Performance marketing is a form of digital advertising where advertisers pay based on the performance of their campaigns. Unlike traditional advertising where payments are made upfront regardless of outcomes, performance marketing involves paying only when specific actions are completed, such as clicks, conversions, or sales.
Key elements of performance marketing include:
- Measurable Results: Advertisers can track and measure the success of their campaigns in real-time using metrics such as cost per acquisition (CPA), return on ad spend (ROAS), or conversion rate.
- Pay-for-Performance: Payments are tied to specific actions or results achieved, ensuring that advertisers get value for their money and can optimize campaigns based on performance data.
- Targeted Campaigns: Performance marketing often utilizes targeting capabilities to reach specific audiences likely to perform the desired actions, improving efficiency and effectiveness.
- Various Pricing Models: Common pricing models include cost-per-click (CPC), cost-per-acquisition (CPA), cost-per-lead (CPL), and revenue share. Each model aligns payment with different stages of the customer journey and advertiser goals.
- Digital Channels: Performance marketing predominantly operates through digital channels such as search engines, social media platforms, affiliate networks, and email marketing, leveraging their tracking and targeting capabilities.
- Optimization and Testing: Continuous optimization is a hallmark of performance marketing, as advertisers use data insights to refine targeting, messaging, and placements to improve campaign performance over time.
Overall, performance marketing allows advertisers to maximize their budget by focusing spending on campaigns that deliver measurable results, making it a preferred choice in digital advertising for many businesses.
Pricing Models
There are four common pricing models used in the online performance advertising market.
CPM (cost-per-mille, or cost-per-thousand) Pricing models charge advertisers for impressions, i.e. the number of times people view an advertisement. Display advertising is commonly sold on a CPM pricing model. The problem with CPM advertising is that advertisers are charged even if the target audience does not click on the advertisement.
CPC (cost-per-click) Advertising overcomes this problem by charging advertisers only when the consumer clicks on the advertisement. However, due to increased competition, search keywords have become very expensive. A 2007 Doubleclick Performics Search trends Report shows that there were nearly six times as many keywords with a cost per click (CPC) of more than $1 in January 2007 than the prior year. The cost per keyword increased by 33% and the cost per click rose by as much as 55%.
In recent times, there has been a rapid increase in online lead generation – banner and direct response advertising that works off a CPL pricing model. In a cost-per-lead pricing model, advertisers pay only for qualified leads – irrespective of the clicks or impressions that went into generating the lead. CPL advertising is also commonly referred to as online lead generation.
Cost per lead (CPL) pricing models are the most advertiser-friendly. In 2007, an IBM research study[2] found that two-thirds of senior marketers expect 20 percent of ad revenue to move away from impression-based sales, in favor of action-based models, within three years. CPL models allow advertisers to pay only for qualified leads as opposed to clicks or impressions and are at the pinnacle of the online advertising ROI hierarchy.
In CPA advertising, or Cost Per Acquisition, advertisers pay for a specific action such as a credit card transaction (also called CPO, cost-per-order).
Advertisers need to be careful when choosing between CPL and CPA pricing models.
“Digital marketing creates brand awareness and interaction with the target audience. Advertisers are not paying for the actual conversion in digital marketing. While in performance marketing, advertisers are paying for the leads and for converting them to potential customers."
A combination of paid advertising and brand marketing, performance marketing refers to advertising programs in which affiliates and marketing companies are only paid when a desired action is completed, such as a completed lead, sale, booking or download.
