Performance marketing is a marketing strategy that is entirely driven by measurable elements of a campaign, such as clicks or conversions.

“Half the money I spend on advertising is wasted. The trouble is, I don’t know where that half is.” When John Wanamaker, the legendary 19th-century marketer, said this, he accurately expressed the anxiety that many business owners have felt for generations. Marketing and advertising are clearly effective, but it is unclear how and to what extent they are effective.

Performance marketing attempts to resolve this tension by focusing on marketing that delivers results in a measurable way. The term was first introduced in the mid-1990s, shortly after the rise of Internet marketing, and was a catchphrase coined by marketing companies. Given a choice, why would a business owner invest in marketing that doesn’t deliver results? If business owners don’t have a clear understanding of what performance marketing is (and isn’t), they’re likely to end up in a situation similar to our friend John.

What is Performance Marketing?

Performance marketing is a results-oriented approach to digital marketing where advertisers only pay when a specific action or outcome is achieved. These actions can include clicks, lead generation, sales, or other desired customer actions. Performance marketing relies on a variety of channels, including affiliate marketing, pay-per-click (PPC) advertising, social media advertising, and search engine marketing (SEM).

The term performance marketing was first used shortly after the advent of cost-per-click (PPC) advertising, starting with banner (display) advertising and Google AdWords (now Google Search Advertising).

Is performance marketing the same as affiliate marketing?

Performance marketing is a subset of digital marketing, but not all digital marketing or digital advertising is performance marketing. There are some common types of marketing that can be confused with performance marketing:

Affiliate Marketing

Affiliate marketing may seem like performance marketing at first. It is very easy to track and you can make decisions based on performance. However, there is one important difference.

Performance marketing is active. That is, you create campaigns and continually adjust them to reach your target audience. Affiliate marketing, on the other hand, is passive. The main activity is to set eligibility criteria and decide how much you will pay affiliates when they bring in customers. Affiliates can also run performance marketing campaigns on your behalf.

Affiliate marketing involves several main groups working together:

• Retailer/Seller: A business that sells products or services, creates affiliate marketing offers, and pays for marketing activities.
• Affiliates/Publishers: Partners who promote a retailer's products or services through various channels, such as websites, blogs, or social media.
• Affiliate Networks/Third Party Tracking Platforms: Act as intermediaries to connect retailers and affiliates, and provide tracking, reporting, and payment services.
• Affiliate Manager/OPM (Outsourced Program Management): A professional or agency that manages your affiliate program on your behalf, handling recruiting, optimization, and relationship management.

Each of these groups plays a vital role in the marketing ecosystem, working together to create, promote, track, and optimize marketing campaigns based on measurable results.

Brand Marketing

The primary goal of brand marketing is not a measurable outcome. Instead, the goal is to convey a brand message, emotion, or experience. For example, a major brand may run a social ad with the same message as a TV commercial. Marketers can track the results of a brand marketing campaign, but unlike performance marketing, the goal is not to optimize measurable outcomes.

Market validation

Performance marketing is most effective when there is a proven demand for your product and you understand who your customers are. In other words, it is suitable for growing from $5,000 to $500,000 in monthly sales. If your business is just starting out and trying to acquire your first customers, optimizing for results for cost may not be the best strategy for your business.

Digital advertising can certainly be used for market validation, but it's better to structure your campaigns like a series of scientific experiments rather than running them like a race car chasing performance.

How does performance marketing work?

Google and Meta (the company that owns Facebook and Instagram) are the two most commonly used platforms for running performance marketing campaigns in the United States. For example, if you are a store that sells natural soap, you might start by investing $1,000 per month on Google to reach people who search for “natural soap” or “organic skin care.” If your ads targeting the keyword “organic skin care” drive the most sales, you can either focus your budget on that keyword alone or scale up your budget to drive more sales.

Performance marketing is often associated with pay-for-results, but in reality, the billing model does not determine whether it is performance marketing. As long as campaign decisions are based on measurable results, it can be considered performance marketing.

What are the benefits of performance marketing?

The growth of digital marketing shows no signs of stopping. When you use performance marketing effectively, you can enjoy the following benefits:

1. Cost-effective campaigns: When you run performance marketing campaigns, you only pay for actions, such as clicks or leads. Every dollar you spend contributes to real results, so you can use your budget more wisely.

2. Measurable: Metrics like conversion rates, click-through rates, and cost-per-acquisition are tracked in real time, so you can quickly evaluate and optimize your campaigns.

3. Targeted Reach: You can fine-tune your campaigns to deliver personalized ads to specific audiences, ensuring the right people see your ads at the right time.

4. Flexibility: When you need to shift your strategy, performance marketing campaigns can be easily adjusted based on your advertising data. You can easily scale your campaigns up or down as needed.

Four Main Types of Performance Marketing

Modern businesses are investing in four main types of performance marketing:

Social Media Advertising

Social media advertising involves running ads on Facebook, Instagram, Twitter, LinkedIn, etc. These campaigns are usually set up in a funnel structure: at least one campaign to reach new people and one campaign to reach people who have visited your site but haven’t converted yet. Not all social media advertising is performance marketing. If it’s not intended 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 type of search terms they are targeting. For example, a business may run campaigns for the type of product they sell, for their competitors’ brands, and for their own brand.

