The goal of creating an additional revenue stream becomes more feasible when you can rely on recurring commissions from your referrals. And while there’s some effort behind every conversion, it’s the commission structure in recurring affiliate programs that comes closest to the idea of passive income.
Here, I will evaluate the revenue model in recurring affiliate programs from both perspectives, that of the merchant and of the affiliate partner.
SaaS and the recurring revenue model
You could say that SaaS was made for the recurring revenue model. An intangible product that’s accessed and hosted entirely on the web with no need for installing any applications. How would you charge for a product like that? On a subscription basis, of course. Which means that most SaaS customers become repeat customers if they renew their subscription after the first month or year, depending on the subscription period.
Why recurring affiliate commissions are better
Based on a benchmark research by Recurly, the average churn rate among SaaS companies is only 4.79%. Their sample included over 1,500 subscription websites and covered both voluntary and involuntary churn among customers.
In general, SaaS companies experience less churn because they have a higher proportion of B2B customers. And B2B sales cycles tend to be longer. The purchase process is more complex and can involve many decision-makers. So, buyers usually consider B2B purchases more carefully.
Both merchants and affiliates benefit from the recurring model if affiliates can bring in promising customers who don’t churn right away. And while there’s no available data on the churn rate of SaaS referral sales, we can at least say that in our Supermetrics partner program, it is in line with the overall company-level customer churn rate.
Since most SaaS merchants offer free trials for their product, you could say that the affiliate is only responsible for bringing in leads to the merchant. These leads then either convert or don’t after their trial ends. But it also depends on the quality of the product whether a conversion takes place. Both conversion rate and the customer retention rate determine the chance of recurring commissions. Proper targeting and the quality of those prospects makes a big impact.
Value-adding partners build long-term profit
A value-adding partner who explains and showcases the benefits of the product and tailors the sales pitch to the needs of the prospect in question is more likely to bring in repeat customers. In such cases, compensating the affiliate for first purchase only isn’t ideal. Especially if the referred customer chooses monthly billing but ends up becoming a long-term customer.
In affiliate programs with lower-priced products, affiliates typically focus on sending a large volume of prospects to the merchant’s website, hoping some of them will purchase the product.
In these cases, there’s no direct contact between the affiliate and the referred customer. But paying recurring commission is a good way for the business to attract new partners by increasing their earning potential.
Overall, recurring affiliate programs work best with businesses that have a high customer retention rate and affiliate partners who can bring in promising customers. So, choose the products and brands you work with carefully. And if you use the product yourself, it’s easier to evaluate the product’s ability to retain its users.
The best recurring affiliate programs are those that are market leaders in their field and in high demand. Rather than promoting brands that no one knows about in a saturated market.
Recurring commissions and other factors worth considering
A higher commission rate or even the recurring commission model doesn’t automatically translate into more affiliate income. Multiple factors come into play, including:
- Product-audience fit
- Is there demand for the product among your audience or network?
- Market demand and competition
- Is there enough demand for the product in the market?
- Are there many competitors? Does the niche seem too saturated?
- Product price and sales cycles
- Is the product’s price high enough to guarantee proper commissions?
- What is the average sales cycle from prospect to purchase?
- Compensation model
- Does it pay flat fees, one-time, recurring, or lifetime commissions?
- Free trials
- Does the company offer free trials for all prospects?
- Tracking and cookie lifetime
- How are referral sales tracked?
- If cookies are used, what is their lifetime?
- Support and marketing materials
- Does the program provide product guides that narrow down the product’s USP and other useful marketing materials such as banners, videos, and text ads?
- Payment method and window
- What payment methods are used and how frequently are commissions paid?
- Additional incentives
- Are there any promo codes, bonuses, or other performance-based incentives?
The commission model is only one of the factors. But if all of the above are in check, you have much higher chances of turning your affiliate marketing efforts into a long-term revenue stream.
