The CEO of a vertical-specific SaaS vendor with a high price point emailed me the other day with a question about creating an Affiliate Marketing program to accelerate growth.
I gave him a fairly detailed answer and I thought I’d elaborate on that answer even more and share it with you… enjoy.
“Hey Lincoln, we’re thinking of starting an affiliate marketing program for our SaaS company to help accelerate growth.
From what I’ve read and the examples I’ve seen they’re commonly offered by lower priced SaaS apps, sub $200/mo, but our app is higher priced at $1k, $5k, or $10k/mo.
I’m thinking of offering an affiliate commission of 1 month of Monthly Recurring Revenue (MRR) after month 2 for all converted referrals. And maybe double that for an annual subscription.
I know you’ve talked about Affiliate Marketing for SaaS apps before, but do you know of any successful B2B SaaS affiliate programs with similar subscription prices?”
Below is my significantly-elaborated response…
I’ll answer that, but let me work through some assumptions before I do.
Affiliate Program Controversy
Just like anything, there can be evil affiliate marketers and there can be good ones. For the most part, the less control you have over your affiliate program (i.e. the lazier you are in many cases), the more likely you’ll attract the scammers and they’ll take advantage of you.
Don’t be lazy, do it right, and you will mostly likely be fine.
When you’re done reading this post, if you still need some entertainment, make sure you read the comments on those VentureBeat posts. It’s gold, Jerry.
Okay, so back to the question at hand.
Affiliate vs. Reseller vs. Referral Programs
First, I assume you’re talking about an affiliate program whereby independent folks out there on the web sign-up and then send you traffic through special URLs and – if that traffic results in an action (more on this later) – you pay them a commission or a fee.
What’s cool about that is – even if you gave the affiliate 100% commission – the customer is still paying you… they’re still your customer, you have the relationship with them and (assuming the 100% commission is limited to the initial sale) you can up- or cross-sell them so you actually make money off of ‘em later. Nice.
That model of 100% commission up front + backend continuity revenue is a model many companies use, but to execute that in a SaaS business takes a bit of finesse; there are probably better ways (I’ll show you some later).
But the bottom line is, with an affiliate program, the customer is your customer directly regardless of what you pay your affiliates… and that’s a very, very good thing.
Now… what you’re NOT talking about is a Reseller / Value-Added Reseller / Representative model where you have a much more tightly-coupled relationship with your partner and where – in a lot of cases – they own the relationship with the customer. White-labeling and even outsourced sales forces could fall into this category.
BTW… Most people (even today in 2013) that are talking about Affiliate Marketing in SaaS are speaking from this POV since the reseller model is typical in Enterprise Software and with Enterprise SaaS… but it’s not affiliate marketing like we’re talking about here, so be careful the person you’re learning from is talking about what you think they’re talking about.
Okay, and just so we’re on the same page… both of those models are very different (well, the latter isn’t just one model but several different types all grouped together) and they differ from yet another thing…
… referral programs.
Referral programs are generally for your existing users and customers to help you spread the word about your SaaS app and when they do, often both the referring user and the new user will be rewarded.
Referral programs can offer a monetary reward, but generally do so in the form of app credits (even if those are pegged to dollars) rather than actual cash.
While seemingly similar – including at the technology level – Affiliate and Referral programs are very different in execution. You need to know your customers and market well to understand which to choose.
Dropbox – during it’s famous “14 months to an epiphany” replaced it’s Affiliate program with a Referral program because they learned their early users weren’t motivated by monetary compensation. When they switched to offering more storage for both the referring user and the new user (among several other things) their growth accelerated.
In fact, there are certain market segments that might want the cash for referring people – the more traditional affiliate model – but would be afraid that others would think they *need* the money, so they would be unwilling to spread the word lest their friends and colleagues think they’re poor. #truth
Also, technology early adopter types most likely valued storage and functionality over money anyway.
On the other hand, some people are motivated by cash and aren’t ashamed of it so a full-on affiliate program is likely the best bet in that market.
A nice little rule of thumb is that if there are more people out there that might be willing to shill for you than use your product, the affiliate model is probably the best place to put your energy than building out a referral program.
