Performance Marketing 101: Your Ultimate Guide

Whether you're a new business owner or have been in business for a while, you know that marketing is essential to growing your customer base. It is the lifeblood of a successful business. The form of marketing you choose should depend on various factors, like your long-term goals, the products you sell, and your target audience.

However, businesses often end up investing too much of their revenue in the wrong marketing types without getting any significant results.

Today, let's explore a new and powerful type of marketing called performance marketing. We'll understand the what, how, and why of performance marketing, along with all the variables involved in launching and running a successful performance marketing campaign! 

What is performance marketing?

Performance marketing is a results-driven approach to digital marketing that means advertisers pay only when specific actions, like clicks, leads, or sales, happen. It uses channels like affiliate marketing, pay-per-click (PPC) advertising, social media advertising, and search engine marketing (SEM).

How does performance marketing work?

Performance marketing works by setting clear goals and tracking their success using various tools and analytics. Advertisers monitor key metrics and adjust their campaigns to improve results. Here's how it typically works:

1. Setting goals: Advertisers decide on specific campaign goals, such as increasing website traffic, generating leads, or boosting sales.
2. Targeting: To reach the right people, marketers identify their target audience based on factors like demographics, interests, and behavior.
3. Creating ads: Advertisers make engaging and relevant ads that appeal to their target audience and encourage them to take action.
4. Launching campaigns: They launch their campaigns on various online platforms, such as search engines, social media, display networks, and affiliate networks.
5. Monitoring and optimization: Advertisers continuously monitor how their ads perform in real time, analyze the data, and make changes to improve results.
6. Tracking conversions: They track conversions and key metrics to measure the campaign's success and calculate the return on investment (ROI).
7. Scaling: If a campaign is successful, advertisers can invest more money to reach a larger audience and get more conversions.

Benefits of performance marketing

When you use performance marketing to your advantage, you'll see the following benefits:

1. Measurable results: Performance marketing is driven by data and successful transactions. It lets businesses track and measure their campaigns in real time, showing what's working and what isn't, allowing for quick adjustments.
2. Cost efficiency: You pay for actual results, such as clicks or sales, ensuring you're only spending on effective campaigns and making your budget more efficient.
3. Targeted audience reach: Advanced targeting options let you reach specific demographics, interests, and behaviors, ensuring your ads reach those most likely to be interested in your product or service.
4. Flexibility and adaptability: Campaigns can be easily adjusted based on real-time data. If something isn't working, you can quickly change your strategy to focus on what is.
5. Quick launch and scaling: Performance marketing campaigns can be launched quickly, ideal for time-sensitive promotions. Successful campaigns can also be scaled up quickly to reach a larger audience.
6. Higher return on investment (ROI): With a focus on measurable outcomes, performance marketing often leads to a higher ROI. Continuous refinement based on performance data ensures more effective budget allocation.
7. Multichannel approach: Performance marketing can be used across various online channels, like search engines, social media, display ads, and email marketing, diversifying your reach.
8. Transparent performance tracking: Detailed analytics provide a clear view of campaign performance, aiding informed decision-making and justifying marketing spending.
9. A/B testing opportunities: You can test different elements, like ad copy, visuals, landing pages, and calls to action, to see what works best, leading to continuous improvements.
10. Adaptable budgeting: Performance marketing can fit any budget, allowing you to start small and increase investment as you see positive results.

So, using performance marketing's data-driven approach, cost efficiency, precise targeting, and adaptability, you can make a powerful strategy for achieving marketing goals with clear accountability and measurable success.

Metrics to monitor performance marketing

Whether it's the number of clicks, page views, or sales, key metrics are crucial for measuring and improving performance.

Here are some of the most commonly used metrics and KPIs in performance marketing to help you better understand its pricing:

Cost per click (CPC)

Cost per click (CPC) is the amount you pay to get someone from your ad to your website. However, there are a few things to keep in mind: On Google, a click means someone visits your site, but on Facebook, a click can be anything, even someone clicking "Like." To make fair comparisons across platforms, performance marketers usually track link clicks on Facebook. The formula of CPC is: 

CPC and an ad’s click-through rate (CTR) have an interesting relationship. Ad platforms prefer showing ads that people like to click on, so if your ad is engaging, they'll “reward” you with a lower CPC. This is why keeping an eye on CPC can help you figure out which ads are best at engaging your audience.

