Half of the money I invest in advertising is misused; the problem is, I don’t know which half. When the great 19th-century businessman John Wanamaker said this, he expressed the agony of generations of business entrepreneurs. Marketing and advertising are undoubtedly effective, but how and to what extent?
Performance marketing seeks to fix this issue by focusing on the aspects of marketing that can be measured. The word, coined in the mid-1990s, shortly after internet marketing, was a stroke of branding genius by marketing firms. If they had the opportunity, why would a business owner spend on anything other than effective marketing?
Digital advertising platforms such as Google and Meta have helped fulfill this promise by giving great sales outcomes and thorough performance data, resulting in an order-of-magnitude increase in industry growth. (Meta had over ten million advertisers on its platform.) However, they have also created a world of complicated vocabulary, critical financial decisions, and misplaced expectations. If business owners don’t grasp what performance marketing is and aren’t, they’re likely to end themselves in the same situation as our friend John.
Table of Contents
What is Performance Marketing?
Performance marketing is a results-oriented strategy to digital marketing in which advertisers pay only when certain actions or outcomes are met. These actions may include clicks, leads, sales, or other important customer behaviors. Performance marketing is based on a variety of channels, including affiliate marketing, pay-per-click (PPC) advertising, social media advertising, and search engine marketing.
The term performance marketing originated shortly after the introduction of pay-per-click (PPC) advertising, which began with banner (display) ads and Google AdWords (now Google Search Ads).
Is Performance Marketing the Same as Affiliate Marketing?
Performance marketing is an aspect of digital marketing; however, not all forms of digital marketing, including digital advertising, are performance marketing. Here are some other popular methods of marketing that could be confused with performance marketing:
Affiliate Marketing
Initially, affiliate marketing may appear similar to performance marketing: It is extremely trackable, and you can make performance-based judgments. However, there is one significant distinction.
Performance marketing is an active process in which you design and iterate campaigns to target your intended audience. Affiliate marketing is passive: you simply define who qualifies to be an affiliate and how much you’ll pay them for each customer. Affiliates may even conduct performance marketing initiatives on your behalf.
Brand Marketing
The basic purpose of brand marketing is not measurable: it is to promote a brand’s message, feeling, or experience. Large brands, for example, may launch social ads that duplicate the messaging of their television advertisements. Although marketers can track the results of a brand marketing campaign, unlike performance marketing, the purpose is not to optimize for a certain statistical result.
Market Validation
Performance marketing is most effective when you have proven the need for your product and understood who your target audience is. In other words, increasing sales per month. If you are just starting and trying to get your first customers, optimizing for cost-per-result may not be the ideal option for your organization.
Digital advertising can be used for market validation, but campaigns should be designed as a series of scientific experiments rather than a performance-driven race car.
How Does Performance Marketing Work?
Google and Meta (which owns Facebook and Instagram) are the two most popular platforms for launching performance marketing campaigns in the United States. For example, if you own a store that offers natural soap bars, you could begin by paying $1K per month on Google to reach customers looking for “natural soap” or “organic skincare.” If advertising targeting “organic skincare” generates the most sales, you might focus your budget just on those keywords, or you could increase your budget to drive even more sales.
While performance marketing is sometimes connected with pay-per-outcome, the billing mechanism does not indicate whether anything is performance marketing. Performance marketing can be defined as campaign decisions made in response to measurable results.
What Are the Benefits of Performance Marketing?
There are no signs of digital marketing slowing down. If you employ performance marketing to your advantage, you will notice the following benefits:
Cost-Effective Campaigns: When you conduct a performance marketing campaign, you only pay for actions that result in clicks or leads. Every dollar spent contributes to results, so spend it carefully.
Measurability: Conversion rates, click-through rates, and cost per acquisition are tracked in real-time, allowing you to swiftly review and optimize campaigns.
Targeted Reach: Campaigns may be fine-tuned to reach specific audiences, so the right people see the correct ads at the right times.
Flexibility: If you need to change strategy, performance marketing campaigns can be quickly altered using ad data. You may easily scale up or down to meet your needs.
4 Main Types of Performance Marketing
Modern businesses invest in four major categories of performance marketing.
Social Media Advertising
Social media advertising includes running ads on Facebook, Instagram, Twitter, LinkedIn, and other platforms. Typically, these efforts are built up with a funnel structure of at least one campaign to reach new people (known as prospecting) and at least one to reach those who have visited their site but have not yet converted (retargeting). Not all social media advertising is performance marketing; when not employed to generate conversions, it can be used for brand promotion or market validation.
Search Engine Marketing
Search engine marketing runs advertising campaigns to drive visitors from search engines such as Google and Bing. These campaigns are typically designed around the types of searches they target. For example, a company may have campaigned for its product type, competitor brands, and its brand.
Search engine marketing is virtually always performance-based. It is also completely independent of SEO.
Influencer Marketing
Usually, influencer marketing has not always been thought of as “performance” marketing. However, things have altered in recent years. Influencers have become more business savvy, and the advancement of both influencer management tools like Gatsby and influencer partnership platforms have allowed businesses to properly measure and iterate on their influencer collaborations, making them truly performance-driven.