In fact, affiliate marketers are very (most?) often NOT customers of the products and services they promote.
They might be users of the product or get free access or preview versions so they’re actually promoting something they know and understand (though not always), but being an affiliate does not equate to being a customer.
Whereas in the referral model, those referring others to your product or service are generally users (though they might not be paying customers, but that’s okay assuming they refer people who will pay you).
Okay… so now that *that’s* clear as mud, let me clarify something about Affiliate Marketing and high-priced SaaS products.
SaaS Products are Often Cheap
To your point about affiliate programs and low-priced SaaS offerings, here’s my take.
First, I think it’s fair to say that most (most… not all) SaaS companies have prices that are less than $200/mo which is why there aren’t too many higher-priced offerings that also have affiliate programs.
Overall, only a small percentage of SaaS providers have affiliate programs and only a fraction of those have prices over $200/mo (at any level), so there you go.
Also, lower-end SaaS companies generally have a low/no-touch e-commerce style sales model that makes affiliate marketing a more natural extension of the sales funnel vs. those with higher prices and higher-touch offerings.
Of course high-price != high-touch… but far too often SaaS == low-price.
That said, most SaaS companies that have tried affiliate programs have found very little success… IMHO not because affiliate marketing doesn’t work, but because for most vendors it’s just another random act of marketing.
And frankly… one of the biggest struggles for SaaS vendors is marketing… so why would affiliate marketing be any different for them?
Speaking of Marketing…
Before you start recruiting affiliates, make sure you can sell your stuff, that you have a sales funnel that converts, etc.
Ah, but there’s the rub: If you can sell your stuff, why do you need affiliates? Assuming that’s a legitimate question, the answers are scale and distribution.
Look… I have worked with companies before that had affiliate programs where the affiliates were much better at driving traffic to their site than they were.
Their affiliates came up with ads and sales copy that captured the value prop of the offering and targeted the right customers better than the vendor did.
The affiliates did that because they were motivated by large payouts.
Sure, but those fizzled out quickly because even if they can effectively convince people to click on a link to go to your site, it’s up to you on your site, with your landing pages, sign-up & on-boarding processes, engagement, follow-up, etc. to turn the visitor – even a super-hot, ready-to-go lead – into a customer.
And if you don’t have that part optimized – or even semi-effective – your affiliates will soon stop promoting your stuff.
Seriously… who wants to work hard to send people to a site that doesn’t convert customers?
In fact, one of the things vendors competing for the same affiliates will use to try to get someone to promote their offer over a competitor is to talk about their conversion rates.
All things being equal (high payout, low refunds, etc.), if I’m an affiliate, I’m going to send my audience / traffic / clicks to the offer that converts better. Makes sense, right?
So you – yes YOU – have to have a Sales Funnel that converts (I can help you with this BTW – whether you have an affiliate program or not) if you want to keep the affiliates you recruited engaged and promoting your stuff.
Wild… the same stuff that matters for your customers – engagement – matters for your affiliates.
What a world we live in.
Affiliate Marketing Requires Product / Market Fit
If you’re a startup and you’re reading this, you must reach product / market fit before you bring affiliates into the mix.
Don’t try to get affiliates to sell for you until you can sell your product yourself to people other than early adopters… and until you’ve reached Product / Market Fit it’s unlikely you can do that.
Don’t think you can rely on your affiliates to figure out what you’re selling for you and then integrate their hard work back into your marketing.
As I said recently, if your site doesn’t convert, your affiliates will quickly stop promoting your stuff no matter what the promised payout is… since they’ll never get it because your site doesn’t convert.
Affiliate Marketing is for scale and distribution… it is not a replacement for your lack of marketing ability and hope that you won’t have to develop it.
That all said, it’s your job to continue to optimize the customer experience during the sign-up, on-boarding, and engagement processes, provide new and continuously tested and updated landing pages for your affiliates to send customers to, and to develop optimized creatives, sales copy, email swipes, etc. for your affiliates to use.
