SaaS companies are positioned to take advantage of their high margins in order to drive growth that traditional businesses could only dream of. By design, SaaS companies are built to scale up with very low marginal costs. This means that every new customer can directly affect your net profits. Some customers, however, are more valuable than others.
The value of a customer must be judged based on their marginal lifetime value (LTV). A new customer brings you revenue immediately. But they also cost you something to acquire – through your sales and marketing process. In addition, it costs you something to provide your service to them. You have servers to run, technical and customer support, and other costs associated with each new customer. And some customers stay with you much longer than others.
Traditionally, to decide how much you can pay for a new customer, you would spend a bunch of time building a model of customer LTV which takes all of these components into account. As long as each new customer costs less than the modeled LTV, then you’ll be profitable and can reinvest these profits to continue growing! But modeling LTV can be extremely difficult, especially in the high-uncertainty environment which most SaaS startups and companies operate in. Affiliate marketing can be used as an ingredient in your marketing mix that produces high LTV customers without necessarily needing to have an accurate number for this LTV up front.
In this short paper, we’ll bring up the key points that we’ve found to be most important in starting a successful affiliate marketing program – one that produces predictable marginal profits no matter the accuracy of your customer LTV models. Each section will present a key component and will be followed by the key takeaways. You can refer back to these takeaways as you build your affiliate program to spark your memory.
1 Structuring Your Affiliate Program
The most important thing when setting up your affiliate program is to align your goals with your affiliate’s goals. You want the referrals reaching your landing page or sales material to be highly qualified, warm leads. You’d like them to buy without a laborious sales process and become long-term customers. These results need to be properly incentivized. The best affiliate programs do this by ensuring that the affiliate has the same interests as the brand.
For instance, instead of paying affiliates commission for clicks, trial starts or for email list sign-ups, pay them a percentage of referred revenue as you receive it. This means that successful affiliates will earn predictable, recurring commissions when they refer good customers. The longer this customer stays with you, the longer your affiliate receives commission payments. This aligns the affiliate’s goals to yours – increasing revenue and customer LTV – and will reduce the risk that you as the brand incur.
This component alone is the simplest thing an affiliate program can do to improve the chances of success – because it simplifies the problem. You no longer have to determine how much you’re willing to pay for a new customer up front. Rather, you’ll pay your affiliates for the actual customer LTV every month as you realize this revenue. If you’re a finance nerd, then you’ll notice that this amortizes the cost of your affiliate marketing – allowing you to make the best use of the present value of your capital.
Said more simply, since you only pay affiliates based on the new revenue that you receive from their referrals, you don’t spend money on ineffective marketing or unqualified leads. In this system, your incentives are aligned and the best behaviors are rewarded.
This reduced risk also allows you to pay your affiliates more generously. We’ve found that 30% of the recurring revenue you earn from a referral is a good starting point. This incentivizes quality, long lasting, high paying customers instead of customers that churn out after the affiliate is paid.
Another tip when structuring your program that will reduce your risk is to wait until your refund period is over before approving a commission for a referral. This means that if you have a policy that you will refund a customer within 30 days, then wait the 30 days from the time you bill the customer before you approve the commission.
Designing your affiliate program like this will reduce the risk of starting your affiliate program to only the time that you put in.
- Pay a recurring commission of 30% of revenue.
- Don’t approve the first referred commission until your refund period is over.
2 Recruiting Top Affiliates
The key to the success of your affiliate program is quality affiliates. The Pareto Principle applies heavily here. Users of LinkMink, on the whole, get over 80% of their referral revenue from just 10% of their affiliates. These top affiliates are 8 times as effective as a normal affiliate. There are 3 main qualities that distinguish an A-grade affiliate from the rest.
Relationship with the Brand
Your best affiliates will have a strong relationship with the brand and share a similar or overlapping audience. A-grade affiliates could come from existing customers who love your product or even personal friends of someone in the company.
Audience Size (and quality)
Ideally, you want your affiliates to have a large audience of people who are your potential customers. An affiliate with an audience of 10,000 potential customers will likely outperform an affiliate with a larger audience who aren’t your target customer.
