What is Performance Marketing: The Ultimate Guide

Performance marketing is a results-driven approach to digital advertising where businesses only pay when a desired outcome occurs, such as a sale, lead, or click. This strategy optimizes return on investment (ROI) by tying spend directly to measurable actions.

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In this comprehensive guide, we’ll cover everything you need to know about performance marketing, including:

• What is Performance Marketing and How It Works
• Performance Marketing vs. Traditional Digital Marketing
• Key Principles and Benefits
• Main Channels and Strategies
• Performance Marketing Metrics and KPIs
• Tips for an Effective Campaign
• Frequently Asked Questions

What is Performance Marketing and How Does It Work?

Performance marketing, sometimes referred to as “pay-for-performance” marketing, is a modern approach to digital advertising focused entirely on driving and measuring results.

The Performance Marketing Association (PMA) defines performance marketing as:

“A form of digital marketing where advertisers pay only when a specific, measurable action is achieved, such as a sale, lead, click, or download.”

With performance marketing, businesses collaborate with partners to run advertising campaigns across various digital channels. They compensate partners based on the delivery of tangible outcomes instead of impressions or visibility alone.

For example, a retailer might pay an affiliate marketing partner a commission every time someone clicks on one of their ads and makes a purchase. Or they could pay a social media influencer each time someone signs up for their email list after viewing a sponsored post.

This pay-for-performance model provides advertisers with greater transparency and control over their marketing spend. There is a direct correlation between ad investment and sales, leads, or other results.

How Does Performance Marketing Work?

There are a few key players that make performance marketing campaigns work:

• Advertiser: The brand, business, or retailer investing in advertising to promote their company or sell products.
• Publisher: An affiliate, influencer, media company, or other partner who publishes and distributes advertisements to their audience.
• Network: A platform that connects advertisers and publishers, tracking the performance of campaigns.
• Customer: The end consumer who takes a measurable action, like making a purchase.

The Performance Marketing Process Includes:

1. An advertiser partners with a publisher through a network or direct relationship.
2. The publisher displays, optimizes, and manages ad campaigns to drive results.
3. Consumers see an ad and take a specific action, like clicking a link or buying a product.
4. The network tracks these conversions and performance.
5. The advertiser pays the publisher based on the agreed upon commission or pricing model per action.

Both the advertiser and the publisher benefit from this performance-based arrangement when executed effectively.

Advertisers get in front of targeted audiences likely to convert, only paying when those conversions occur. Publishers earn steady payouts by driving tangible results.

By optimizing based on real-time performance data, both parties can refine strategies to improve results over time.

Performance Marketing vs. Traditional Digital Marketing

How does performance marketing differ from traditional digital marketing and advertising?

With traditional digital marketing campaigns, advertisers purchase ad space, sponsorships, or impressions without any guaranteed return:

• Run an online display ad campaign based on reach and impressions
• Sponsor influencer content without knowing the exact ROI
• Buy radio spots based on listener estimates

Performance marketing instead ties spend directly to measurable actions taken by consumers after seeing an ad. Advertisers have complete transparency into the ROI of their campaigns.

Here is a comparison:

Performance marketing gives advertisers more control over budgets by only spending when agreed-upon results happen. This allows for rapid optimization of campaigns based on hard performance metrics.

The Benefits of Performance Marketing

Why should companies invest in performance marketing strategies?

Here are the main benefits of this model over traditional advertising:

Results-Driven Approach

With guaranteed outcomes, advertisers can accurately measure the revenue earned from ad campaigns against the cost. You know exactly how much you must spend to acquire customers and can calculate your return on each channel.

Performance marketing gives you the data to determine where to allocate budget for maximum profit.

Greater Transparency

Most marketing channels make it difficult to connect spend directly to outcomes. The lack of transparency into what’s working makes optimization tricky.

With performance marketing’s trackable metrics, you gain visibility into the exact impact of each campaign. There’s no guessing game or estimations required.

Increased Control Over Spend

Paying only when agreed-upon actions happen gives advertisers complete control over their marketing investment. You can set daily budgets, optimize bids, and pause or stop campaigns at any time.

Compare this to investing in a year-long radio ad contract without knowing how many customers will actually hear it. The flexibility to adjust based on real-time metrics is invaluable.

Reduced Risk

With guaranteed outcomes, most of the guesswork associated with advertising campaigns is eliminated. You don’t have to predict or estimate anything when launching a new partnership or leveraging an emerging channel.