Search engine marketing is always performance marketing by nature. It is also completely separate from search engine optimization (SEO).

Influencer Marketing

In the past, influencer marketing wasn’t considered performance marketing. But things have changed in recent years. Influencers have become more sophisticated, and the growth of influencer management tools like Gatsby and influencer partnership platforms has allowed brands to properly track and improve their influencer partnerships, making them truly performance-driven.

Native Advertising/Sponsored Content

Similar to influencer marketing, but instead of an influencer, you pay a publisher to write about your brand. The marketer has a high degree of creative control over the content they publish, and some publishers call it native advertising, others sponsored content, but the strategy is the same. It’s important to note that in most countries there are regulatory requirements to disclose that the content is sponsored.

Performance Marketing Examples

• Cost-Per-Click (PPC) Advertising : This is a form of performance marketing where the advertiser pays a certain fee each time the ad is clicked. For example, if an ad is clicked on a search for a specific keyword in Google Ads, the advertiser will pay for that click.
• Email marketing is: a performance-based marketing strategy where advertisers send emails to their target audience with the goal of driving sales or leads. For example, they send emails with specific promotions or product information and measure performance by tracking the sales or leads generated.
• Social Media Marketing: A performance marketing strategy that uses social media platforms to reach potential customers and deliver marketing messages. For example, Facebook ads show product advertisements to users with specific interests, and measure the success of the campaign based on responses to those ads.
• Search Engine Marketing (SEM): A performance marketing strategy that involves running advertising campaigns to drive traffic to a website from search engines. For example, by placing ads in search results for specific keywords, you drive users to your site, and then measure the visits or conversions that result from those ads to evaluate the success of the campaign.

How to Measure Performance Marketing

Performance marketing is all about pursuing the best results. As much as you spend, it’s all about getting the most out of your money. The four key cost-effectiveness metrics that are important in a performance marketing campaign are:

Cost per Thousand Impressions (CPM)

Cost per thousand impressions (CPM) is the cost that an advertiser must pay to display their ad 1,000 times. CPM comes from the Latin word "mille", meaning "thousand." Advertisers and marketers measure their costs based on 1,000 impressions instead of single impressions, because individual impression costs can vary greatly.

This metric primarily reflects how expensive it is to advertise on that platform, and how competitive it is to reach your target audience. For example, the CPM to reach people searching for “buy natural soap online” is likely to be higher than the CPM to reach people searching for “personal hygiene tips.” The former is a search term with higher purchase intent, so more advertisers will bid on that keyword.

Cost per Click (CPC)

Cost per click (CPC) is the cost you pay to drive traffic from your ad to your website. There are a few caveats to this metric. For example, Google considers a click to drive traffic to your website, while Facebook includes likes on your ad. To make a fair comparison between platforms, performance marketers usually only track link clicks on Facebook.

CPC is inversely related to the click-through rate (CTR) of an ad. Since ad platforms want to show ads that people actually want to click on, if the ad is attractive, it can be “rewarded” with a lower CPC. Therefore, monitoring CPC can help you understand which ads are engaging your audience the best.

Cost per Conversion

Cost per conversion varies depending on your business. For ecommerce stores, it is usually reported as Cost per Sale (CPS). Or, if you focus on selling to new customers, it is sometimes called Customer Acquisition Cost (CAC). For B2B marketing, you may use Cost per Lead (CPL).

Cost per conversion is the most important metric in your performance marketing program. If you reach your CPS or CAC goals, you are ready to scale your campaigns and drive more sales in a reliable way. If you miss your goals, you could be losing money.

How do we calculate this important math? It's simple:

CPS Model: CPS < Gross Margin . If you spend money to drive individual sales (including existing customers), your cost per sale should be less than the average gross margin for those sales. If it’s more than that, you’re losing money. If you’re not sure what your gross margin is, try using a profit margin calculator.

CAC Model: CAC < CLTV (Customer Lifetime Value ). If you spend to acquire a new customer and expect them to buy again in the future without advertising, you can spend the total lifetime value of the customer (average gross margin per order * average number of orders). This model is more sophisticated, but it is important for stores that maintain long-term relationships with their customers.

The Limitations of Performance Marketing

Performance marketing is the direct response advertising of the past (primarily newspaper or direct mail advertising). It helps to think of performance marketing as “digital direct mail advertising”:

Not focused on brand building

Performance marketing is targeted and conversion-focused. This means identifying sub-segments of the market that are more likely to convert and nurturing them through multiple touchpoints. In other words, it is not the best strategy when you want to introduce your brand to a large audience.

Risk of Brand Duplication

Performance marketing focuses primarily on calls to action (CTAs). That is, most performance marketing ads ask viewers to take action, such as “Learn More,” “Get Offers,” or “Shop Styles.” For businesses looking to build brand equity or awareness, too much performance marketing can result in redundant messaging and audiences losing interest in your brand.

Performance Marketing FAQs