Why Companies Should Pay Insane Commissions and Why They Shouldn't

Friday, December 12, 2014

Someone told me about his idea of paying massive commissions to encourage affiliates to bring new users on board. It's no secret that some companies pay 10%, 20% - even 50% of the purchase price to guns for hire who are willing to market a product. After all, with many digital goods, any income above zero represents a net gain.

So here's a tough question for you: what's the highest percent payout that a rational company would be willing to pay?

Most folks would probably guess a number below 100%. After all, there's no point to giving away the entirety of a product's sales price to an outside vendor, right?

Actually, there are some cases when it might make sense. Imagine that a customer makes a purchase from a coffee supplier. Is it likely that the customer will make another purchase in the future? Quite probably. Each successful sale represents a lead, and in many cases it may make sense to spend more than the customer's initial purchase price to acquire him. After all, as long as the customer's long-term value exceeds the affiliate's cut, it will make economic sense to pay the affiliate quite a bit.

So if it might make sense to pay out more than a 100% commission - why does no one do it? There's one obvious reason. Such affiliate deals can be gamed.

Imagine that a company offers to pay a 200% commission on any sale. A clever (though unscrupulous) affiliate could set up a network of shill buyers. In exchange for fronting the cost of the initial purchase, he and his buyers could split the remaining commission. Both affiliate and shills would profit from the pricing mistake of the company. Those pesky folks who might game the system ruin it for everyone and ensure that payouts above 100% will be a gimmick shrouded in fine-print or exist only in the domain of amateur pricers.

Want to make sure you're not taken to the cleaners? Check out my book on software pricing or contact me for a pricing consultation.