“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 that performs in a measurable way. The term, first introduced in the mid-1990s shortly after digital marketing, 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 had more than 7 million advertisers 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 type of digital marketing campaign in which the budgeting and decision-making are driven primarily by the measurable results of that campaign. Performance marketing is based on an active, iterative feedback loop: run campaigns, see what works, double down, repeat.
From a practical perspective, the term refers almost entirely to paid marketing campaigns. Although other types of digital marketing, such as organic social media or SEO, can certainly drive sales, the feedback loops on these channels are too slow to be considered true performance marketing campaigns.
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 term performance marketing was 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 marketing refers 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 from SEO.
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 like Gatsby and influencer partnership platforms has 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:
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 brand marketing campaign, unlike performance marketing, the goal isn’t to optimize for a measurable result.
Affiliate marketing may seem like performance marketing at first: It’s highly trackable and you can make decisions based on performance. However, it has one crucial difference.
Performance marketing is active: You create and constantly iterate on campaigns to reach your audience. Affiliate marketing is passive: 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.
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 impressions refers to the cost for an advertiser to generate 1,000 views of their ad. The acronym CPM’s origin is cost 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, 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 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). In B2B 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 a profit 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 the total 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 “digital direct mail ads” 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.
- Risk of brand dilution. Performance marketing is call-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 caused Meta to rename the “Results” reporting to “Estimated Results.” Savvy marketers are starting to use holistic reporting models that build on CAC and CLTV, such as MER, 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.