Cost per mille (CPM)

Cost per mille (CPM) is the cost for an advertiser to get 1,000 views of their ad. Advertisers use 1,000 views instead of just one impression because the cost of a single impression can vary a lot, but it’s more stable over 1,000 views. The formula for calculating CPM is:

CPM helps you understand how expensive it is to advertise on a particular platform and shows how competitive it is to reach your target audience. For instance, the CPM for "buy natural soap online" will likely be higher than for "personal hygiene tips" because more advertisers are bidding on the first keyword, as those searchers are more likely to make a purchase.

Cost per purchase/sale (CPP/S)

Cost per purchase (CPP) or cost per sale (CPS) is ideal if you're focused on boosting sales. With this approach, you'll measure your campaign's success by counting the number of sales. You then reward your partners each time someone buys a product through their efforts.

This means that whenever a customer makes a purchase that can be directly linked to one of your partners, you'll pay that partner. It’s a great way to ensure that you’re only spending money on marketing that leads to actual sales, making every dollar count.

Cost per lead (CPL)

In cost per lead (CPL), you pay whenever a user shares their information, like filling out a form. This payment rewards your partners for generating leads. You then focus on converting these leads into paying customers through continued engagement and targeted marketing, effectively building relationships and growing your customer base.

Cost per acquisition (CPA)

Cost per acquisition (CPA) is a metric used in digital marketing to measure how much it costs to gain a new lead or customer. In ecommerce, CPA is calculated based on the revenue generated from the marketing campaign's traffic. Unlike customer acquisition cost (CAC), which averages the cost across all channels, CPA focuses on individual channels or campaigns.

Lifetime value (LTV)

Customer lifetime value (LTV) predicts the total value a customer will bring to a retailer over their entire relationship. It uses predictive analytics to estimate spending based on interactions and behaviors.

LTV helps businesses understand each customer's potential financial impact, considering factors like purchase history, frequency, order value, and retention. By calculating LTV, businesses can make smarter decisions about marketing, retention, and personalized experiences to maximize long-term profitability.

Conversion rate (CR)

The conversion rate is a metric that shows how effective your marketing is in turning clicks into desired actions, like purchases or sign-ups. It helps you understand if your call to action (CTA) and offers are resonating with your audience.

Studying this metric can reveal whether your landing page and ad creatives are aligned with customer expectations. For example, if you have a high click-through rate but a low conversion rate, it might indicate that visitors are not finding what they expect after clicking your ad.

This insight allows you to adjust your campaign strategies to improve the customer journey and increase conversions. Essentially, it's about making sure your marketing efforts are not just getting clicks but also driving meaningful actions that benefit your business goals.

Return on ad spend (ROAS)

ROAS (return on advertising spend) helps businesses gauge how effective their ads are in boosting profits. It's like ROI (return on investment) for ad spending: a number above one means the ads are bringing in more money than they cost. This helps businesses measure performance and plan future ad spending and strategies. A simple step to calculate your ROAS is:

However, ROAS isn't perfect. It doesn't account for longer or shorter sales cycles, so it might not always show the full picture. Also, because it's a ratio, it doesn't show the actual impact of ads.

For example, a social media ad that makes $100 with a $10 spend looks as effective as another ad that makes $20,000 with a $2,000 spend, even though the latter adds more to the bottom line.

Return on investment (ROI)

ROI, or Return on Investment, measures how effective your marketing is by showing if the money spent is generating enough profit. Simply put, it tells you if you’re earning more than you’re spending. Here’s how you can calculate the ROI:

• Net profit: This is the gain from the investment minus the cost of the investment.
• Cost of investment: This is the total amount of money spent on the marketing campaign.

The goal of ROI is to ensure that the revenue generated from the marketing campaign exceeds the money spent, meaning you make more dollars than you invest.

Performance marketing types and channels

Performance marketing channels are digital platforms where you can run campaigns to achieve specific business goals like clicks, ad views, downloads, and app installs. Here's a brief guide to the most common channels and their ad formats:

Display ads

Display ads have been around for a long time in performance marketing, and they're still popular with many brands. However, how brands run these ad campaigns has changed. Now, instead of paying platforms for every impression or click, companies often pay them when a buyer clicks on a video or image ad and makes a purchase.

Social media advertising

With billions of users on social media globally, platforms like Facebook, Twitter, Instagram, TikTok, LinkedIn, Reddit, and Pinterest offer vast opportunities to expand your campaigns and connect with new audiences. Each social media platform supports various ad formats, such as display ads and videos tailored to their specific features. 

