What Is Performance Marketing? A Definition and Guide

“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” When the legendary 19th-century merchant John Wanamaker said this, he captured the angst of generations of business owners. Marketing and advertising clearly work—but how, and to what extent?

Performance marketing aims to solve this tension by focusing on the part of marketing thatperformsin a measurable way. The term, first introduced in the mid-1990s shortly afterinternetmarketing, was a stroke of branding genius by marketing companies. If they have the choice, why would a business owner invest in anything other than marketing that performs?

Digital advertising platforms like Google and Meta have helped make good on this promise by delivering incredible sales results and comprehensive performance data, which has grown the industry by an order of magnitude. (As of 2019, Meta hadmore than 7 millionadvertisers on its platform.) But they’ve also introduced a world of complex jargon, crucial budget decisions, and misaligned expectations. If business owners don’t have a clear understanding of what performance marketing is (and isn’t), they are likely to end up no better off than our friend John.

What is performance marketing?

Performance marketing is a results-driven approach to digital marketing, where advertisers pay only when specific actions or outcomes are achieved. These actions can include clicks, leads, sales, or other desired customer behaviors. Performance marketing relies on various channels, such as affiliate marketing, pay-per-click (PPC) advertising, social media advertising, and search engine marketing (SEM).

Google and Meta (which owns Facebook and Instagram) are the two common platforms for running performance marketing campaigns in the United States. For example, if you’re a store that sells natural soap bars, you might start by spending $1,000 per month on Google to reach people searching for “natural soap” or “organic skin care.” If the ads targeting “organic skin care” drive the most sales, you could shift your budget toward only those keywords, or expand your budget to drive even more sales.

The termperformance marketingwas coined shortly after the advent of pay-per-click (PPC) advertising, starting with banner (display) ads and Google AdWords (now Google Search Ads). While performance marketing is often associated with paying per result, the billing model doesn’t actually determine whether something is performance marketing. As long as campaign decisions are made based on measurable results, it can be considered performance marketing.

4 main types of performance marketing

Modern businesses invest in 4 main types of performance marketing:

Social media advertising

Social media advertising includes running ads on Facebook, Instagram, Twitter, LinkedIn, and more. Typically, these campaigns are set up with a funnel structure: at least one campaign to reach new people (called prospecting) and at least one to reach people who have visited their site but not yet converted (retargeting). Not all social media advertising is performance marketing—when not used to drive conversions, it can also be used for brand marketing or market validation.

Search engine marketing (SEM)

Search engine marketingrefers to running advertising campaigns to drive traffic from search engines such as Google or Bing. These campaigns are usually structured based on the types of searches they target. For example, a business might have campaigns for the type of product they sell, competitor brands, and their own brand.

Search engine marketing is almost always performance marketing by nature. It is also entirely separate fromSEO.

Influencer marketing

Historically, people haven’t always considered influencer marketing to be “performance” marketing. But in recent years, that’s changed. Influencers have gotten more business savvy, and the growth in both influencer management tools likeGatsbyandinfluencer partnership platformshas allowed brands to properly track and iterate on their influencer partnerships, making it truly performance driven.

Native advertising/sponsored content

Similar to influencer marketing, but instead of paying an influencer to speak about your brand, you pay a publication to write about it. As the marketer, you get a high degree of creative control over what they publish for you. Some publications call it native advertising, others sponsored content, but the strategy is the same. Note that in most countries, publications have a regulatory requirement to disclose that the content is sponsored.

What performance marketing is not

Performance marketing is a subset of digital marketing—but not all types of digital marketing, or even digital advertising, are performance marketing. Here are some other common types of marketing that might be mistaken for performance marketing:

Brand marketing

With brand marketing, the primary goal isn’t measurable: It’s to spread a brand message, feeling, or experience. For example, large brands might run social ads that mirror the message of their TV ads. Although marketers may track the results of a brandmarketing campaign, unlike performance marketing, the goal isn’t to optimize for a measurable result.

Affiliate marketing

从属营销看似性能ob欧宝娱乐app下载地址eting at first: It’s highly trackable and you can make decisions based on performance. However, it has one crucial difference.

