It was Adidas that recently made headlines by admitting that it over-invested in digital advertising. The sports brand had its focus on the ROI of individual marketing campaigns at the expense of long-term brand building. This paved the way for a critical shift in their marketing strategy, a move from the ROI-obsessed marketing efficiency to marketing effectiveness.
But what is the difference between marketing efficiency and marketing effectiveness? And what is their role in affiliate marketing? This article tries to answer these questions and provide a guideline for measuring the success of an affiliate program. But first, it’s important to understand why there is a need to move beyond ROI and individual campaign performance.
A strong concentration on efficiency tends to create a situation where a company is fixated on specific KPIs, reducing costs and maximizing profits. Less attention is then given to long-term growth and brand building activities. And it’s easy to see the strategic fault here when it comes to strong brands such as Adidas. But does it apply to startups and SMBs in the same way?
It does, and here’s why. When you place ROI at the forefront, you have an incentive to collect only easy and quick wins. But since your business seeks growth in the long term, you need to evaluate the contributions of your marketing efforts on your business as a whole. Instead of going for the lowest hanging fruit, pay attention to financially-driven metrics, or KPIs such as customer lifetime value if you want to shift your focus more toward marketing effectiveness.
For an affiliate program, your marketing success relies on the success of your affiliates. Therefore, to maximize your affiliate program’s effectiveness, you need to focus your marketing efforts on them. But this doesn’t mean just tracking their performance. Your primary task is to keep them engaged and committed to your program. Think of affiliates as your brand ambassadors who spread knowledge about your products and endorse them to their networks.
But when it comes to tracking and measuring the performance of an affiliate program, you can also move beyond ROI-focused efficiency metrics toward marketing effectiveness.
Here is a list of affiliate marketing KPIs that help you measure marketing effectiveness:
1. Traffic from affiliates
Compare the difference in traffic flow to your website from affiliates and other promotional channels. You can evaluate the overall impact of your affiliate program on your website traffic. How has it changed over time and is there an upward trend?
If your affiliate traffic is on the decline, it’s time to activate your affiliates and recruit more new ones. Declining affiliate traffic means that there are more attractive alternatives available. Make sure that your affiliates have strong incentives to promote your products.
2. Lifetime value of referred customers
This is a prediction of the net profit that each referred customer will bring you over the entire customer relationship. Once you know how long you should expect your customer relationship to last, you’re able to predict how many transactions you should receive from each referred customer. And here are the steps to calculate it:
First, you need to choose a time period, for example year-to-year. Let’s say 2018–2019. Then, you should calculate your retention rate, churn rate, average revenue by customer and your profit margin. You will need all of them before you get your lifetime value.
- Retention rate
Calculate first the revenue in 2019 from customers who were referred by your affiliates in 2018. Then, divide this number by the total revenue in 2018.
- Churn rate
This is a simple calculation of 1 minus your retention rate. It shows you how many of those referred customers are no longer your paying customers.
- Average revenue per user (ARPU)
It tells you the revenue from each referred customer per year. First, calculate the total revenue from referred customers during the entire time period 2018–2019. Then, divide it by the total number of referred customers in the same period.
- Profit margin
Also known as net margin, it gives you the amount by which revenue from referred customers exceeds the costs of running your affiliate program. These costs include the commissions you pay to your affiliates, affiliate platform fees, any discounts and the money you spend on affiliate recruitment and marketing.
Once you have gathered each of these numbers, you may use the following formula to calculate your lifetime value: ARPU divided by churn rate and multiplied by profit margin. The resulting customer lifetime value tells you how much profit an average referred customer brings to your business over the lifetime of their customer relationship.
3. Percentage of active affiliates
At first, you need to define what it means to be an active affiliate. An affiliate who generates sales in a given period of time is the most obvious definition. You might consider, for example a period of one year or six months, based on your preferences.
While this is a simple metric, it provides valuable information about the quality of your affiliates. If only a small percentage of your affiliates are active, it’s time to re-evaluate your affiliate recruitment strategy. Perhaps you’re not targeting the right segments.
Since affiliate recruitment is the most time-consuming part of running an affiliate program, changing your targeting strategy can make all the difference. This also shows how looking at conversion rate is not enough when measuring marketing effectiveness.
If you would like to improve your affiliate recruitment strategy, you may check our earlier post about recruiting affiliates for B2B.
4. Incremental revenue from affiliates
Incremental revenue measures the contribution of marketing to sales. It is the increase in sales resulting from advertising and other marketing efforts. In terms of affiliate marketing, it is the revenue from new customers that have been referred by affiliates.
This number helps you evaluate the overall impact of your affiliate program on your business. It shows how much revenue you would not have received without affiliate marketing. You can then compare this number to the incremental revenue from other channels such as PPC, content and social, for example.
5. Contribution margin
Many businesses have a tendency to focus on conversion rates and conversion rate optimization. They want to have an optimal ratio of costs and benefits. Their goal is to achieve the best compromise with the optimal contribution margin. It’s about getting more out of what you already have. This process is also known as improving efficiency.
Converting a visitor or lead into a customer generates value for your business, and conversion rate describes the efficiency of this value creation process. Tracking your conversion rate across different channels offers valuable information about how to allocate your budget to achieve the best performance. While this is an efficiency metric, it can provide information that leads you to adjust your long-term growth strategy.
However, what conversion rate doesn’t take into account is that the most important value creation process is actually when you convert a one-time customer into a repeat customer. Loyal customers are the ones who create long-term effectiveness. In terms of affiliate marketing, this means converting affiliates who make a one-time sales into affiliates who make recurring sales.
Affiliates who make recurring sales are especially effective on the B2B side where the average product value is higher. If you want to read more about B2B affiliate marketing, you can take a look at our earlier post about doing affiliate marketing for B2B.
This is why your contribution margin is a more relevant metric for marketing effectiveness. As an affiliate program manager, you can measure your contribution margin by calculating the average sales revenue from an affiliate minus the average cost of recruiting an affiliate. It takes the quality of your affiliates into account. A high conversion rate is not of much value, unless those affiliates bring you actual sales.
These KPIs should help you measure the effectiveness of your affiliate program. While measuring efficiency is important for individual marketing efforts and campaigns, marketing effectiveness is what determines your long-term growth and the success of your strategy. The key is to optimize your primary value creation process and seek continuous improvement.
If you want to read more about the basics of affiliate marketing, you can take a look at our Ultimate Guide to Affiliate Marketing.
About Johannes Rastas
An Affiliate Program Manager at Supermetrics, Johannes Rastas has worked in communications and marketing in Kyiv and Helsinki. Passionate about marketing, statistics and content, he’s actively looking for new affiliates to join the Supermetrics Affiliate Program. Feel free to contact him on LinkedIn