Choosing which platform to focus your efforts on depends on your target audience. For instance: 

• Instagram has a younger user base, with 31% falling in the 18 to 24 age bracket and more than half being below 34. So, if that's your target audience, you should focus on Instagram. 
• Facebook has a larger millennial user base, with 32% of its active users aged 25-34 and 18% aged 35–44.
• TikTok is popular among Gen Z, with 37 million actively using the platform, but it's also gaining traction with millennials.

Native advertising

Native advertising seamlessly blends into the environment where it appears by matching the design, content, and writing style of the platform.

Successful native ads are designed not to look like traditional advertisements. They might appear as suggested articles at the end of a news or content page or as posts within a social media feed. Because they feel less intrusive, users tend to engage with them more willingly compared to other types of ads.

Search engine marketing (SEM)

SEM (search engine marketing) involves two main methods to appear prominently on search engine results pages. The first method is unpaid and uses search engine optimization (SEO). This method relies on optimizing content to align with search engine algorithms to naturally rank higher in results. However, it's not an easy feat to get your website ranked on Page 1 of Google. It takes a lot of time, resources, and, most of all, patience!

The second method involves purchasing pay-per-click (PPC) ads. Here, companies bid for ad placement on search engine results pages and only pay when someone clicks on their ad. This allows brands to secure a favorable position in search results and effectively reach their target audience.

Affiliate and influencer marketing

Affiliate marketing is a cost-effective way to grow and engage mobile users. It's a performance-based model where you partner with networks, programs, or influencers who connect you with publishers. These publishers promote your products or services.

In affiliate marketing, you pay for actual results, such as app downloads or purchases made through specific links or coupons, not just for clicks or views. Successful affiliate programs typically have a strong brand presence across multiple marketing channels, attracting an active and loyal audience. It's a smart addition to your marketing strategy to increase ROI and reach new customers.

Email marketing

Email marketing continues to thrive as a way to engage audiences, using targeted emails to highlight products, services, or content. In fact, 33% of marketers send emails every week. 

Its strength lies in personalized messages that cater to user preferences and behavior. Beyond promoting goods, it serves as a valuable tool for building and maintaining strong customer relationships.

How to build a performance marketing strategy

With so many different types of performance marketing channels and campaigns, there is no single way to build a perfect strategy. 

However, these are the main steps you can use as a guide to get your performance campaign running toward success:

Step 1: Set your campaign goal: Decide what you want to achieve, like increasing brand awareness, driving website traffic, or boosting sales. Your goals will guide how you set up and run your campaign.

Step 2: Choose your digital channels: Don’t rely on just one platform. Use a mix of channels, like social media, affiliate marketing, and native ads, to reach a wider audience. Pick channels that align with your goals and target audience.

Step 3: Create and launch your campaign: Understand your audience’s needs and create ads that speak to them. Pay attention to details like ad sizes and copy limits based on the platform you’re using. Launch your campaign once everything is ready.

Step 4: Measure and optimize: After launching, monitor your campaign’s performance. Analyze the data to see what’s working and what’s not. Adjust your strategy and budget to focus on the best-performing channels and tactics to maximize your return on investment.

You can now take your performance marketing to the next level with Madgicx. Our AI Marketer is like having a personal AI-powered media buyer by your side, giving you expert tips to optimize your Meta ad campaigns and get better results. Here's how your dashboard will look:

The AI Marketer was created by performance marketers. It “thinks” like a performance marketer and gives you recommendations that improve your business’s bottom line. Add our AI Marketer into the mix and get better outcomes while staying in tune with changing consumer behaviors. Sign up for a free trial today!

FAQ - How is performance marketing different?

Performance marketing vs. digital marketing

Performance marketing is a subset of digital marketing that focuses on measurable outcomes such as clicks, leads, and conversions, where advertisers only pay for specific actions. However, digital marketing encompasses a broader range of online marketing activities, including SEO, content marketing, and social media, without necessarily being tied to direct performance metrics.

Performance marketing vs. affiliate marketing

Performance marketing includes various types of campaigns, like PPC, display advertising, and social media ads, all aimed at achieving specific actions and measurable results. Affiliate marketing is a component of performance marketing where affiliates earn commissions by promoting products and driving sales or leads for advertisers, making it a specialized form of performance-based advertising.

Performance marketing vs. paid marketing

Performance marketing is characterized by its focus on measurable actions and paying only when these actions occur, such as clicks, leads, or sales, ensuring that every dollar spent is tied to a specific outcome. Paid marketing, on the other hand, involves any form of online advertising where money is spent, including performance-based campaigns, but also encompasses broader strategies like display ads and sponsorships that may not always focus on direct performance metrics.