Affiliate commission structure explained
There are different ways in which an affiliate program can calculate your commission. Initially this can be a little bit confusing, but once you familiarize yourself with the different affiliate commission structures it will be easy to calculate which affiliate program makes you the most money.
Basically there are four ways of commission calculation:
Percentage of revenue
You get a percentage of the revenue your affiliate provider makes on a sale or subscription. Especially for continuous services such as web hosting or online trading accounts, a percentage of revenue can continue to make you money long after you initially referred a customer. Some successful affiliate marketeers have by now retired and live solely off the commissions they still earn from past sales.
Commission per sale (CPS)
A commission per sale earns you an amount x when you refer a customer to your affiliate provider and he makes a purchase. Typically a CPS makes you more money in the short run than a percentage of revenue, but you miss out on any profit on return customers or continued subscriptions.
Commission per lead (CPL)
Many affiliate programs use the term 'lead' for a prospective customer who hasn't bought anything yet. The measures to determine whether someone counts as a 'lead' differ, but often it includes an act on the part of the referral such as opening a free demo account or signing up for a newsletter. Since the required act is free, obviously the threshold is much lower for someone to become a lead than for them to become a customer. Not surprisingly, CPL figures tend to be much lower than CPS figures.
Commission per click (CPC)
If you are an affiliate on a cost-per-click-basis, you earn a commission each time a visitor of your site clicks through to your affiliate provider. Because there is no guarantee that the visitor will buy or even do anything on the site they visit, CPC tends to be low. Although in some well-targeted highly profitable markets such as online trading or real estate, you can still make multiple dollars on a single click.
Commission per mille (CPM)
Generally you'll want to stay away from CPM structures, as we'll explain shortly, but for the sake of completeness we mention it anyway. On a CPM-basis you earn money per one thousand impressions of an advertisement on your website, click or no click. This measure used to be popular in the early years of online advertising but is rarely used these days.
Effective commission per click (EPC)
It can be difficult to find out which affiliate program makes you the most money if they offer you a reward based on different measures. For example, one online brokerage service might offer you a 15% revenue share where another offers you a $25 CPL. Which one would be the most profitable for you? Well, it depends. You need to understand a few basic calculations to answer the question.
Clickthrough rate
Let's start at the bottom. For each hyperlink or banner on your website you can calculate its clickthrough rate. This is the number of times a visitor clicks on the link divided by the total number of times it was displayed. For example, if your banner is displayed 10,000 times each month and 150 people clicked on it, that's a clickthrough rate of 1.5%..
You can use the clickthrough rate to compare CPC and CPM measures. CPM = CPC x clickthrough rate x 1,000. In the above example, if your affiliate program would offer you $1 per click, that would translate into a CPM of $1 x 1,5% x 1,000 = $15. For each 1,000 displays of the link, you'd effectively earn $15. That means that for your 10,000 displays each month you'd get $150.