Performance Marketing Explained

Businesses involved in the e-commerce industry, which is a saturated and competitive market, make huge efforts to stand out from the crowd. A certain percentage of the owners realize the power of native advertising and the magic of creativity. Thinking out of the box combined with innovative approaches such as programmatic provide the companies with competitive advantages and the ability to personalize products or services as deeply as possible. Being at the forefront implies considerable investments, however, it takes time and patience to figure out what works well and what is right for the business. A degree of uncertainty is always there.

Performance marketing is an alternative path. The concept refers to an online marketing model where the advertiser pays for achieved results rather than hopes and experiments. Marketing performance is paid in case it bears fruit and attains the aims via existing channels. This particular practice is set to generate a user response in the form of a subscription, registration, or purchase, just to name a few. 

Delving into the theory: the channels

The term performance marketing refers to programs in the field of online marketing and advertising, where marketing companies and advertisers are paid after a particular action takes place such as click, lead, or purchase.

Performance marketing works on the basis of paid marketing channels, such as search engine marketing, sponsored advertising, social media advertising, affiliate marketing, and native advertising.

  • Search engine marketing (SEM) — Search engine marketing has been one of the most popular performance marketing channels for years and it owes its success to Google AdWords. The strength of SEM is showcased by the chance to show ads to those who are ready to buy. Given that keywords are the spine of this channel, working with them and choosing them is an art, thus, it requires comprehensive keyword research.
  • Sponsored advertising — this channel can provide high-quality traffic, boosting conversions and online visibility before a highly targeted audience. Sponsored content is deemed a win-win situation for both advertisers and publishers. Belonging to native advertising forms, sponsored articles are of a long-term nature, and they have a positive effect on brand awareness, conversions, traffic, and consumer behavior.
  • Social media advertising — Significant investments are being made in social media advertising so that media buyers and advertisers can participate in performance marketing programs. Achieving measurable results via social media platforms and organic reach has become a true challenge. Investing in social media advertising gives knowledge on measuring KPIs by clear metrics such as cost per click (CPR) and click-through rate (CTR), as well as ROI.
  • Affiliate marketing — a publisher establishes relationships with the advertiser in pursuit of increased sales or traffic. After the traffic is sent to advertisers, the affiliate receives commission for a validated sale. Many brands consider this channel to be effective in terms of return on investment. Moreover, any website operator can play the role of the affiliate.
  • Native advertising — This channel plays a special role in performance marketing as it provides a chance to tackle ad blockers, ad blindness, and it generates ten times more clicks than any other type of online advertising. Native advertising equals high-quality content and smart distribution to relevant publishers.

Obviously, each channel is characterized by its own specific audience. In this case, each channel implies working with different platforms in order to reach these audiences. For example, Google search engine shows the advertisements among the search results. Our service provides an opportunity for the advertisers to display ads on the most credible and high-profile publishers and reach vast audiences. Social media giant Facebook gives a chance to display ads to its visitors and Instagram account owners.

Before choosing what exactly should be displayed on a particular platform, a number of aspects are taken into account and analyzed. Each platform provides the options to fulfill targeting and segmentation of the audience. When audience segments are defined, next comes bidding — determining the sum of money an advertiser agrees to pay for the ad to be shown in a particular place and time.

Performance of the advertisements is factored as building trust remains one of the biggest challenges in the advertising world. That is, the network is sure to decrease the ad exposure in case it has low-quality ratings. From the economic perspective, performance marketing relies on a client taking an action. In other words, if the action does not occur the network does not receive money.

Performance marketing vocabulary: the measurements

Performance marketing is all about particular actions. Thus, it is logical we outline the vital metrics that serve to measure these actions.

  • CPA (cost-per-acquisition) —  pricing model where an advertiser pays for acquisition, whether it is filling form, a click, or a purchase.
  • Impression — payments are dependent on how many times the ad is seen. Usually, the fees are lower because the level of engagement is low and is hard to predict.
  • Engagement — it can be measured in different ways. Various social media platforms will offer various purchasing plans based on engagement.
  • Clicks — should be paid for in the case the aim is to boost website traffic.
  • Leads — this measurement pertains mostly to B2B organizations, it includes filling forms and/or email opt-ins.
  • Sale — in this case, an advertiser pays after a purchase takes place.  

Each action mentioned above represents an advertising objective. At the same time, these terms stand to calculate the effectiveness of performance marketing. Before you start, there is something to remember: performance marketing begins with defining the campaign goals — it is the basis. After that, you get a clear idea of the platforms to use, expenses, and outcomes.

How to make performance marketing work?

Indeed, performance marketing sounds great. Nevertheless, for the performance marketing strategy to show positive results, there is a lot to think about and take care of beforehand. First and foremost, you have to understand that performance marketing as a tool poses a very specific and measurable goal. Marketing results should not be used for brand awareness for instance — it just does not make any sense.

Secondly, it is important to consider the payment model design. Provided there is a chance to use a number of various online channels — everything depends on conversion rates. When defining the payment model, one will choose out of the following: CPL (Cost per Lead), CPA (Cost per Action or Cost per Acquisition), or CPC (cost per click).

Performance marketing does not tolerate amateurs. This model demands highly qualified professionals to unleash the entire potential of it. We have mentioned before that performance marketing implies using tracking systems, thus, complex digital tools are applied to help achieve the goals. There has to be a competent approach where people know exactly how to maximize the benefit of these technologies.

The other thing worth mentioning is that performance marketing underlines the crucial role of monitoring. That is, the performance marketing strategies require real-time analysis. When a malfunction or any wrong turn is detected it should be fixed and taken care of as soon as possible. One performance marketing secret is constant optimization of performance marketing results — this is an indispensable condition for a performance marketing strategy to work well.

Barriers to adoption

Caked Marketing issued a comprehensive survey on performance marketing and the major challenges in a successful adoption of the model were defined. The study outlined 7 major reasons to avoid using performance marketing: 49% of the respondents stated that the uncertainty of return on investment prevents them from using performance marketing; 31% have no allocated budget for this purpose; 31% of respondents blame the company’s bureaucracy as the reason for not investing in the method; 23% claim the cost is too high; 22% of people are not familiar with these technologies; 21% point at data security risks; and 19% specify lack of skills or resources as an excuse.

Unveiling the benefits

Probably this block should be read and analyzed by the actors from the previous block survey, so they could sum up pros and cons. Performance marketing represents the fastest growing segment of digital advertising. The very same Cake Marketing research reveals that 93% of the companies working with performance marketing strongly recommend it. Given Business Intelligence technologies will gain momentum the effectiveness of performance marketing will increase as the methods of ROI extension will be known.

Among the major benefits of performance marketing,  we point out the following:

  • Greater control over results.
  • The advertiser knows the exact unit cost of each and every action, whether it is a registration or sale or subscription.
  • Performance-based marketing can significantly reduce the company’s risks.

In order to make this method work 100% businesses must consider creating attractive ads, clear landing pages, and developing click-through processes.

So, as you can see performance marketing offers an alternative perspective for businesses by giving more control, more confidence in the marketing efforts, and a clear view of the results. However, for the time being, there are constraints that need to be tackled. Like any other effective tool, performance marketing must be in the hands of prominent specialists. In case you are interested in this topic and want to know more — we’d be happy to answer your questions: client.support@mgid.com