What Is Performance Marketing?
Performance marketing refers to a type of advertising and marketing campaign where payment is made by the advertiser (also known as a brand, seller, retailer or merchant) to the publisher (also known as a performance marketing company or agency) when a specific action, known as a conversion, is made by a customer. A conversion could consist of a phone call, an ad view or impression, an ad click, the generation of a sales lead or an actual sale – whatever action the advertiser is looking to achieve. The type of action that is considered a conversion and the cost of each conversion is agreed upon by the advertiser and publisher before the campaign begins. As such, in performance marketing, there isn’t a set price for an advertisement, marketing program or ad campaign. The cost is based on the actual number of conversions resulting from the ad campaign or marketing program.
What Are The Advantages Of Performance Marketing?
One of the main benefits of performance marketing is that advertising dollars are only spent once there are actual results. In a traditional advertising campaign, the advertiser pays for the program upfront regardless of the outcome. With performance marketing, payment is only made after the campaign has produced conversions. If the conversions fail to materialize, no payment is required. This type of arrangement is advantageous for advertisers with limited marketing budgets, although it can be used by advertisers with large budgets as well.
Because a conversion is required before payment, a performance marketing campaign must be able to identify and measure each conversion. This measurement allows both the advertiser and publisher to test which campaigns successfully create conversions and which campaigns fail to do so. This creates an advantage over traditional ad campaigns in which it may be impossible to measure exactly how many customers interacted with, or even noticed, an ad campaign – nevermind quantify the number of conversions that resulted because of it. The measurability of performance marketing has also given rise to a new pricing model to quantify conversions. Performance marketing conversions can be expressed as Cost Per Mille (CPM), Cost Per Click (CPC), Cost Per Lead (CPL), Cost Per Acquisition (CPA) or whatever parameter is required by the advertiser. (For further explanation of these terms see below.)
Performance marketing produces instantaneous data that can be used to optimize advertising and marketing campaigns. Because campaign results can be easily measured in real time by both the advertiser and publisher, it’s possible to quickly adjust the campaign based on those results. Additionally, as opposed to traditional advertising, where the publisher is paid upfront regardless of conversions, in performance marketing, publisher payment is dependent on conversions. This means the publisher has a vested interest in working with the advertiser to optimize the campaign in order to increase conversions.
An advertiser’s risk is substantially lower with performance marketing than it is in traditional marketing. Because the advertiser only pays for conversions, there is no risk of paying for an advertising or marketing campaign that fails to produce any results. Risk is actually passed onto the publisher whose income depends on creating a successful campaign that produces conversions.
Return On Investment (ROI)
From an advertiser’s point of view, performance marketing guarantees ROI. Because no payment is required unless there are conversions, the advertiser is guaranteed that their marketing money is being spent only on the results they wish to achieve. Performance marketing also gives advertisers the necessary information to ensure their marketing spend is low enough to ensure an adequate ROI.
Because of the measurability of performance marketing, advertisers and publishers alike are able to track the behavior of their customers. Performance marketing allows advertisers and publishers to learn where their customers originate, where in the consumer journey or marketing funnel they reside, and what entices them to act. This not only provides pertinent information on current customers, but also becomes valuable in attracting future customers. This can lead to more personalized, targeted and relevant advertising for both future and current customers.
What Are The Main Types Of Performance Marketing Conversion Measurements?
Along with the advent of digital advertising came a whole new language to qualify the different types of conversions. As mentioned previously, a conversion is a specific action by a customer promoted by a publisher and desired by an advertiser. Although individual advertisers may have very specific requirements for their definition of a conversion, the most common conversion measurements fall into four different groups. They are:
Cost Per Mille (CPM)
With “mille” being the French word for one thousand, CPM is the price an advertiser would pay a publisher for one thousand views or impressions of an advertisement. As one of the earliest online advertising measurements, its desirability by advertisers has dwindled over the years as it became apparent that just because a customer visited a webpage that featured an advertiser’s ad, there was no guarantee the customer would even notice it. Evidently, CPM is a direct descendent of traditional TV or print advertising where exposure, rather than action is the main objective.
Cost Per Click (CPC)
With this type of advertisement, the advertiser only pays for each click an online ad generates. Although clicks don’t necessarily guarantee a sale, successful CPC ads indicate customer interest and interaction. CPC ads work well for generating website traffic or for companies who already experience high conversion rates from their website visitors.
Cost Per Lead (CPL)
CPL campaigns are based on the creation of a qualified lead as stipulated by the advertiser. The criteria for a qualified lead will change from advertiser to advertiser, but ultimately a qualified lead would exhibit most of, if not all, the qualities needed to become a paying customer. For this reason, qualified leads are highly sought after and cost much more than CPCs or CPMs.
Cost Per Acquisition (CPA)
An acquisition equates to an actual sale for the advertiser. For this reason CPA campaigns are the most expensive form of performance marketing, but also require the least effort on behalf of the advertiser.