The Mathematics of Profit in Affiliate Marketing

by WorkFromHome on December 20, 2011

If you’re already an affiliate marketer, or if you’re looking to learn how to work from home by doing affiliate marketing, then you’re going to have to learn how to deal with some of the math that comes along with the job. By performing testing and working with the numbers that you get from your tests, then you can learn how to boost your profits in ways that you hadn’t previously considered. The ability to do this gives you an advantage over your competition because you’re doing analysis that they are not. What’s great is that doing all of this doesn’t even require some type of advanced mathematics. Instead, all you need to know is basic addition, subtraction, multiplication and division.

Understanding What Conversion Rates Mean

One of the most basic measurements that you can take in affiliate marketing is the conversion rate of an offer. You can get the conversion rate by dividing the number of conversions by the number of potential buyers and then multiplying that number by 100. For example, if you had an offer for blue widgets that earned 10 conversions with 80 potential buyers, then the conversion rate would be 10/80 * 100 = 12.5 percent. Conversion rates are an indicator of the quality of your web traffic, your ad copy and the layout of your website. While a conversion rate doesn’t tell the whole story of your profit, you’ll often be doing optimization on your campaign to boost your conversions.

Looking at Profit Per Conversion

Aside from your conversion rate, your profit per conversion is another important measurement. Generally speaking, you’ll know this value ahead of time, but this isn’t always the case. For example, if you’re selling yellow widgets for $50 each, and you get 30 percent of the proceeds, then your cut would be $15 for each individual conversion. It seems obvious when you think about it as you are reading this, but when you do your calculations, make sure that you are pairing a profit per conversion to the correct item. The other thing to watch out for is that you don’t automatically assume an increase in the profit per conversion will make you more money. However, if you have a reason to believe that the conversion rate will stay the same, like in a case of moving from one affiliate to another for the same item, then it’s pretty safe to assume that you’ll be making more money.

Comparing Two Products

Using our knowledge of conversion rates and the profit per conversion of different items, you can determine which item will be the best to promote. For example, suppose that widget A gives a profit of $20 per conversion and has a conversion rate of eight percent while widget B yields a profit of $15 per conversion and has a ten percent conversion rate. Your task is to figure out which of the two items will make the most money for you on average. To figure this out, multiply the conversion rate by the profit per conversion, and you’ll get your average profit per visitor. For widget A, this value is $20 times 0.08 equals $1.60 per customer. Widget B has a profit per customer of $15 times 0.10, which is $1.50. We can clearly see that widget A outperforms widget B in this scenario.

Examining Traffic Sources

Aside from looking at conversion rates and profit in those terms, you can also analyze different traffic sources with a similar line of thought. The lower the quality of your traffic, the lower your conversion rates will be. Along similar lines, when your traffic is of a higher quality, then you will make conversions more often. However, high quality traffic typically costs more than low quality traffic, and it’s up to you to figure out which is more profitable after you take into consideration how much money you will earn from the affiliate programs you’re promoting.

An Example Analysis

When you’re looking at possible traffic sources, one way to simplify your calculations is to think of it in terms of how many conversions you’ll expect to get over a period of time. Suppose that traffic source A will provide 100 visitors each day with an average conversion rate of ten percent. Let’s compare this to traffic source B which will provide 150 visitors each day with an average conversion rate of just six percent. Traffic source A will generate an average of 100 times 0.10 equals 10 conversions each day, while traffic source B will give us an average of 150 times 0.06 equals 9 conversions each day. If these two traffic sources cost the same, then traffic source A is the better value. However, keep in mind that if both will be sufficiently profitable, then it may be in your best interest to purchase both of them to maximize your profits.

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