Why Recurring Commissions Are Not Always As Good As They Appear

If you frequent any affiliate marketing or internet marketing forums, you will know that many affiliates actively seek affiliate programs that offer recurring commissions. Recurring commissions are offered on products in which the customer has to pay a monthly fee in order to continue receiving the product or service.

The benefits of recurring commissions are well documented. Rather than receive a one off commission, you can generate residual income for many years. I made a lot of money this way. In fact, I still make around $100 a year from referrals I made back in 2000 (granted that isn’t much…but 13 years is a long time in the affiliate game!).

Whilst recurring commissions are popular in some niches, the majority of affiliate programs pay a fixed commission for a referral. This is either a fixed fee (e.g. $25) or a fixed commission rate (e.g. 30%). Commission rates may also increase if you increase the number of referrals.

If you want to promote a specific affiliate program, the method in which you earn commissions is normally out of your hand. However, some affiliate programs do allow you to choose whether you would prefer a one-off commission payment or a recurring commission. Which should you choose?

The answer to that is not always easy to answer.

For many years I chose recurring commissions every time as the idea of generating income for years appealed to me. For many affiliate programs, that was the wrong choice. Take the poker industry, for example. Click for click, I generated a better return through affiliate programs that paid me by depositing customer rather than a percentage of earnings.

The idea of generating affiliate income for several years is enticing, though things are rarely as rosy as the affiliate network makes out. Here are a few things you should bear in mind with recurring commission affiliate programs.

You Make Less Money in the Short Run

It is easy to forget that money now is worth more than money later. With a typical affiliate program, you will earn a higher affiliate commission right away. With recurring commissions, you will earn a percentage of the monthly fee charged to the customer. This is always lower.

For example, a hosting company may give you the choice of earning $50 per referred customer or 10% of the customer’s monthly fee. Which method generates the most income in the long term is difficult to calculate. A basic hosting package at $10 per month would only generate $1 per month in recurring commissions. On the other hand, a dedicated hosting package could retail for $200 per month and earn you $20 per month income. That may sound like choosing recurring commissions is the best option; however you need to bear in mind that most people you refer will probably be beginners and will therefore choose a cheaper hosting package (at least in the short term).

In the first scenario, you would need the customer to remain with the hosting company for over four years to earn $50. The average commission generated per month will probably be higher than $1, but this situation does illustrate the benefit of choosing a fixed affiliate commission rather than a recurring commission. Ten referred commissions would immediately earn you $500 under the fixed referral commission; regardless of what hosting plans customers choose. With recurring commissions, it could be more two or three years before you make the same amount, perhaps even more.

Remember, money is worth more now than later. Generating more income in the short term will allow you to reinvest more income into your business (advertising, hire staff etc).

Lifetime Commissions Do Not Last a Lifetime

The big attraction of recurring commissions is that commissions last a lifetime. You could be generating income in five, ten or even twenty years. Well, that is what merchants would like you to believe. The truth is that this will not happen.

Unfortunately, companies usually change their affiliate policy after a few years. This first happened to me with Fastclick. Fastclick were one of the biggest advertising networks on the internet before being acquired by ValueClick in 2005. I had referred hundreds of new advertisers and publishers to them over the years. This earned me between $100 and $300 per month in referral commissions.

One day I received an email from them that they were not going to honour affiliate payments any more. In one swoop, I had lost thousands of dollars per year.

This has happened to me many times. FullTiltPoker was generating thousands of dollars for me every month before the American government banned online poker in the USA. The company was eventually bought by PokerStars, who did not honour the payments that affiliates were owed. To make matters worse, Pokerstars emailed me last week and advised that since I had not referred them a new customer this month, they were closing my account. I had referred them tens of thousands of customers and helped them generate millions of dollars, however a modification in their terms and conditions was made in August 2013 was implemented to simply close down accounts that are not as active as they should be. A poor way to treat someone who had been a partner for over ten years.

Companies do not always change their terms and conditions. The most common reason for recurring commissions stopping is the closure of the affiliate program. Markets change. Businesses change hands. That is why at one point, a company may decide to simply close the affiliate program rather than maintain it. This is very common. I have seen several WordPress theme stores close their affiliate program over the last twelve months alone.

When you choose an affiliate program that pays recurring commissions, please be aware that your commissions could simply end one day. Do not be fooled into thinking that this will not happen because a company is valuable. Companies worth hundreds of millions of dollars have been guilty of treating their affiliates in this way.

Residual Income From Each Referral Will Drop Over Time

Over time, the residual income that each referred customer generates for you will head towards zero. This is a natural direction for every product that charges customers on a monthly fee. When a customer cancels their account, your referral commission will disappear with them.

Say you refer one hundred customers in a given month. In the following month, perhaps only ninety customers still have an active account. In six months, you may find that half of your referred customers have cancelled their accounts.

The rate in which members cancel their account depends on the product being referred. A hosting account has the possibility of generating commissions from a referral for years as it is a service that website owners need. It is also a service that people do not change often. In contrast, a course that teaches you how to become a blogger should have a higher cancellation rate. The reason being that most customers will cancel their membership after a few months if there is no new information being published. That is, there is no reason for them to renew their membership every month.

Recap

There are pros and cons to promoting products that offer recurring commissions for referrals. Sometimes a fixed fee is more profitable, other times recurring commissions is better. The decision can be difficult so be sure to take all factors into consideration:

  • Compare the recurring rate to the fixed commission rate.
  • Research the product you are referring thoroughly and ask how long customers likely to be members?
  • Be aware that affiliate programs can end at any time. If an affiliate program abruptly ends, all recurring commissions will cease.

What is your view on recurring commissions? Do you have a preference for them over fixed fee affiliate programs?

Kevin

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