But something more than marketing is required…
The Correct Mindset is Critical
So many of the things that hold SaaS vendors back – and I know you hate it when I talk about this stuff – is mindset.
It’s not your tactics, your tools, or even your strategy… it’s the mindset you go into the planning, development, and execution of those things with that is limiting your success. #truth
Here’s an example of mindset getting in the way of success.
Most vendors – SaaS or otherwise – who have tried and failed (or been less-than-successful) with affiliate marketing start with this overarching premise:
“What’s the least I can pay my affiliates and maybe still keep ‘em interested?”
That’s a pretty limiting statement that reveals the true nature of where the vendor (or the marketing genius behind this tactic) is coming from.
That’s what someone like Tony Robbins might refer to as a scarcity mindset. And I just lost you because I invoked the name of the Mighty Robbins.
Now, on the flip-side, companies – again, SaaS or otherwise – that have succeeded or thrived with Affiliate Marketing think:
“What’s the MOST I can afford to pay my affiliates?”
Obviously the longer your customer lifetime – and the more likely you are to grow Lifetime Value (LTV) through expansion revenue – the more you can afford to pay out up-front or on a recurring basis (or both).
When you have this attitude, a lot of the necessary things will start to fall into place for Affiliate Marketing success.
Of course, this mindset will help you when you’re…
Designing Affiliate Payout Schemes
I see questions like this all the time: “What’s the industry standard compensation model for affiliates in SaaS?”
Good news… there’s not one! You actually get to be creative. Neat.
When talking about how you pay your affiliates, there are two main things to consider… and they’re huge and 100% specific to your offer, your goals, your customers, and… your affiliates.
First, do you offer a one-time payment or recurring payment (or both)?
The common misconception with SaaS vendors is that since we’re dealing with recurring revenue we need to pay out in a recurring fashion.
Of course this fits nicely with the vendors model and seems less risky because we only pay our affiliates when we get paid.
And of course this way they won’t rip us off and we won’t lose out… ah, scarcity mindset again!
Here’s a little secret you’ll argue with me about but one you’ll probably find to be true if you actually do the research, talk to potential affiliates, etc.
Some affiliate marketers actually prefer one-time payments over recurring payments.
WHA!?!?!? That’s crazy, Lincoln. I like you, but you’re crazy.
It’s true and this flies directly in the face of the people giving advice who’ve never implemented affiliate programs and just talk out of their ass-umptions all the time.
But as I like to say all the time…
…your logical thinking means nothing compared to actual customer (or affiliate, in this case) behavior!
So yes, even if the recurring payments over the entire customer lifetime would equal more over time, when it comes to gettin’ paid, as the saying goes, a bird in the hand is better than two birds in a tree or something like that. Whatever.
Also, if your Affiliate program is new (which it probably is when you first start), potential affiliates don’t know, like, and trust you yet… so they’ll want their money as fast as possible; again, even if it’s considerably less than they’d make over time. Time Value of Money, Opportunity Costs, etc.
But take the time to actually get to know your affiliates (this will seem like a step you can just avoid because – c’mon… having affiliates is supposed to help you scale quickly, right? This seems like work. Bleh. No thanks.) so you’ll know going into this.
Or your affiliates might love recurring revenue. I don’t know.
But you need to know that some don’t and if those make up your pool of potential affiliates… good luck if you go the opposite route with your payouts.
Payout for What, Though?
Well, second, when considering how to compensate your affiliates, you have to know what you are going to pay them for.
You can pay them for a new customer, you can pay them for a lead, for a new Free Trial sign-up, for an opt-in (single or double… double is probably best) to your mailing list or email course, etc.
Most affiliate programs pay out based on the affiliate sending the vendor a customer, but that is mostly because they don’t know what’s possible and/or haven’t really thought it through.
This is the Cost Per Action (CPA) model, though you will sometimes see it broken down further to Cost Per Lead (CPL) or whatever. It all falls under the CPA model, though.
Or you can pay for all of those things, compensating the affiliate as the engagement with the prospect grows, though this can get complex and I’d advise you not to over think it at first.
