Today's post is great information for both bloggers and companies who work with them.
How Reviews Work
Many of today's bloggers make some – not all, but some – of their income through affiliate reviews and marketing. This means that they receive and review a product, generally writing up a promotional post or email about their experience with the brand or product and linking to that product with their affiliate links.
When someone reads their review and clicks on the link to purchase that product, the blogger receives a commission from the sale, much the same way that a real estate agent receives a commission for a property bought or sold through them. They facilitate the sale and therefore receive a compensation once the sale is made.
Many brands (companies) will offer bloggers free products in exchange for the review and promotion. Some also compensate the bloggers time and effort to write and publicize the information, which I think is only right and just, but that is a topic for another day.
What those brands (and sometimes bloggers) do not realize is that when a product is given in exchange for a service, the full purchase price of that “free” product is taxable income to the blogger.
So if no money is paid for the service in addition to the “free” product, the blogger starts out 15% in the hole (or more depending on your state) just in receiving the product.
So the product therefore, is not really free.
I am going to rock your boat, with what I'm about to say:
I am going to propose that bloggers could often do better for their bottom line profits if they insisted on paying something for those review products.
I know you're probably shocked…
Bloggers have been so trained to accept “freebies in exchange for a review” and companies have long thought that offering a free product should be a great incentive for a review, that it may be hard to change your thinking about this, but bear with me…
What I am NOT saying:
I am not saying that you must pay for every product you review.
I am not saying that you must pay full price for every product you review.
What I am saying is
DO THE NUMBERS before you decide if “free” is really a wise business choice or not!
Let's look at some examples, and I'll teach you to do the math for your unique situation.
Let's say Awesome Company wants to give you a $100 dollar product “free” in exchange for a review. And let's say you are in a 15% tax bracket. Yours may be much higher, especially if you are labeled as self-employed, but we'll use 15% for example sake. And lets say that you're pretty sure you can earn at least 100% of the purchase price in affiliate commissions once you write the review.
So here is what your chart will look like:
You have to claim the $100 product as if it was $100 of income, plus $100 of affiliate income for recommending the products to others who buy through your links. So your total income is $200 and you are taxed 15% ($30). Your profit from the experience is $70 in your pocket plus you get to keep the product.
If you were to pay full price ($100) for the product (as a business expense), and could earn $100 in affiliate income, your business expense would cancel out your taxable income and you would owe no taxes, and also earn no profit. It's a wash.
If you could arrange to pay half price ($50) for the product (as a business expense), and could earn $100 in affiliate income, your taxable income (income – expense) would be $50. You would owe $7.50 in taxes and profit $42.50.
If you could arrange to pay 25% of the price ($25 as a business expense), and could earn $100 in affiliate income, your taxable income (income – expense) would be $75. You would owe $11.25 in taxes and profit $63.75.
If you could arrange to pay 10% of the price ($10 as a business expense), and could earn $100 in affiliate income, your taxable income (income – expense) would be $90. You would owe $13.50 in taxes and profit $76.50.
If you could arrange to pay 5% of the price ($5 as a business expense), and could earn $100 in affiliate income, your taxable income (income – expense) would be $95. You would owe $14.25 in taxes and profit $80.75.
So in the case of our example, paying between 5% and 10% of the purchase price resulted in a better end profit for the blogger than if he had received the item for “free” or even paid full price.
[Tweet “#bloggers might #profit more by paying for #review products. Get the scoop!”]
This example was created on the assumption that the blogger could earn back the full purchase price amount in affiliate commissions. One cannot always predict if this will be possible, or how quickly it will be possible.
This example also leaves out any additional cost to the blogger such as time or hourly wages to the VA who may be helping to research, create images, or promote this review. That cost would be subtracted from the bottom profit line.
All of these variables should be taken into account when accepting a product review proposal.
- Is the product considered income or expense?
- How much affiliate commission do I predict I can earn?
- What will the total income be?
- How much taxes and other things will I need to pay to do the review/promotion?
- Is the total profit worth it?
Personal Insight: I am a blogger, but I am also a brand, and while I am willing to give out free products in exchange for reviews, I am also very willing to accept payment for review products. In my mind, as a brand, offering payment, when none is expected shows that you are a responsible business person, who does their homework, and would make me even more willing to work with you.
When Should You Accept a “Free” Product for Review?
Though paying for the review product can earn a higher profit, there will also be times when you can, and perhaps even should accept a “free” product for review. Here are some examples of those times:
- You are helping out a friend and don't mind loosing a few pennies in taxes to do it.
- You really love the product and don't care if it will cost you to promote it.
- You know you'll make enough back in affiliate commissions to cover the cost of the income taxes.
- The company is paying you a fee for your service as well as giving you a free product.
- You agree to do it as a trial because you want to prove your capabilities to the brand, and to establish a relationship with the company with the understanding that the first one is “on me” but all future reviews will require payment for services.
So here is my advice: You are the boss. You are the one whose influence will increase that product's or brand's success. Your time and the influence you've built deserves compensation. Do the math each and every time. The future of your business depends on you making good and informed business decisions.
What are your thoughts? Do you have anything you'd like to add to the discussion? Please comment below or join us on our Facebook Page to share your thoughts.