Performance Marketing

“I waste half of the money I spend on advertising, but I don’t know which half.” This was the frustration of many business owners expressed by the renowned 19th-century businessman John Wanamaker. Advertising and marketing are effective, but how and to what extent?

By concentrating on the aspect of marketing that performs in a measurable way, performance marketing seeks to resolve this issue. The word was coined by marketing firms as a brilliant branding strategy in the mid-1990s, just after internet marketing. Why, given the option, would a business owner choose to spend money on anything other than marketing that works?

The sector has risen by an order of magnitude as a result of the great sales results and thorough performance data that digital advertising platforms like Google and Meta have provided. (As of 2019, Meta’s platform had more than 7 million advertisers.) However, they have also brought us a world of difficult terminology, significant budget choices, and misplaced expectations. Business owners are likely to end themselves in the same situation as our friend John if they don’t have a clear understanding of what performance marketing is (and isn’t).

Performance marketing: What is it?

Performance marketing is a type of digital marketing campaign where the campaign’s measurable results serve as the main factor in budgeting and decision-making. Performance marketing relies on an active, iterative feedback loop where programs are conducted, evaluated for effectiveness, then repeated.

Practically speaking, the phrase nearly exclusively relates to sponsored marketing initiatives. Although other digital marketing strategies, like SEO, marketing automation or organic social media, can undoubtedly increase sales, the feedback loops on these platforms are too sluggish to qualify as true performance marketing campaigns.

The two most popular platforms for launching performance marketing campaigns in Europe are Google and Meta (which owns Facebook and Instagram). To reach customers who are looking for “natural soap” or “organic skin care,” for instance, a store that sells natural soap bars might start by spending $1,000 per month on Google advertising. You could change your budget to solely include those keywords, or you could increase it to generate even more sales, if the advertisements that target “organic skin care” generate the greatest revenue.

Soon after the introduction of pay-per-click (PPC) advertising, which began with banner (display) ads and Google AdWords, the phrase “performance marketing” was coined (now Google Search Ads). Although paying for results is sometimes associated with performance marketing, the billing mechanism itself does not explicitly specify whether anything is performance marketing. It is acceptable to classify a campaign as performance marketing as long as decisions are made based on quantifiable outcomes.

Furthermore, to avoid guesswork and wasting countless hours, you can apply for a free Google Ads audit through reputable digital marketing firms that specialize in ensuring you get the most profitable ROAS.

Performance marketing comes in 4 primary forms.

Modern companies invest in four types of performance marketing:

Social Media Advertising

Run ads on Facebook, Instagram, Twitter, LinkedIn, and other social media platforms. These efforts are typically set up using a funnel structure, with at least one campaign to reach new individuals (known as prospecting) and at least one to reach site visitors who haven’t converted yet (retargeting). Not all social media advertising is performance marketing; it can also be used for brand marketing or market validation when not intended to increase conversions.

Also, more often than not, if proper audit and analysis are not given to each social media campaign, it might not necessarily fit into the description of a profitable facet when it comes to performance marketing.

Search engine marketing (SEM)

Search engine marketing is the practice of running advertising campaigns to drive traffic from search engines like Google or Bing. These campaigns are typically designed to target specific types of searches. A company, for example, may have campaigns for the type of product they sell, competitor brands, and their own brand.

By definition, search engine marketing is almost always performance marketing. It is also entirely distinct from SEO.

Influencer Marketing

Influencer marketing has not always been thought of as “performance” marketing. That has changed in recent years. Influencers have become more business savvy, and the advancement of influencer management tools such as Gatsby and influencer partnership platforms has enabled brands to properly track and iterate on their influencer partnerships, making them truly performance driven.

Sponsored Content / Native Advertising

In a similar vein to influencer marketing, you pay a publication to write about your brand rather than an influencer to speak about it. You have a lot of creative control over what they publish for you as the marketer. Some publications refer to it as native advertising, while others refer to it as sponsored content, but the strategy is the same. It should be noted that in most countries, publications are required by law to disclose that the content is sponsored.

What performance marketing is not

Digital marketing in general, and even digital advertising in particular, does not include all forms of performance marketing. The following are some additional popular marketing strategies that could be misconstrued for performance marketing:

Brand Marketing

Spreading a brand message, feeling, or experience is the main objective of brand marketing; it is not quantitative. Large brands, for instance, may launch social media commercials that replicate the message of their TV advertisements. While brand marketing campaigns may be tracked by marketers, unlike performance marketing, the aim is not to optimize for a quantifiable outcome.

Affiliate Promotion

At first glance, affiliate marketing may resemble performance marketing: It is very trackable, and decisions can be based on performance. There is a significant distinction, though.