As long as each party delivers on the arranged metric, both see a return. This dramatically minimizes financial risk.

Scalability

The best performing campaigns can be scaled rapidly while cutting those not producing desired outcomes. Paying only for conversions lets you ramp up budgets exponentially in a short period without additional risk.

Advanced Tracking and Attribution

From clicks to post-click conversions, performance marketing relies on accurate campaign tracking and attribution. Sophisticated reporting dashboards provide incredible visibility into each touchpoint along the customer journey.

Understanding the true impact every ad and marketing channel has on conversions is crucial for optimal budget allocation. Performance marketing makes this level of measurement possible.

In short: By directly connecting ad spend to measurable goals, performance marketing gives advertisers greater transparency, flexibility, and control over their marketing results.

Performance Marketing Channels

Now that you understand the principles behind it, what are some of the main performance marketing channels available to advertisers?

While the lines between some forms of digital marketing continue to blur, we can break performance strategies into five primary categories:

1. Affiliate Marketing

Affiliate marketing is one of the most popular and efficient performance marketing channels. In the PMA’s most recent report, 81% of advertisers leveraged affiliate partnerships.

In affiliate marketing, a brand partners with publishers who promote products or services on their platforms in exchange for a commission on any resulting sales or leads.

Common affiliate partnerships include:

• Bloggers review products or write comparison articles driving clicks to an advertiser’s site. They earn commissions when review readers make purchases.
• Loyalty sites highlight coupon codes and deals to incentivize purchases from select retail partners. They earn a percentage of any sales driven by their audience.
• Product feed partners optimize Product Listing Ads directing searchers to advertisers’ sites for checkout. Commissions get paid per purchase.
• Niche review sites test products like mattresses, web hosting services, or VPNs and convert readers to trackable landing pages with exclusive deals.

Affiliate tracking software handles attribution modeling and payouts each time a publisher’s platform contributes to a conversion event. Advertisers access a turnkey network full of partners motivated to drive sales on their behalf, risk-free.

In 2021, publishers earned over $16 billion globally from participating in affiliate programs. Spending on affiliate channels grew at an annual rate of 6.6% in the past year.

With the ability to develop partnerships across all types of sites, social channels, and mobile apps, affiliate marketing offers advertisers an endlessly scalable performance marketing strategy. Expect massive growth to continue in this space.

2. Search Engine Marketing (SEM)

Search Engine Marketing encapsulates paid advertising done through search engines like Google and Bing. The most common formats include:

• Paid search (PPC): Text ads displayed atop search engines in paid ad slots. Advertisers bid against each other for positioning and only pay when searchers click on an ad.
• Shopping ads: Product image and price listings shown in dedicated retail sections of search engines. Retailers pay each time a user interacts with or clicks on one of these ads.
• Display advertising: Banner image and video ads placed by advertisers across an ad network spanning thousands of websites. Performance pricing models include cost per impression (CPM) and cost per click (CPC).

There are also options to pay for placements on Google’s Display Network and Amazon’s Demand Side Platform.

Here is the continuation of the performance marketing guide:

SEM is a goldmine for performance marketers, representing over 50% of total digital ad spend in the U.S.

With predictable, trackable results available at massive scale, it’s no wonder PPC and Shopping campaigns dominate so many brands’ marketing budgets. Advertisers also praise the level of transparency and control as key benefits over traditional advertising.

Keep a close eye on this juggernaut channel as automation and personalization via A/B testing continue to advance in the coming years.

3. Social Media Marketing

Performance marketing on social platforms empowers advertisers to engage with highly targeted audiences while optimizing budgets to actual campaign results.

Common pricing models available include:

• Cost per impression (CPM) – Pay each time your ad is displayed in a user’s feed
• Cost per click (CPC) – Pay when someone clicks your ad
• Cost per action (CPA) or acquisition (CPL) – Pay only when someone takes a key action
• Return on ad spend (ROAS) bidding – Pay to reach a target return on budget based on revenue

Top platforms providing advanced performance-based ad solutions include:

• Meta Ads Manager – Offers precise audience targeting features for Facebook, Instagram, Messenger, and Audience Network placements with robust analytics.
• Snapchat Ads Manager – Performance campaigns have above-average conversion rates thanks to Snapchat’s young, engaged user base.
• Pinterest Ads Manager – The platform’s strong commercial intent makes it ideal for CPC-based efforts focused on traffic and conversions.
• TikTok Ads Manager – Already supporting CPC and CPM-based campaigns as the fastest growing media channel.

