Incremental sales in affiliate marketing
The most common question that advertisers ask us is how can we prove that the affiliate channel is driving incremental sales? Not an easy question to answer, particularly because the definition of an incremental sale can vary by advertiser and without specific data can be subjective. Let's take a hypothetical example to demonstrate this.
An affiliate generates 100 sales using a £20 off voucher. The normal cost of a sale to the advertiser is £10, with the addition of the voucher the cost is £30. The average order value (AOV) that the customer generates in one purchase is normally £1,000.
The affiliate has generated 100 sales, at a cost to the advertiser of £3,000 but the average order value is higher than £1,000, at £1,200 so it has generated £120,000 worth of revenue. The incremental revenue therefore is much higher than the voucher code cost.
Let's try harder and make the assumption that the AOV does not increase and that 40% of consumers would have purchased without the voucher. The cost of: "would have purchased anyway" becomes...
- 40 sales x £10 = £400
- 40 sales at £20 voucher = £800
- 40 sales would have generated £40,000 of revenue
Take into account these non-incremental costs, it cost £8,200 to drive an additional £60,000 in revenue, again, the incremental revenue from running this activity justifies the cost.
The question of incremental revenue is hard to answer accurately as it depends on a number of factors, but most importantly do you know which of your customers would have purchased without the voucher code? Probably not, but you can make an estimate of a worse-case scenario and see if this is something you can accept as a business.
In the previous scenario it is easy to justify the activity, but if the AOV was much lower, and the CPA much higher there will be a point at which the additional cost of the voucher does not justify the incremental revenue driven. These are scenarios which you should consider when running any affiliate activity, but it will likely always be somewhat subjective. However, ask yourself how many of the sales driven through all your marketing channels are truly incremental to any one channel, probably not very many at all.
Return on Investment (ROI) or Return on Advertising Spend (ROAS) are common metrics used to assess the effectiveness of any marketing activity, including the affiliate channel. The most commonly used calculations for these are:
(Revenue - AdSpend) / AdSpend
Revenue / AdSpend
For example, if your AdSpend within the affiliate channel is £100,000 and the revenue generated from that AdSpend is £2m your ROAS is 20, or £20 for every £1 spent.
What is a good ROI or ROAS?
This depends on a number of factors such as:
- Your target ROAS
- Your average ROAS across all marketing channels and / or digital marketing channels
- The benchmark in your industry or sector
It is however a great way to ensure that you are growing your affiliate programme cost effectively and benchmarking it against other internal activity or industry benchmarks to see whether you are over or under indexing. It is then a business decision as to how you want to develop this, if you are in growth mode you may be prepared to operate at a lower ROAS to gain sales volume and market share. Whereas if you are in efficiency mode you will want your ROAS to be as high as possible.
There are some factors that can affect your ROAS:
- Revenue generated through the affiliate channel
- How much you pay your affiliates for the revenue generated
- Promotional costs (vouchers/offers / free delivery)
- Other costs such as agency, network and platform
How you measure ROAS or ROI may take into account these factors or just what you pay to affiliates, again this is purely a business decision and you should operate in a way which allows you to easily benchmark and compare the affiliate activity internally.
And lastly, the ROAS or ROI can vary per affiliate and at different trading periods, it is adaptable and changeable, but it is good practice to work towards a desired target and ensure you are monitoring this at a granular level as required.