Performance marketing is active: to reach your audience, you develop and refine campaigns over time. Setting the criteria for who is eligible to be an affiliate and the amount you will pay them for a customer is all that is required to engage in passive affiliate marketing. Even performance marketing initiatives could be carried out on your behalf by affiliates.

Market Validation

Performance marketing is most effective when you’ve established that your product is needed and you know who your target market is. In other words, increasing monthly sales from $5,000 to $500,000. Optimizing for a cost-per-result may not be the ideal course of action for your business if you are just starting out and attempting to attract your first clients.

Digital advertising may undoubtedly be used to validate the market, but the campaigns should be constructed like a series of scientific experiments rather than like a race car that chases performance.

How to Measure Performance Marketing

The goal of performance marketing is to achieve the best outcomes. It’s all about your cost-per since we’re spending money. When it comes to your performance marketing efforts, there are 4 important cost-per-metrics to consider:

Cost per thousand impressions (CPM)

Cost per 1,000 impressions is the price an advertiser pays to have their ad viewed 1,000 times. The term “cost per mille,” which derives from the French word for thousand, is the origin of the acronym CPM. Because the cost for a single impression can vary greatly up and down, advertisers and marketers utilize 1,000 instead of merely cost per impression because the cost is more stable over a larger number of individuals.

This indicator mainly informs you of how expensive it is to promote on this platform and how difficult it is to reach the target audience. For instance, since the former searcher is more likely to make a purchase, the CPM to reach them will probably be greater than the CPM to reach them with “personal hygiene suggestions,” since more advertisers will bid on the term.

Cost per click (CPC)

The cost to send a person from your ad to your website is referred to as the cost per click (CPC). There are a few pitfalls to be aware of with this metric: A click on Facebook refers to any click on your ad, including hitting Like. On Google, a click is when someone clicks on to your website. Performance marketers usually analyze link clicks on Facebook to compare platforms similarly.

CPC and an ad’s click-through rate are inversely related (CTR). Platforms for advertising prefer to display ads that viewers want to click, thus if yours is compelling, they will essentially “reward” you with a lower CPC. Because of this, tracking CPC can help you determine which ads are most successfully attracting viewers.

Cost Per Conversion

Your organization will have a unique cost per conversion statistic. For online shops, it’s usually a sale, which is frequently stated as cost per sale (CPS). Alternately, you might concentrate solely on sales to new clients, which are often referred to as a client acquisition cost (CAC). Use cost per lead (CPL) in B2B marketing instead.

The most crucial figure for your performance marketing program is this one. Your campaign is ready to grow if you hit the proper CPS or CAC, at which point you can dependably generate more sales. You will lose money if you are unable to hit your target.

How do you perform the crucial math? Simple:

The CPS model’s gross margin is CPS. Your cost per sale must be lower than your typical gross margin from that sale if you are spending money to generate individual sales (even those from repeat customers). In the event that it is higher, you are essentially paying to lose money.

Model for CAC: CAC CLTV (customer lifetime value). You may spend up to the total worth of the client over time (average gross margin per order * average number of orders) if you are investing to recruit new consumers who you know will return to buy more products without advertisements in the future. Although this is a more complex strategy, it is crucial for businesses that maintain long-term connections with their clients.

Performance Marketing’s Limitations

An industry that is far older than performance marketing is direct response advertising (typically in newspapers or direct mail). You can comprehend performance marketing’s limits by comparing it to “digital direct mail ads”:

doesn’t emphasize creating a brand. Performance marketing is highly targeted and conversion oriented, which entails locating the market segment that is most likely to convert and nurturing that group through several touchpoints. In other words, it’s not the best technique if you want to present your brand to a lot of individuals.

Brand-dilution risk. Calls to action (CTA) are the focus of performance marketing. To put it another way, almost every performance marketing advertisement prompts the audience to take action (e.g., “Learn more,” “Claim offer,” “Shop styles,” etc.). Too much performance marketing might muddy your message and make customers tune you out for brands looking to develop brand equity (or hype).

false assurance of attribution Performance marketers are still unsure of the precise amount of sales that their commercials generated. Recent modifications to privacy policies are partly to blame for this: Many browsers limit the ability of marketers to see what users do (such as converting). The “Results” reporting was changed to “Estimated Results” as a result of Apple’s iOS14 Update. Smart marketers are beginning to base their campaign decisions on comprehensive reporting models like MER, which are built on CAC and CLTV.

Millions of merchants have relied heavily on performance marketing as their main method of business expansion. You can position yourself to join their ranks by being aware of its main routes, levers, and traps.