The combination of reach, advanced audience segmentation, diverse creative formats, and closed-loop attribution techniques make social media marketing an emerging performance giant. Expect even more sophisticated solutions as platforms compete for advertising dollars.

4. Content Marketing

While often considered a top-of-the-funnel brand awareness play, content marketing can also drive tremendous mid and lower-funnel performance when executed effectively.

Advertisers collaborate with publishers to develop “sponsored content” designed to motivate a specific action by readers. Payment models based on content marketing outcomes include:

• Cost per impression (CPM)
• Cost per click (CPC) to a landing page
• Cost per lead (CPL) generated
• Cost per acquisition (CPA)
• Cost per view (CPV) for video

Native advertising is an example of a content marketing format gaining popularity to promote products to hyper-targeted audiences in a performance-driven way.

Advertorial articles and videos closely resemble the actual media content where they are placed but include sponsor promotions integrated seamlessly into the storytelling.

Partners like Taboola, Outbrain, and Revcontent facilitate native sponsored placements across major online publishers, sharing revenues when viewers click through to advertiser websites and transact. Other examples include sponsored podcasts and newsletter inserts.

More publishers are waking up to content marketing opportunities as extensions of their performance marketing stacks in today’s crowded digital landscape.

5. Email Marketing

While email has long focused on open rates, click-through-rates, and top-line subscriber counts, sophisticated performance tracking features have made this channel much more accountable.

Metrics popular for managing email program performance include:

• Click-to-open rate (CTOR) – Percentage of opens that result in clicks to site
• Sales conversion rate – Percentage of clicks driving an online purchase
• Conversion rate from open – Percentage of opens that drive a desired goal
• Revenue per email sent (RPES) – Total sales revenue per broadcast email

Monitoring these KPIs daily while A/B testing subject lines, content formats, calls to action, timing, and segmentation strategies enables email marketers to optimize deliverability, click activity, and conversions.

With email continuing its reign among top customer acquisition and retention channels, finely tuned performance stays vital for advertisers.

Performance Marketing Metrics and KPIs

Now that you know the basics of how performance marketing works and the channels available, let’s examine some best practices for setting up tracking and reporting.

Monitoring the right metrics is crucial to gauge campaign effectiveness and continually optimize based on data-driven insights about what’s working best.

Common performance marketing metrics include:

• Clicks – Number of clicks on an ad or content link
• Click-through-Rate (CTR) – Clicks divided by ad impressions
• Cost-Per-Click (CPC) – Amount you pay for each ad click
• Conversions – Completions of a desired goal like a purchase or registration
• Conversion Rate (CVR) – Conversions divided by total visitors or ad clicks
• Cost-Per-Acquisition (CPA) – Advertising cost to acquire each customer
• Return-On-Ad-Spend (ROAS) – Revenue generated per amount of ad spend

Monitoring this performance data daily or weekly provides tremendous visibility into what’s resonating best with your audiences across publishers, formats, and creative variations.

Tools like Google Analytics, Meta Business Suite, and transaction-focused platforms like Appsflyer enable in-depth analysis of multi-touch journeys leading to conversions. Determining your most profitable publisher partnerships and highest converting campaign creative empowers continual optimization.

Are text ads or display banners driving more clicks and sales? Do influencer collaborations deliver more leads for the money versus programmatic channels?

Getting data-driven answers to these questions is at the heart of executing an effective performance marketing strategy and maximizing your budgets.

Tips for Launching a Successful Performance Marketing Program

Here are five keys to activating a high-impact performance marketing strategy for your brand:

1. Set Clear Goals and KPIs

Be specific about the outcomes you aim to achieve. Common goals include:

• Increase sales by __%
• Drive __ newsletter subscribers monthly
• Acquire mobile app customers at __ target CPA
• Achieve __ ROAS across paid social efforts

With exact objectives defined, identify the right KPIs to track performance against those goals for accurate spend forecasting and optimization.

2. Allocate Budget to Top Performing Channels

Don’t spread efforts and resources too thin early on. Analyze historical performance data and focus on channels delivering the highest returns first.

Double down on what works to gain quick momentum toward goals before expanding to additional publishers and platforms.

3. Continually A/B Test Ad Creative and Offers

Run experiment after experiment to discover the optimal combination of ad formats, designs, copy, landing pages, products, deals, timing, and placements to drive conversions across each marketing channel.