BTW, you may see other terms out there like CPM (Cost Per Mille… mille means “Thousand” in Latin) where you pay for getting your offer in front of people (impressions) or Cost Per Click (CPC) where you pay simply for clicks, but those are more specific to advertising (AdWords, email marketing, etc.) than affiliate marketing, though they may figure in somewhere. Good to know what they are at least.
Okay… So How do you Pay your Affiliates?
Affiliate Payment Metrics
Are you going to Pay for Leads, Actions, or Customers?
I can’t tell you what you should pay for in this post because I don’t know you, your product, your market, your affiliates, etc.
If you want me to tell you how to compensate your affiliates, you’ll have to work with me one-on-one so I can really understand what’s going on in your business, market, etc. That’s fair, right?
That said, I’m happy to show you what some other companies – SaaS or otherwise – are doing so you can use that for inspiration (PLEASE DO NOT COPY THEM!):
InfusionSoft is one of the original SaaS companies to have a substantial affiliate business, and this makes sense due to it’s close proximity to the Internet Marketing niche. In fact, InfusionSoft itself is used by some of the biggest, most successful private affiliate programs out there so they (probably) know a thing or two about affiliate marketing.
Now, while their prices are not in the multi-thousand/mo range like in the original question I was asked (unless you do a lot of add-ons and have a ton of contacts), they’re not “cheap” either. And while they are a recurring revenue business, they have a one-time payout for new customers.
Like a lot of SaaS companies, web hosting providers have a self-service model and will often pay for new customers rather than other actions.
According to their presentation at the Traffic & Conversion Summit back in January 2013 in San Francisco, the guys at freewebsite.com did around $60M in revenue in their first 24 months in business with about 98% of revenue coming in from affiliates.
The other 2% was generated through their own efforts so they could pass the learning onto affiliates!
They caused major disruption in the retail hosting game – an industry that is incredibly saturated – by being deliberate with their marketing and aggressive with their affiliate payouts and affiliate recruitment tactics.
Hosting companies – like the guys above as well as managed hosting companies like WPEngine – know they’ll likely have a super-long lifetime if they can just get people in the door and on-boarded. It’s hard and/or annoying to switch hosting providers, so once you’re in, you’re in for a while until something catastrophic happens, probably.
WPEngine goes a step further and actually has a two-tier affiliate model where they reward affiliates for referring other affiliates. Since it is only two-tiers it stops short of being a pyramid scheme, but this can drive up your affiliate numbers big time (or you can have affiliates canabalizing each other and hurting some of the benefits we’ve talked bout… know your audience!).
Also, WordPress powers like 19% of the interweb now, so there are a lot of people blogging about it, developing for it, etc…. lots of potential affiliates out there. Not every company has such a massive potential affiliate base… though it’s not always quantity as much as quality that matters.
When you have a higher-priced offering, you do generally have a more complex sales process. Not always, but often. The cool thing about affiliates is – in theory – they’re making the sale for you, which is why you reward them. They basically send you a customer.
But when there’s a more complex sales process involved, it might be unrealistic to expect your affiliates to make the sale for you… but they could send you really warm leads all day long. In that scenario you could just pay them for the lead as Hubspot does… they pay $10 per lead and tout offers that convert at 30-50% (because that’s important for a potential affiliate to know!)
Honestly, $10 is probably much cheaper than an AdWords click to an opt-in landing page (and in this case they only pay if they get the lead… and not just per click) and – because the affiliate is likely a person the lead trusts – the likelihood of conversion from this form of lead gen is probably much higher… and the resulting payouts for the affiliates, while probably not that Maroon5 money, probably buys lunch a couple times a week.
While HasOffers – a SaaS platform for managing your own affiliate programs – indicates that you can pay for various actions throughout the engagement process – and their system makes that relatively easy to implement – I don’t personally know anyone that does that in practice, though I’m sure someone has tried it.
Loop11 does both CPL & CPC, whereby they pay $1 for every new trial sign-up you send ‘em as well as 25% of the sale price (one time) for new customers, so there’s that.
