The 97.7% COGS Problem in Affiliate Marketing (and How to Fix It)

The Setup

Affiliate marketing has a structural economics problem that most operators discover too late. The channel scales fast — you can go from zero to six figures in monthly revenue within weeks. But the cost structure that enables that speed also captures nearly all of the value. When external affiliates drive your traffic, their commissions are your cost of goods sold. And in performance-based affiliate models, that COGS can consume 90-100% of revenue before you touch a dollar.

According to Forrester's 2024 Affiliate Marketing Benchmark Report, average affiliate commission rates in health and wellness verticals range from 30-50% of revenue for standard programs, escalating to 70-90% for performance-based CPA (cost per acquisition) models where affiliates bear the media buying risk. A 2023 Partnerize analysis of DTC affiliate economics found that brands relying on external affiliates for more than 60% of traffic typically operate at gross margins below 15%, with the most affiliate-dependent operations running below 5%.

The Stealth Labz operation, run by Michael George Keating, recorded $848,031 in affiliate payouts against $868,147 in net revenue over 28 months — a 97.7% COGS ratio. This is the extreme end of the affiliate dependency spectrum. It is also a problem the operation systematically addressed through infrastructure investment, and the margin trajectory across the 28-month dataset shows the fix in real time.

What the Data Shows

The 28-month P&L tells two different COGS stories depending on which months you examine.

In the affiliate-dominated phase (February through April 2024), COGS consistently exceeded revenue. February 2024: $358,679 in affiliate payouts against $311,443 in net revenue — COGS at 115.2% of revenue, producing a gross loss of $47,236. This is not an accounting error. In CPA affiliate models, the operator commits to a payout-per-acquisition that can exceed the average revenue-per-customer in months with high refund rates or lower average order values. The affiliate gets paid on the acquisition regardless of downstream revenue realization.

March 2024: $144,064 in payouts on $134,984 in revenue (106.7% COGS). April 2024: $150,423 in payouts on $142,699 in revenue (105.4% COGS). Three consecutive months where the business paid more to acquire customers than it collected from them. The aggregate gross loss across those three months was $64,040.

The structural shift began when external affiliate traffic dried up (May 2024 onward) and owned traffic infrastructure (STL channels) came online (May 2025 onward). The COGS trajectory during the owned-traffic phase:

Month	Net Revenue	COGS	COGS %	Gross Profit
Jul 2025	$9,673	$4,546	47.0%	$5,126
Oct 2025	$22,872	$18,397	80.4%	$4,475
Nov 2025	$4,854	$1,388	28.6%	$3,466
Dec 2025	$3,642	$842	23.1%	$2,800
Jan 2026	$663	$122	18.4%	$541

According to Shopify's 2024 DTC Economics Report, healthy gross margins for owned-traffic DTC operations range from 50-70%, with best-in-class operations exceeding 70%. The December 2025 and January 2026 COGS figures (23.1% and 18.4%) represent a structural shift from affiliate economics to owned-traffic economics — moving from below-zero margins to margins approaching the healthy range for the model.

The revenue is smaller. December 2025 revenue of $3,642 is 1.2% of the February 2024 peak of $311,443. But $2,800 in gross profit on $3,642 in revenue (76.9% gross margin) is a fundamentally different business than -$47,236 in gross profit on $311,443 in revenue. The first model scales losses. The second model scales profit.

The portfolio-level data shows the transition clearly. PRJ-12, the highest-revenue business line ($652,495 net), operated at -5.9% gross margin — net negative over its lifetime because affiliate payouts exceeded revenue in the high-volume months. PRJ-16, at $48,342 in net revenue, operated at 74.8% gross margin. PRJ-14 and PRJ-15 operated at 39.6% and 37.4% respectively. The business lines with the lowest affiliate dependency had the highest margins.

How It Works

The 97.7% aggregate COGS ratio is the mathematical consequence of a specific business model choice: using external affiliates who bear the media buying risk in exchange for high per-acquisition commissions. This model enables rapid scale (zero to $341K/month in three months) at the cost of capturing almost none of the value created.

The fix is not "negotiate lower affiliate rates." External affiliates in CPA health and wellness verticals set their rates based on their own media costs and margin requirements. The fix is structural: replace external traffic with owned traffic infrastructure. When the operator controls the traffic source — through owned media, direct response, SEO, or proprietary distribution channels — the COGS line reflects fulfillment and processing costs, not affiliate commissions.

The Stealth Labz infrastructure investment addressed this directly. PRJ-01 (194,954 lines of code) replaced $19,909 in annual SaaS costs and centralized operational control. The STL-owned traffic channels that came online in May 2025 generated revenue at 23-47% COGS in the months where they were the primary source — versus 105-115% COGS during the affiliate-dominated months. The build cost of the entire infrastructure portfolio: $65,394. The SaaS displacement alone was $19,909 annually. The margin improvement on owned traffic represents the ongoing structural return.

What This Means for Decision-Makers

The 97.7% aggregate COGS ratio is the honest number. It reflects the full 28-month dataset, including the months where affiliate payouts exceeded revenue. Any operator presenting affiliate-driven businesses without disclosing the COGS structure is obscuring the single most important line item in the P&L.

For PE operators evaluating affiliate-dependent businesses, the question is not "what is the revenue?" but "what is the COGS as a percentage of revenue, and what is the trajectory?" A business doing $300K/month at 115% COGS is destroying value at scale. A business doing $3K/month at 23% COGS has a margin structure that rewards growth. The Stealth Labz dataset shows both states in a single operation across 28 months — and the infrastructure investment that drove the transition from the first state to the second. The aggregate number is -16.9% EBITDA. The trajectory is what matters.

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Related: [C7_S148 — 28 Months of P&L Data] | [C7_S149 — How to Survive a 99.9% Revenue Collapse] | [C7_S154 — From -$57K to +$2.6K Monthly EBITDA]

References

1. Forrester (2024). "Affiliate Marketing Benchmark Report." Commission rate ranges for health and wellness verticals across standard and CPA models.
2. Partnerize (2023). "DTC Affiliate Economics." Gross margin analysis for affiliate-dependent DTC operations by traffic source concentration.
3. Shopify (2024). "DTC Economics Report." Healthy gross margin benchmarks for owned-traffic DTC operations.
4. Keating, M.G. (2026). "The Compounding Execution Method: Complete Technical Documentation." Stealth Labz. Browse papers