Performance marketing isactive:You create and constantly iterate on campaigns to reach your audience. Affiliate marketing ispassive:You simply set the parameters for who qualifies to be an affiliate and how much you’ll pay them for a customer. Affiliates could even run performance marketing campaigns on your behalf.

Market validation

Performance marketing works best when you have validated that there is a need for your product and you understand who your customer is. In other words, going from $5,000 per month in sales to $500,000. If you are just launching and trying to gain your first customers, optimizing for a cost-per result might not be the best thing for your business.

Digital advertising can certainly be used for market validation, but the campaigns should be built like a series of scientific tests instead of like a performance-chasing race car.

How to measure performance marketing

Performance marketing is about chasing the best results. Since we’re spending money, it’s all about your cost-pers. There are 4 key cost-per metrics that matter for your performance marketing campaigns:

Cost per thousand impressions (CPM)

Cost per thousand impressionsrefers to the cost for an advertiser to generate 1,000 views of their ad. The acronym CPM’s origin iscost per mille, with “mille” being the French word for thousand. Advertisers and marketers use 1,000 instead of just cost per 1 impression because the cost for a single impression can fluctuate wildly up and down, but is steadier over a thousand people.

This metric primarily tells you how expensive it is to advertise on this platform, and it’s related to how competitive it is to reach the people you want to reach. For example, the CPM to reach people who search “buy natural soap online” will likely be higher 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 (CPC)

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, aclickrefers 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 tracklink clickson Facebook.

CPC has an inverse relationship with an ad’s click-through rate (CTR). Advertising platforms want to show ads that people actually 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 metric is going to be specific to your business. For e-commerce stores, it’s typically a sale, often reported as cost per sale (CPS). Or, you may focus specifically on sales to new customers, which is typically referred to as a customer acquisition cost (CAC). InB2B marketing, you might use cost per lead (CPL) instead.

This is the most important number for your performance marketing program. If you hit the right CPS or CAC, then your campaign is ready to scale and you can reliably drive more sales. If you can’t hit your number, then you’ll lose money.

How do you do that (very important) math? Simple:

CPS model: CPS < gross margin.If you are spending to generate individual sales (including returning customers), then your cost per sale needs to be less than your average gross margin from that sale. If it’s more, then you’re essentially paying to lose money. If you’re unsure what your gross margin is, use aprofit margin calculator.

CAC model: CAC < CLTV (customer lifetime value).If you are spending to acquire new customers, and you know those customers will return to buy more products without ads in the future, then you can spend up to thetotal value of the customer over time (average gross margin per order * average number of orders). This is a more sophisticated model, but it’s important for stores that have long-term relationships with their customers.

Limitations of performance marketing

Performance marketing is the spiritual successor to a much older industry: direct response advertising (typically in newspapers or direct mail). Thinking of performance marketing as “digitaldirect mailads” can help you understand its limitations:

• Doesn’t focus on brand building. Performance marketing is highly targeted and conversion focused, meaning identifying the subsegment of your market most likely to convert and nurturing them through multiple touchpoints. In other words, if you want to introduce your brand to a large number of people, it’s not the best strategy.

• 品牌稀释的风险。营销是c性能ob欧宝娱乐app下载地址all-to-action (CTA) driven. In other words, nearly every performance marketing ad asks the viewer to do something (“Learn more,” “Claim offer,” “Shop styles,” etc.). For businesses that want to build brand equity (or hype), too much performance marketing can dilute your message and lead to audiences tuning you out.

• False certainty in attribution. Performance marketers still can’t say with certainty exactly how much revenue their ads drove. Part of this is due to recent changes in privacy policies: Many browsers restrict advertisers’ ability to see action users take (such as converting). Apple’s iOS14 Update causedMeta to renamethe “Results” reporting to “Estimated Results.” Savvy marketers are starting to use holistic reporting models that build on CAC and CLTV, such asMER, to make campaign decisions.

Performance marketing is incredibly powerful—millions of merchants have used it as the primary way to scale their business. By understanding its key levers, channels, and pitfalls, you can set yourself up to join their ranks.