Performance Marketing 101 – What It Is and How It Works

With the global business environment getting tougher, advertisers are faced with the challenge of slashed ad spends. And as most businesses cut conventional advertising methods and switch to smart ones, digital marketing has seen a remarkable rise over the past decade. But the evolution hasn’t stopped as even digital marketing gets smarter by the day and offers higher ROI than before.

As a business, you’d hardly care what means, tactics, tools, or strategies are used by the marketing agency to get you your desired outcome: a sale, lead or click. So essentially, you’ll be paying the ad company only when the desired action has taken place; if it doesn’t, you don’t pay. And that’s what performance marketing is all about. It’s a result-based approach where the marketer is paid when a result is achieved.

Performance marketing is a very broad term that accommodates digital marketing and advertising programs where an advertiser pays for performance or a desired action. It’s a highly targeted way of digital or online marketing that helps both retailers and affiliates grow their business, creating a win-win situation through constant innovation.

What Is Performance Marketing?

In a conventional digital marketing mix, advertisers (retailers or merchants) pay marketing companies (affiliates or publishers) upfront regardless of the success of the ad campaign. This seems only fair as marketing costs are being incurred no matter if the ad succeeds or fails. But in performance marketing, no upfront payments are made by the advertiser to the publisher. Instead, they pay after the desired results are achieved.

These results may include a completed lead, sale, booking, download, or just a click. While it enables the advertiser to paint a larger picture for their business success, performance marketing helps the affiliate or publisher develop innovative and highly ROI-based campaigns and earn big from the results they accomplish.

As opposed to other forms of digital marketing, performance marketing gives the merchant or advertiser the confidence that their money is being well spent and they’re already converting the target audience even before paying for the targeted transaction. And for the advertiser, increased brand exposure and clicks come free in the process as they only pay for the action once it’s completed.

Is Performance Marketing Same As Affiliate Marketing?

Although often confused with affiliate marketing, performance marketing is not the same. In fact, affiliate marketing falls under the ambit of larger performance marketing which also includes search marketing, email marketing, influencer marketing, and any other form of digital marketing that can produce the desired results.

While the two may seem to overlap often, there’s a different approach to affiliate marketing and performance marketing, with the latter including so much more today. And with the constant rise of new technology and innovation in the marketing industry, the performance marketing mix is only growing with the passage of time.

Today, some examples of performance marketing may include influencers with a big following, personalized shopping plugins, and even conversation optimization tools charging the merchant or advertiser only once the sale is complete. If it doesn’t, the exposure that the advertiser gets along the way comes as free of cost and gives them brand exposure anyway.

How Does Performance Marketing Work?

In performance marketing, the advertiser earns from meeting the desired targets and completing the required transactions. If it doesn’t happen, no payments are made by the merchant. But it’s not a process including just the merchant and the publisher. Instead, performance marketing is a complex game that involves four core groups.

These four groups include Retailers or Merchants; Affiliates or Publishers; Affiliate Networks and Third-Party Tracking Platforms; and Affiliate Managers or OPMs (Outsourced Program Management). Working in unison, each group plays a vital role to make the ad campaign successful and drive the desired results.

Retailers or Merchants are the businesses looking to promote their product or service through the publishers. Publishers or Affiliates are the websites, blogs, online magazines, or other such platforms where the merchant’s product or service is promoted.

Affiliate Networks and Tracking Platforms offer information and tools such as product feeds, text links, banners, and promotions and payouts, etc. Lastly, the Affiliate Managers or OPMs provide the added hands required to handle the basic day-to-day management of an affiliate program.


What Are Top Performance Marketing Channels?

We must admit that it’s a tough business climate out there with saturation and a slow market forcing businesses to cut ad budgets and use them where they make a real impact. So no matter if it’s 1 $100 or $1,000 monthly budgets, the merchant is increasingly looking to get the best bang out of their bucks, as well as make the most of the time spent in marketing initiatives.

As discussed earlier in this article, performance marketing is a comprehensive mix of different marketing strategies and approaches. The goal for the ad companies is to give the advertiser their desired results and get paid. To achieve this, they use a number of digital marketing channels, some of which include:

  • Native Advertising
  • Affiliate Marketing
  • Pay-Per-Click (PPC) Marketing
  • Social Media Advertising
  • Email Marketing
  • Websites
  • Content Marketing
  • Search Engine Optimization (SEO)
  • Word of Mouth Marketing

What Are The Factors That Determine Best Utilization Of Marketing Channels?

A combination of factors determines how the ad reaches your target audience. This is crucial in turning your ad campaign into success as going wrong in any of these areas might hurt your entire effort. Here are some of these factors.

  • Segmentation of target audience
    Each ad must target the right audience, and the audience must be properly segmented for an effective ad approach.
  • Bid Amount
    The amount you agree to pay for your ad’s visibility at a certain time or place also determines its success in short and long terms.
  • Relevance & Quality
    The relevance of your ad and the quality it promises have a significant effect on your ad’s performance so must be factored in.
  • Conversion or Action Completion
    This is all that an ad campaign in performance marketing boils down to; if the ad isn’t converting to sales or desired action, it’s a failure.