Why affiliate commissions are not passive income
Whatever funnel you’ve built for your affiliate promotions, it’s never a plug and play type of operation, where you can just set it up and forget about it. For your funnel to convert, you need constant updates and improvements. For example, if you’re a content affiliate marketer whose revenue depends on your ability to attract qualified traffic, it’s very much an on-going effort to maintain and grow that traffic.
Similarly for an online course, you have to direct traffic to it and keep the materials up to date. And even for an automated email sequence, you need to build an audience first and then you have to engage with that audience to maintain the relationship.
So, if recurring commissions are not passive income, what about lifetime commissions and other compensation models? Let’s take a look at the four main types of affiliate compensation.
How do recurring commissions compare with other models
Our partner team at Supermetrics conducted a small-scale analysis of our competitors in the SaaS industry. Our sample included a total of 83 SaaS companies in the reporting and analytics niche. First, we checked whether the company had any partner program and then we looked at their compensation model and what else they offered.
More than half of the companies had a partner program, excluding integration and other technology partnerships. And of those partner programs that revealed their compensation structure on their partner page, almost 80% offered recurring commissions. The rest either paid one-time commissions, flat fees, or a combination of the two.
Based on our small-scale analysis, you could almost say that the recurring revenue model is an industry standard among SaaS companies. But to understand why that is the case, let’s compare the four main compensation models in affiliate and partner programs.
- A fixed amount paid for either leads or conversions. Flat fees are more common in B2C affiliate programs. But some B2B and SaaS programs use them, too.
- The upside is that you get your entire compensation at once and the amount can be higher than one commission. But the downside is that you need to land a new customer for each payment and the amount usually doesn’t stack up to your cumulative earnings from one referred customer in a recurring affiliate program.
- The flat fee amounts can also vary within the same program, depending on the product and subscription period.
- A percentage of the purchase price that’s paid only once. Without the recurring feature, one-time commissions have the same disadvantage as flat fees. So, each commission requires a new customer and the cumulative earnings per referred customer usually remain lower.
- If the commission rate is substantially higher compared to the rate in the recurring model, then you benefit from the faster payout by getting access to a larger commission amount right away. And you don’t have to worry about the possible churn of your referred customer.
- One-time commissions are good especially for enterprise-level product categories, where customers mostly purchase annual licenses.
- A compensation model where you can earn multiple commissions from a single referred customer. The subscription-based pricing model that’s widely used in SaaS is the perfect match for recurring commissions.
- Affiliates get paid for both first purchase and when the referred customer renews their subscription. So, their cumulative earnings are usually higher. And the merchant benefits from the incentive affiliates have to bring in quality referrals that don’t churn too fast.
- A longer payout period is the main disadvantage. You don’t get paid right away but you have a chance to build a long-term source of revenue.
- A type of recurring commission where you can earn multiple commissions from a single referred customer for the customer’s entire lifetime. There’s no predefined end point for the commission payments, such as two years after first purchase.
- Paying commissions on the referred customer’s all future purchases is expensive for the merchant. That’s why actual lifetime commissions are rare. Some companies use them in the early stages of establishing an affiliate program as an incentive to get more affiliate partners on board.
- Similarly to other recurring commissions, lifetime commissions have a longer payout period. There’s also no guarantee that the program doesn’t eventually change its commission payments from lifetime to another commission model.
When choosing affiliate programs and evaluating their compensation model, keep in mind that it’s the cumulative affiliate earnings that determine your success, not the maximum amount of an individual commission.
A high flat fee or one-time commission amount might seem attractive. But the frequency of your commission payments also matters a lot. That’s why you’re more likely to end up earning more from recurring affiliate programs in the long term.
And even beyond the compensation model, you have to look at all of those other factors affecting your profit potential, starting with product-audience fit.
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Recurring commissions for resellers and sales-assisted purchases
There can be slight differences in the recurring commission model when it comes to compensating resellers and referrals in sales-assisted purchases.