Let data steer creative, messaging, and offers toward higher performance over guessing what might work best.

4. Monitor and Optimize Based on Attribution

Combining first, second, and third touch attribution empowers you to assess the influence every ad and publisher has on conversions within buyer journeys.

Knowing which channels receive credit for delivering awareness, consideration, and purchase events informs smarter budget decisions over the long term.

5. Stay Agile with Budget Allocation

As the digital landscape and competition evolve, remain nimble in directing resources into evergreen high-growth opportunities while scaling back platforms and publishers producing diminishing returns.

Top marketers make bids and budgets fluctuate continually to capitalize on trends, seasonality, experiments, and launch windows revealing the hottest new profit drivers.

Review performance frequently and reallocate funds based on the latest insights into which partnerships and creatives convert best.

Following this process positions you to get the most out of your next performance marketing launch and set up sustainable momentum.

Now let’s address some frequently asked questions surrounding this modern advertising approach.

Performance Marketing FAQs

What’s the difference between performance marketing and affiliate marketing?

Affiliate marketing represents one channel within the broader performance marketing universe. It refers specifically to partnerships where brands compensate publishers and influencers entirely based on the sales, leads, or other conversions they’re able to drive by promoting offers.

How do you calculate ROI for performance marketing campaigns?

The return on investment (ROI) from performance marketing channels ties directly to the action the advertiser pays for and the compensation model they agree to.

For example:

• Cost per acquisition campaigns – Take total sales revenue driven and divide it by the campaign’s total cost to determine the true return per dollar invested.
• Cost per click campaigns – Look at the number of clicks generated overall and how each click converts down the funnel to estimate true value beyond just the click itself.
• Cost per impression campaigns– Tie impression volume, view rates, and click-through-rates to downstream conversions to gauge true influence on purchasing activity.

Monitoring multi-touch attribution is vital to fully demonstrating ROI across the entire customer journey.

What tools can I use to track performance marketing campaigns?

Top platforms facilitating accurate measurement and robust analytics include:

• Google Analytics
• Meta Business Suite
• AppsFlyer
• Adjust
• Adobe Analytics
• Singular
• Kochav

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Evaluating leading attribution partners tailored to your technical needs and channel mix enables the best visibility into customer journeys and performance.

How can I improve performance marketing results over time?

Ongoing optimization is critical. Continually A/B test ad creative, landing pages, calls to action, products, deals, placements, timing, audiences, and messaging across each partnership and platform.

Let observed performance data inform evolution of strategies and budgets over guessing what might work.

Conduct quarterly reviews of historical analyses to weed out consistent low-performing publishers and double down on those demonstrating steady returns.

Remain agile, shifting funds to the highest converting opportunities as consumer behaviors and emerging channels reveal new potential.

Key Takeaways and Next Steps

Performance marketing prioritizes transparent, measurable advertising outcomes over vanity metrics and guesswork surrounding campaign results and impact.

Paying only when predefined actions like clicks, leads, purchases occur gives advertisers greater control over marketing spend and flexibility to optimize efforts based on hard data.

Key highlights covered in this guide:

• Performance marketing focuses on driving measurable conversions tied directly to marketing costs
• Common pricing models include CPC, CPM, CPA, and ROAS tied to goals
• Channels span affiliate, SEM, social media, content, and email partnerships
• Robust analytics empower continual optimization toward better performing creative, offers, and placements

As today’s marketing landscape accelerates toward automation, personalization, and closed-loop attribution, a performance-first approach becomes vital.

Brands not adopting data-driven partnerships, campaign management, and budget allocation will quickly lose out to the competition.

To accelerate growth, dedicate 2022 planning to piloting new performance-based initiatives across promising digital channels and publishers while finalizing a measurement framework to govern optimization.

Partner with regional and vertical experts to supplement in-house expertise and workaround technical hurdles during onboarding. Consider launching an employee advocate program enlisting your workforce as brand ambassadors to expand reach.

Lean into first and third-party data signals to advance targeting and personalization efforts while balancing consumer privacy expectations.

Stay nimble, hungry, and humble on the path toward mastering modern performance marketing. With the right partners and systems fueling your brand’s paid, earned, shared, and owned content flywheel, the sky’s the limit.

Now it’s your turn. Which performance marketing channels show the most promise for your goals and audiences in the year ahead?