked on the link and you just earned $60 (2,000 x $0.03)!
On page 2, you were running a click-through program that paid you $0.07 per click (to the second page). Again, 2,000 visitors clicked on the link, but only 500 visitors made it as far as the second page. On this page, you just earned $35 (500 x $0.07)!
On page 3, you were running a flat-fee program that paid $7 per new customer. 1,000 visitors clicked on the link, of whom 30 actually bought something. Unfortunately, 10 of those customers had already shopped at that affiliate site before, so you sent over 20 new customers. Congratulations - you just earned $140 (20 x $7)!
On page 4, you were running a % commission program that paid 10% of all sales. Again, 1,000 visitors clicked on the link, of whom 30 actually bought something. The average sale was $50. So you earned $5 per customer ($50 x 10%). You just earned $150 (30 x $5)!

So you can see that in this example scenario, the "best" affiliate program was the one that paid 10% commission on sales, even though some of the other programs may have LOOKED more appealing at first glance.

Because the above example assumes only one affiliate program per page and the same number of impressions to each page, the math is still straightforward. But in real life, things aren't so simple... You may be running many affiliate programs on one page, and you may have very different levels of traffic going to different pages on your site.

Normalization is the name of the game

In order to make sense of the math in any given situation, you have to decide on a standard metric - that is to say, a "base unit of measurement" that you will use to compare the performance of different kinds of affiliate programs. You then need to normalize all the different types of data so that they are expressed in terms of this standard metric.

A very widely known metric is the CPM (Cost per Thousand). In other words, $1 CPM means that for every 1,000 ad impressions, you are able to generate $1.

If your site has two ads per page, and each ad averages $1 CPM, then if your site gets 20,000 pageviews in a month, you will end up earning $40 (2 ads per page x $1 CPM x 20 thousand-page-units)

By normalizing each affiliate program's performance into a CPM equivalent value, you can easily compare the effectiveness of several different programs.

A) To convert a click-through rate into a CPM value:-

1. Find out the number of click-throughs to the ad
2. Multiply the number of click-throughs by the $ value of 1 click - this gives you your total revenue
3. Find out how many ad impressions were needed to produce the total revenue you just calculated
4. Divide the total revenue by the number of ad impressions
5. Multiply the result by 1,000. Hurrah! You've now got a CPM value for your click-through affiliate program

Example:

1. There were 50 click-throughs to the affiliate site
2. Each click pays $0.04 so your total revenue was 50 x $0.04 = $2
3. You needed 4,000 ad impressions to get that revenue
4. $2 / 4,000 = $0.0005
5. $0.0005 x 1,000 = $0.50 CPM.

B) To convert a flat-fee payment into a CPM value:-

1. Find out how many ad impressions (on average) you need to show to produce one new customer
2. Divide the $ value of 1 new customer by this number of ad impressions
3. Multiply the result by 1,000. Hurrah! You've got a CPM value for your flat-fee affiliate program

Example:

1. You produce a new customer every 3,000 ad impressions
2. A new customer is worth $12 so each ad impression is worth $12 / 3,000 = $0.004
3. $0.004 x 1,000 = $4 CPM.

C) To convert a % commission payment into a CPM value:-

1. Find out how many ad impressions (on average) you need to show to make one sale
2. Find out what an average sale is worth
3. Divide the $ value of an average sale by the number of ad impressions calculated in 1.
4. Multiply the result by 1,000. Hurrah! You've got a CPM value for your % commission affiliate program

Example:

1. You produce a sale every 1,500 ad impressions
2. A sale brings in $50 and the affiliate program pays you 10% commission, so each sale is worth $5
3. Each pageview is worth $5 / 1,500 = $0.00333
3. $0.00333 x 1,000 = $3.33 CPM.

Learn to obssess over the right things

Many affiliates get carried away with concern over how much money they are making for every click the advertising they are running generates. The various affiliate networks fuel this obssession by focusing the bulk of their reporting around the value of a click.

STOP right there! There is one huge, fundamental piece missing from this picture... Different types of advertising will produce different click-through ratios.

In other words, an ad on Page 1 of your site may be generating $0.10 for every single click on it. An ad on Page 2, in contrast, may only be generating $0.05 per click. But if the ad on Page 2 is clicked on more than twice as frequently as the ad on Page 1, you will actually make more money off of the ad on Page 2 for any given number of visitors. This is why it's so important to keep going back to a CPM metric, which can be used to make a full and fair comparison between the results of two different affiliate ads.

KEY INFORMATION TO TAKE AWAY

All other things being equal, the best affiliate program for any given situation will always be the one that brings in the highest return on a CPM-equivalent basis. Don't get hung up on the value of a click - focus on the return you get for a given number of visitors, and always choose the affiliate ads that maximize that return.