What Are The Top Payment Models Used In Performance Marketing?

In performance marketing, the ad company makes money by accomplishing the actions or results that the merchant aims for. It could be a sale, a lead, a click, a download, a sign-up, an in-app purchase, or so on. Here are some top payment models used in performance marketing:

  • CPA (Cost Per Acquisition) or Pay Per Sale
    As the term suggests, CPA involves a retailer paying the publisher only once a transaction is made.
  • Cost Per Impression (CPM)
    This is usually the cost of each 1,000 impressions (per one thousand times the ad is shown) that the advertiser pays to the publisher.
  • Pay Per Lead (PPL)
    It’s a non-cash conversion involving a user registering or signing up sharing their personal information.
  • Pay Per Click (PPC)
    In this payment model, an affiliate will be paid by the retailer for each click the prior generates to a landing page.
  • Pay Per ‘X’ or Cost Per Action (CPA)
    The variable ‘X’ here represents any action that a merchant agrees to pay an affiliate for. It can be a click, lead, or sale.

Pros and Cons of Performance Marketing

What are Top Pros and Cons of Performance Marketing?

Like every other marketing approach or strategy, performance marketing also has its fair share of pros and cons. While it helps the marketers build a strong rapport with the advertiser besides ramping up profits if the campaigns go right, they also tend to face hardships and teething troubles caused by performance marketing.

Pros Of Performance Marketing

  • Easier To Land Clients
    It’s easier to land more clients when they know their ad money will be well spent and drive real sales and leads. Marketers can confidently say to the client that here’s 100 leads, you can order again if you like them, and if you don’t like them, then we’ll part ways. That’s a very strong offer that easily converts.
  • More Control
    Performance marketers are to be able to build all of the funnels offline and attach them to the client’s website as a subdomain. Plus, the marketer can build a brand and then sell leads to multiple clients from that one brand. So, there’s more control and bigger opportunity for the marketer.
  • Higher Profit Margin
    Once they’ve got things dialed in, performance marketers should be making roughly 50% gross profit. So let’s say they’re billing $1 million a year, they should be making roughly half that in profit margin. Even after overheads and operational costs, that’s a pretty significant profit margin and also extremely scalable.
  • Less To Do
    In performance marketing, there’s less to do for marketers. All they have to worry about is generating leads through a funnel, and writing ads and generating leads, and tweaking the funnel. They only have to be good at one thing, which is lead generation, which means they can be a master.
  • A Sellable Asset
    Performance marketers can build brands that have and are a sellable asset. So let’s say they’re in the car finance industry, they can build a lead generation brand in that space and point traffic to that brand from YouTube, Twitter, Facebook, etc, and then distribute the leads to multiple clients from that brand.

Cons Of Performance Marketing

  • Hard To Land A Whale Client
    For marketers, it’s hard to land a whale client if they’re just starting with performance marketing. For starters, they’ll need to start at the very bottom. What they can do to safely enter the domain is start small with an existing client and see if they will be interested in switching to the performance-based model.
  • Facebook Ad Issues
    One problem that performance marketers frequently face is with Facebook compliance with their ad accounts getting shut down for no apparent reason. So if they’re thinking about getting into pay-per-lead and spending a significant amount on Facebook, they must be prepared to come across these issues.
  • Thin Early Profit Margins
    As digital marketers begin with smaller clients for performance marketing, profit margins are thin. Let’s say they’re getting paid $50 a lead in an industry, a lot of the time, it’s going to cost them roughly $50 to generate those leads when they’re starting out. And a lot of people become disheartened by it.
  • Sudden Closing of Leads
    If the client is unhappy with the lead quality, and they’re not getting an ROI on the ads, then they’ll switch off immediately. They might have ordered a week’s worth of leads, they can just stop without warning if they’re not getting the ROI. So marketers have to be ready for that type of rejection.
  • No Upfront Payments
    In performance marketing, marketers are only paid once the action is performed. So no upfront payments are given until the goal is achieved. This may cause some marketers to lose confidence as they’re putting in their own money on the campaign that can be shut down if targets remain unmet.

Are You Looking For Performance Marketing For Your Business?

Performance marketing is the latest and trending type of digital marketing today. And with businesses becoming more conscious of their slashed ad budgets being well spent, performance marketing is making the right promise of delivering the desired results. But not all digital marketers are able to offer performance marketing to clients given its challenges and the limited scale of their operations.

If you’re looking for performance marketing for your business, doing a bit of research will help you land an ad agency that offers performance marketing as part of their digital marketing mix. Although you might find this type of marketing a bit costlier than other methods, the true appeal for you will be to pay only after you get the desired results. It’s the greatest value an agency can give for your money, a strong proposition that you can hardly ignore if you’re after real business success.

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