What sets resellers apart from affiliates is that they’re usually more involved with the merchant and in the product’s implementation for the customer. Typically, they sell higher-value deals or larger quantities of the product than affiliates and referral partners. While many affiliates have no direct relationship with the referred customer, resellers sell to their own customers directly.
Some programs use a compensation model, where their partners first purchase discounted licenses and then resell them at the regular plan rate. That discount is the reseller’s profit. But it requires considerable initial investment from the reseller partner to purchase those licenses.
In the Supermetrics partner program, we pay recurring commissions for both affiliate partners and resellers. They both get 20% commissions for all website purchases and their renewals. The only exception to this are sales-assisted purchases of our data integration products, where partners refer prospects to our in-house sales team who handles the sales process internally.
Given the involvement and efforts of our own sales team, the commission rate for sales-assisted referrals is reduced to 15%. But the deal size tends to be bigger, which adds to the overall earnings.
Selling annual licenses
When talking about resellers and sales-assisted purchases, in our company we’re dealing with annual licenses almost exclusively. This means that unlike in most recurring commission models, you get paid right away for an entire year’s worth of commissions. And then another commission next year if the referred customer renews their license.
This is ideal for both the merchant and the partner as the customer commits to a longer subscription period. And in most cases it’s also beneficial for the customer since annual licenses are normally offered at discounted rates.
The only drawback is that smaller agencies may not want to commit to such large payments and might choose monthly billing instead. Even if it means higher total price. This shrinks your pool of prospects for annual licenses.
Performance-based incentives and two-tier affiliate programs
Some affiliate programs have also introduced a tiered commission structure. This means using commission rate tiers that encourage affiliates to increase their performance by earning a higher commission for hitting a set amount of sales. Alternatively, the compensation for hitting such a quota could be a fixed bonus amount that’s paid on top of the usual affiliate commission.
Performance-based incentives such as tiered commissions and bonuses are a good affiliate activation strategy. But it requires a suitable affiliate platform that enables tier payouts. The best possible outcome is that less active affiliates will bring in more sales and move up to the category of top affiliates—those who drive a large share of the total affiliate revenue. And when combined with recurring affiliate commissions, the tiered commission structure is a highly profitable model for both you as an affiliate and the merchant who expands their partner sales.
What are two-tier affiliate programs?
A two-tier affiliate program allows you to earn commissions on sales generated by other affiliates you’ve referred to the program. The first tier commissions remain the same for everyone. And the second tier commissions are paid on top of first tier commissions for those who’ve brought other affiliates on board.
Compensation for referring other affiliates is a good incentive to spread the word about the program. But it poses serious challenges for tracking and attribution. Because the merchant needs to compensate more than one affiliate for customers who may have multiple touchpoints before their conversion. This is why two-tier affiliate programs are rare.
Most recurring affiliate programs offer the opportunity to earn higher cumulative earnings. Those who favor the time value of money might prefer higher one-time commissions or even flat fees. But if you want to establish a more steady source of long-term revenue, recurring affiliate commissions are the way to go.
Affiliates who can bring in quality customers benefit from the recurring revenue model as they receive multiple payouts from a single referred customer. If the customer continues their subscription for a long period of time, the cumulative affiliate earnings will easily surpass the one-time commission or flat fee amount. Landing a new customer for every commission is also more work than landing good customers every now and then who generate recurring revenue.
Merchants benefit from the recurring model because affiliates have an incentive to bring in promising customers who don’t churn right away. That’s why it’s not surprising that most SaaS affiliate programs have a recurring commission model in place. But multiple factors come into play and even recurring compensation doesn’t automatically translate into higher earnings.
For more affiliate marketing tips, check our post about affiliate marketing strategies. And if you want to read more about affiliate marketing compensation models specifically, take a look at our article about affiliate commission.
About Johannes Rastas
A Partner Marketing Manager at Supermetrics, Johannes focuses on expanding the Supermetrics partner program and collaborating with their existing partners. He also works with SEO and content on a daily basis. Feel free to contact him on LinkedIn.