Do more levels of commission equal more risks?
I was wondering recently, what contributes the most to financial burden of revshare programs, or other affiliate systems?
Is that the amount of commission, that company pays for bringing new customers, or is it a multilevel of commissions, so ‘commission you receive, because your referal has found another customer, and this customer introduced another client, and the one under that one has bought something’? 🙂
Thinking about it has taken some time, so I decided to write about the effects of these what-ifs of mine.
Higher commission equals more risk?
First thought: if a program, which gives very high commission for new customer and his purchases has higher risk or bankruptcy, leaving people with nothing, or not necessarily?
And out here, I suppose that it all depends on sell price vs. cost price, etc. and good will of a company’s owner – risk would be the same as everywhere else, neither higher or lower.
a) let’s say I am selling hoovers for $5000 each (fancy hoovers). I hire a representative who tries to sell them and I promise him 40% commission when he does.
40% from $5000 equals $2000.
$3000 is left for the company.
Cost price for a hoover including transport equals, let’s say, $1200.
3000 – 1200 = $1800 profit on each hoover. Is it worth it? Of course.
It is the same as with famous healthy cooking pots, sold for $800 each, but bought for $90 from wholesalers. And that amazing story that comes with them… my grandma has fallen for it once so I know what I am talking about. But I am sure that door-to-door representatives have earned pretty commission…
Conclusion: if a product is fairly cheap on its own, but you sell it for way more, wrapping it up in ‘marketing paper’, then even 40% commission does not make a problem.
b) now let’s think of a revshare program that gives us 8% commission on our referral’s purchases.
A product, for example online advertisement service costs $50 out there.
8% commission = $4
$50 – $4 = $46 profit for a company.
Cost of a product, hosting, transfer, service staff, software, etc – if all of that equals $30 (I don’t know it, I am just guessing) – then 46 – 30 means that $16 will stay for a company. Do they make profit? They do.
So it does not have to result in financial burden at a company.
As long as: cost of a product and its service is lower that $46 – fairly lower, as a company will obviously not work for free.
A little catch in regards to revshare: we have to remember that some percentage of the profit is then shared with users in form of daily bonuses, so a part of authentic profit comes back to purchasers, so a company needs to somehow ‘make it up’.
And that ‘somehow’ may mean… FEES 🙂
If you are a member of a revshare that DOES NOT include any fees, subscriptions, ‘pay in’ costs, etc. – then I think it has a very small chance to sustain.
Because it has to have other profits, to be able to both share and earn something for themselves (I am going to repeat: nobody would run a business for free, without any personal earnings… simple)
To summarize: I would not get excited too quickly, just because a program has everything for free, no costs, blah blah blah… because that is not good for you at all, if you would like to see this business running for a long time. 🙂
More levels of commission equals more risk?
Second thought: if a program offers multilevel commissions is the risk of bankruptcy and closure higher?
And here, I suppose it does. Because, if the multilevel system is poorly prepared, then we may assume it will ‘suck the money out’ of a program.
Of course, the advantage of this system is that it is highly attractive for the users. Everyone wishes to receive commission from 10 levels, preferably a nice amount from each level, but… looking at it from the business/ sales point of view, it doesn’t quite add up. And it is definitely not good if it’s not guarded with multitude of restrictions.
Let’s look at two examples of multilevel reward plans:
Cost of a product: $50
Level 1 – 8%
Level 2 – 4%
Level 3 – 3%
Level 4- 2%
Level 5 – 1%
No restrictions, no paid subscriptions.
How would it work?
Customer from level 5 buys 1 product for $50
His sponsor receives 8% = $4
Sponsor of a sponsor gets 4% = $2
A sponsor above gets 3% = $1.5
The one above him 2% = $1
And a person at the top 1% = $0.5
In total a company needs to pay $9 in commissions from all those levels. They are left with $41.
Total percentage that was ‘sucked out of a company’: 18%, and that’s quite a bit! And the same thing would happen with every product purchase.