Now… Just to be fair, some SaaS companies do pay out on a recurring basis:
- Visual Website Optimizer (ugh… for all the greatness that is VWO, look at the limiting language they use to ‘motivate’ affiliates… maybe they’re killing it with affiliates… maybe they could double-kill it with better copy. They should test that. )
- Shopify - they offer either an up-front or recurring commission… not both
- HighWire – 25% recurring for the life of the customer
I’m just trying to give you some ideas about what to look for and how to do it right… not how to copy what other people are doing. Got it? Cool.
How Much Do you Pay Affiliates?
You see these questions on Quora all the time and what makes my brain want to explode is you also see… answers.
As if it’s possible to give a legitimate answer without knowing all the stuff we just talked about (and a lot more).
Also, I really, really, really hope people aren’t taking what people say on Quora – or even on this blog – as the gospel, going to Starbucks, whipping out their Macbook Air and changing things up… even though I 100% know that is EXACTLY what people are doing.
Like I tell people all the time… my best stuff isn’t on this blog! If you want me to help you, talk to me directly… don’t just take what I write here as a replacement for actual consulting.
That said, if I am forced to answer the question, my response is more nuanced…
I know… I know… not cool.
Look, it’s true and that’s actually the way it should be. What you payout to affiliates, how its structured, etc. should be specific to your situation.
But to bring it back around, as you can see from the examples I’ve given, affiliate payouts can range from $10 for a lead to 25% of recurring revenue in perpetuity to a one-time $1,500 payment for a new customer… and everything in between.
But other than your goals, your customers, your market, your product, your offer, etc. what other inputs should you consider when building an affiliate compensation model.
Well, this is SaaS and I know Customer Acquisition Cost (CAC) is on your mind.
Does Affiliate Marketing Lower CAC?
That’s probably the #1 question I get from SaaS providers and – again – it’s the wrong approach.
Can Affiliate programs lower CAC? Perhaps.
Should an Affiliate program lower CAC? Not necessarily, and here’s why.
I said the goal of an Affiliate program should be scale and distribution.
Distribution to new audiences / market segments that you might otherwise not reach.
Scale because you can reach more of those audiences / market segments faster and consistently.
Neither of those goals necessarily have anything to do with lowering CAC, rather they are all about accelerated growth.
Sure, right now you might have a CAC of $100, but how efficient is that spend?
It might take 10,000 impressions on your AdWords ad before 100 people click through to your landing page at $1 per click for you to finally get 1 customer.
Or you can pay an affiliate $100 to just send you a customer. Even if you have only a 25% conversion rate, for every 4 people they send to you get a customer. I’d say that’s still rather efficient compared to the AdWords example, right?
And in the time it takes you to pay the $100 to AdWords – meaning the time it takes to get the 10k impressions, 100 clicks, and 1 new customer… you might get 5 new customers from affiliates.
So you can also add Efficiency to Scale and Distribution as the goals of an Affiliate program.
One concern using the logic above is that if you pay $100 for a new customer and you get too many of those too fast, you’re going to exhaust your bank account.
That’s a good problem to have in some ways, but also something to keep in mind.
Obviously you need some safeguards in place and payout policies, timeframes, rules about holding funds for a few days to cover refunds, chargebacks, etc.
And while you want that be as much in favor of the affiliate as is reasonable, you also don’t want to be foolish. CYA, y’all.
Speaking of being foolish, don’t be when it comes to…
When you payout more than you’ve taken in, that’s considered going negative.
It’s only bad when you payout more than you WILL take in over the customer lifetime or if it takes too long to finally payback what you’ve paid out (correlates to CAC payback period).
I’m not going to lie… going negative is not without risk.
But to me, “throwing money at AdWords” every month with nonexistent results is also super risky.
Just know your LTV so you don’t accidentally pay out $1000 if you’ll only get $500 from the customer.
And if you’re a new company that doesn’t know your LTV yet for sure because you don’t know the average lifetime of a customer, how do you come up with a number?
Like a lot of what you do as an entrepreneur, you gather as much intel as you can, mix it with your gut feeling, then place a bet on being right.
For specific industries – or specific categories of SaaS – you might be able to find average customer lifetimes. Remember, though, this is not across SaaS as a whole because SaaS IS NOT A MARKET… just across your product category like project management, CRM, etc.