Amount of Promotion
This is really just how much work that affiliate is willing to put in. Are they willing to do a webinar every quarter with you? Are they willing to email their list? Do they only want to add you to their resource page?
The last really important thing about recruiting top affiliates is to know that they won’t come to you. You’ll have to put in some work like you would to get top customers or employees. Treat recruitment like sales. Make a list of 100 people you think would be your ideal affiliates. Then reach out to them however you can and try to sell them on your affiliate program.
To come up with your top 100, think about your best customers – and think about if they’d be a good fit. If you’re B2B – look for good partnership opportunities in the heaviest users of your software. Or look for any place your current customers go to for advice about the problem you solve. If you’re B2C – see if you can find patterns in your users. Who are the influencers? Who gives you feedback every time you release a feature?
Start building quality relationships with potential affiliates now even if you aren’t ready for an affiliate program yet. As your SaaS grows, an affiliate program can be your largest channel for growing revenue. So get started developing relationships with people who could be affiliates as soon as possible.
- Build relationships ASAP!
- Target top affiliates like you would top customers or employees. Reach out to them and sell them on your affiliate program.
3 Helping Affiliates Promote
Some affiliates may already have an individual brand and promotion strategy. Many of the best affiliate programs help their affiliates succeed by providing specific content or events for them to send referrals to. You can also help your affiliates by providing suggestions for them to get started.
If it’s appropriate, ask your affiliates to add your product to a resource page on their site. Or ask them to write a review comparing you to your competitors (if they’ve used them) and post it on their site. Probably the most effective method is to offer a joint webinar with your affiliate and ask them to promote it to their audience.
Most successful LinkMink users treat affiliate marketing as an ongoing project like other marketing streams. They create windows of opportunity through events and campaigns, then encourage affiliates to promote these alongside them. They look at affiliate marketing as a part of their marketing system – feeding highly qualified leads to their sales processes.
- Maintain a shared google doc with your promotional materials to give to your affiliates.
- Ask affiliates to promote a joint webinar, write a review on their site, and add you to their resource page.
4 Automating Your Affiliate Program
If you structure your affiliate program as we suggest, you eliminate the monetary risk of paying for referrals that don’t bring you revenue. However, you still run the risk of wasting your time if your affiliate program is unsuccessful. To give yourself the best chances for success, it’s important to create the simplest system that works for both you and your affiliates, then automate the administrative tasks so that you can and spend your time on improving your program, recruiting top affiliates, and helping them be successful.
Here’s a list of systems we’ve seen in most successful affiliate programs:
- Automate the linking and tracking process – it requires some code, but it’s much more effective than asking for coupon or referral codes. Make sure your affiliates can link to any page on your site without your involvement. You want to give your affiliates the freedom to link to the best content for their specific referrals. This means making sure that they are able to directly link to any location on your site (and/or blog) with their referral link.
- Automate the connection between revenue and referrals – ensure that you keep track of new customers, conversion between plan types, cancellations, and so on. Affiliate commissions should be based on the actual revenue you receive from a referral at the time you receive it.
- Automate the vetting/review process – when you get a new referral, you’ll want to review it to make sure that it’s legitimate. But eventually, as that referral pays you every month, you’ll no longer want to review these commissions. Make sure that as your affiliate program grows, you are able to minimize the amount of time it takes to approve commissions every month.
We built LinkMink specifically for SaaS companies who want to take a data-driven approach to word-of-mouth marketing. LinkMink comes built in with the tools necessary to automate the administrative tasks that come with a successful affiliate program. If you find yourself looking for a ready-built solution with baked-in best practices, we can’t recommend LinkMink enough (but we would say that, wouldn’t we).
- Build (or buy) a system that keeps you focused on the important factors for success – sections 1 – 3 above… *cough* LinkMink *cough*
- Make sure your affiliates are able to promote your best content to their audience. This means tracking direct referral links across your site and blog.
- Streamline your process for paying your affiliates so it doesn’t become a burden when your affiliate program is successful.
- Track referrals through plan changes, and make sure you handle refunds – otherwise you run the risk of your marketing costs being decoupled from your revenue.
By LinkMink – the easiest way for SaaS companies to share revenue on the web.