Native Advertising/Sponsored Content
Similar to influencer marketing, however rather than paying an influencer to promote your company, you pay a publication to write about it. As a marketer, you have a great deal of creative influence over what they publish for you. The strategy is the same, whether the magazine refers to it as sponsored content or native advertising. It is worth noting that most nations require media to disclose if their content is sponsored.
Performance Marketing Examples
Pay-per-click (PPC) advertising is a type of performance marketing that requires marketers to pay a fee each time their ad is clicked.
Email marketing is a performance-based marketing approach in which advertisers send emails to their target audience to increase sales or leads.
Social media marketing is a type of performance marketing in which marketing messages are delivered to potential customers via social media platforms.
Search engine marketing (SEM) is a performance marketing technique that entails executing advertising campaigns to direct visitors to websites via search engines.
How To Measure Performance Marketing
Performance marketing is all about achieving the best results. Since we are spending money, it is all about your cost-per-unit. Four major cost-per-metrics are important for your performance marketing campaigns:
Cost Per Thousand Impressions
The cost per thousand impressions is the cost for an advertiser to generate 1,000 views of their ad. The term CPM stands for cost per mille, where “mille” is the French word for thousand. Advertisers and marketers use 1,000 instead of just cost per impression since the cost of a single impression might fluctuate dramatically, whereas it is more consistent over a thousand individuals.
This indicator primarily informs you of the cost of advertising on this platform, as well as the level of competition to reach the people you want to reach. For example, the CPM to reach people who search “buy natural soap online” will probably be greater than the CPM for “personal hygiene tips,” because the former searcher is more likely to buy, so more advertisers will bid on the keyword.
Cost Per Click
Cost per click (CPC) refers to the cost to get someone from your ad to your website. This metric has a couple of gotchas to be aware of: On Google, a click refers to someone clicking through to your site, but on Facebook, it refers to any click on your ad, even clicking Like. To compare apples to apples across platforms, performance marketers will typically track link clicks on Facebook.
CPC has an inverse relationship with an ad’s click-through rate (CTR). Advertising platforms want to show ads that people want to click, so if your ad is engaging, they will effectively “reward” you with a lower CPC. That’s why monitoring CPC can help tell you which ads are best engaging your audience.
Cost Per Conversion
Your cost-per-conversion statistic will be unique to your firm. For Ecommerce stores, it’s usually a sale, also known as cost per sale (CPS). Alternatively, you might concentrate solely on sales to new customers, which is sometimes referred to as a customer acquisition cost. In B2B marketing, you may utilize cost per lead (CPL) instead.
This is the most crucial metric for your performance marketing program. If you achieve the desired CPS or CAC, your campaign is ready to grow and can regularly drive additional sales. If you don’t meet your target, you will lose money.
How do you do such important math? Simple:
The CPS model predicts a lower gross margin. If you are spending to produce individual sales (including repeat clients), your cost per sale must be lower than your average gross margin from that sale. If it’s greater, you’re effectively paying to lose money. If you don’t know what your gross margin is, use a profit margin calculator.
CAC model: CAC < CLTV If you are investing money to recruit new customers and know they will return to buy more products without adverts in the future, you can spend up to the customer’s worth over time (average gross margin per order * average number of orders). This is a more complex approach, but it is vital to businesses that have a long history with customers.
Limitations of Performance Marketing
Performance marketing is the spiritual successor to a much older industry: direct response advertising (usually found in newspapers or direct mail). Consider performance marketing as “digital direct mail ads” to better understand how it works.
Doesn’t Focus on Brand Building
Performance marketing is highly targeted and conversion-focused, which means identifying and nurturing the subsegment of your market that is most likely to convert across multiple touch points. In other words, introducing your brand to a large number of people is not the greatest technique.
Risk of Brand Dilution
Performance marketing uses call-to-action (CTA) messages. In other words, practically every performance marketing ad prompts the viewer to take action (“Learn more,” “Claim offer,” “Shop styles,” etc.). For firms looking to generate brand equity (or hype), too much performance marketing can dilute your message and cause people to tune you out.
False Certainty in Attribution
Performance marketers still can’t determine with certainty how much income their advertising generated. Some of this is related to recent changes in privacy policies: Many browsers block advertisers’ ability to see user actions (such as conversions). Effective advertisers are beginning to adopt holistic reporting models that expand on CAC and CLTV, such as MER, to inform campaign decisions.
Performance marketing is extremely effective millions of merchants have counted on it to grow their businesses. Understanding its major levers, channels, and dangers will prepare you to join its ranks.
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The Bottom Line
Performance marketing is a dynamic and results-driven approach that provides organizations with a verifiable and cost-effective means to reach their intended audience. Marketers can optimize their campaigns in real-time by employing data and analytics, ensuring they only spend for actual results such as clicks, leads, or sales.
This strategy not only maximizes ROI but also guarantees openness and accountability, making it an appealing option for enterprises of all sizes. As digital environments evolve, mastering performance marketing approaches will be important to maintaining competitiveness and attaining long-term success.