I’d even go a step further and look for even tighter analogs than just product category… like price level, target market, etc. Those will definitely have an impact on customer lifetime, LTV, and CAC.
Now, if you were to use industry data and basically make an educated guess, to hedge that bet you placed on yourself being right, you can limit those negative payouts to a certain number of deals and see how they work out before doing that on an unlimited number of transactions.
If you do that, be clear with your affiliates about your plans to limit the number of deals… but if you do things right, keep your affiliate program private, maintain control and communication with your affiliates, etc. this shouldn’t be a problem.
But just to reiterate the reason companies “go negative” and offer a big chunk up front to their partners rather than paying out on a recurring percentage basis is that it simply gets the affiliates more interested and willing to promote their stuff.
Like I said before, affiliates see $50 today as a lot better than $3/mo for 36 months, even though the latter represents $108 total.
Empower Your Affiliates and they’ll Enrich You
Remember, companies who have successful affiliate programs work hard to help affiliates make sales… they have a funnel that converts, they keep an eye on what tactics & creatives are working – and what aren’t – and communicate that back to their affiliates.
And they pay their affiliates on time, every time, without fail.
But that goes back to putting your affiliates on a pedestal vs. seeing them as leaches and scammers.
And just like any other marketing initiative, you can’t just create an Affiliate program, put it out there, and expect it to be effective.
It’s work… but work that will add Scale, Distribution, and Efficiency to your Customer Acquisition efforts.
Non-SaaS Affiliate Examples
Here are some other examples to check out, though they’re not all SaaS. This is good, BTW, as your affiliates probably aren’t just going to sell SaaS products so you need to know what else they sell and how they’re thinking about their business:
- http://www.500affiliates.com/ <== a dedicated affiliate site for plus500
- https://www.onesky.com/affiliates/index.cfm <== private jet charters
- http://www.jetcharters.com/affiliates/ <== more jet charters
- http://www.highpayingaffiliateprograms.com/ <== lot’s of high-paying affiliate programs to study
Soul Searching and Naval Gazing
To be successful with an affiliate program – and to set it up the right way for your affiliates (who cares what other SaaS vendors do, this is about your affiliates, your customers, and you), you’ll need to do some research and planning.
Some questions you need to consider are:
- What can you afford to pay out? What are your hard costs, what’s the contribution margin for each customer at full retail price, etc.
- Who are your potential affiliates? What other products and services do they promote?
- Are they straight-up affiliate marketers or are these people that work with your potential customers in a trusted advisor capacity?
- What will your potential affiliates want – one-time payout or recurring?
- Will you have an open, anyone can join affiliate program or will you keep it private and vet potential affiliates?
Public vs. Private Affiliate Programs
The only thing I can say for sure without knowing anything about your situation is, at first, I’d keep your Affiliate Program private, small, and invite-only or qualification-based and work closely with your affiliates to learn what works, what doesn’t, etc.
Private Affiliate programs are ones you control completely, from who you let be an affiliate, to the logistics of clicks, payouts, refunds, etc. and you can leverage a service like HasOffers for that.
Public Affiliate Programs use networks like ShareASale, Commission Junction, Clickbank, or JVZoo and – while you may have some control over who can promote your offers – think of these networks as having built-in distribution (they’re a two-sided marketplace model), but it’s distribution that is one-step removed from your control. For that simple reason, you probably don’t want to start there.
Once you run your limited, private Affiliate Program for a bit you’ll figure out from quickly if you want to roll it out to the public, keep it private but expand it, change it completely, or kill it.
As for the specifics of your payout scheme… without knowing more about your situation, I can’t give you an answer other than it depends, though I’m happy to help you figure that out.
You Need an Optimized SaaS Sales Funnel
For immediate consultation and advice on Affiliate Marketing programs or Sales Funnel Optimization, schedule at least a 15-minute meeting with me via Clarity. If you feel a more involved engagement is required for me to help you, email me with the specifics of your situation (as much detail as you’re comfortable giving) and we’ll setup a meeting to work through the particulars.