It would be much better for a company that’s based on affiliate system to introduce PLAN B: some additional costs and restrictions for their customers, just so some of that 18% comes back to them. Preferably, as much as possible 😉 And that makes much more sense, if you think from a business point of view (resulting in lower financial weight on a company’s shoulders). Example:
Paid subscriptions. Every user, when they reach a certain point with their activities within a company, needs to pay for monthly subscription (only then they have right to further commissions and SOME OF IT comes back to a company)
Commission thresholds. For example, to receive commissions from level 2 you have to accumulate sales of over $1000. Then, the time between 0 and $1000 is the time for a company, when they do not have to pay you those additional commissions.
Read: ‘more money left in a till’.
There are few affiliate program that want to keep their marketing plan attractive to users, by sticking to multilevel reward system, but to not to lose everything, they also have paid subscriptions and higher fees (e.g. for withdrawal) and also commission thresholds.
To not to advertise anything in particular, I will give you the example, without mentioning details of what company it is:
It is easy to see out here, that although there is an earning plan for earning from 8 levels… to get to that 8th level you would really have to do a good job, and not everybody is going to achieve it. I would even say: not many will get there.
In addition, individual commissions are well prepared, because they don’t give you 8% at the start, it is opposite. You start from 5% and you receive that one, up until your own purchases exceed $1000.
To reach the second level you have to either spend $1000 yourself, or your referals need to pay in minimum of $3000.
And that is not a small amount.
Once you get to that place, then… you receive additional 1% in commission from 2nd level. 1%…! And this is not a great deal of money, is it? 🙂
But I think that those a little ‘mingy’ marketing plans are attractive on one side, because a big player can do it, and on the other hand they are sensible, because they don’t allow for the money to leak out of the program too quickly. For a company it is the advantage.
Crazy amounts as a decoy for commission hunters.
In the time of hyips (the beginning of last year) multilevel commission systems were that decoy. If a company was giving 20% in commissions from level 1, 10% from level 2 and 5% from level 3, then in total, 35% of a product price was leaking out of a program! That was some craziness! At the same time, high commissions and mlm included to it, meant one thing: a company with close down before you know it.
Not even saying about ‘honesty’ and intentions of owners.
Effect: 30, 45 days and both a company and money were gone.
If you see LARGE commissions in affiliate program, and if in addition it has MANY levels and LITTLE costs and restriction – the it’s the best to run and stay away from it.
I wouldn’t expect anything good in there.
Is 1 level of commission ideal?
YES: Because it results in a minimum amount of money leaving a program, so they experience the highest profits.
NO: Because it is not attractive for the biggest and the average marketers, trade representatives and sellers (and they are the driving power, that brings affiliate programs forward and gives it a good kick at the start). They know what sort of power multilevel systems have and if a company has only 1 level and little commission percentage they would just simply find something else to promote.
Today, the selection of affiliate opportunities is enormous (and I mean ENORMOUS), so you can pick and choose.
Why should we even give commission to people who bring new users in?
a) because then we don’t have to employ them, and that minimizes costs. 🙂
Instead of employing staff and giving them contracts – modern ‘employees’ will only get commission reward, and that would happen if they manage to sell something. If they are lazy and inefficient, they wouldn’t get anything. No sales = no money. It is ideal situation for an employer.
b) because we don’t have to spend money for advertisement.
A person who gets a nice commission percentage, will work at good company and product advertisement himself. On the Internet, in between of friends, etc.
P.S. I have heard recently, that the commission reward system, so ‘I will pay only if you sell it’ is a modern form of slavery, heheh…
Unfortunately, this is a modern form of earning.
Employer is not a typical employer so he does not spend money for people’s holidays, sick-pays, time off, sitting down in an office from 8am till 15pm, and more.
Instead, an employee tries his hardest, because he knows he will only earn on his hard work (so he works). And he knows one more thing too: that his earnings ARE NOT LIMITED to what he would have on a ‘normal’ contract. If he tries, finds partners, create automated or fast solutions, he may earn amounts, that he would never be able to get in an ‘ordinary’ job. And if he gets bored of that, he can just start actively working for another company that would pay him for sales.