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What Is Performance Marketing And How Does It Work?

What Is Performance Marketing And How Does It Work?

When reading a magazine, how often do you view the ads in it? Do you afford most nothing more than a cursory glance and check out of the most eye-catching of them all? If you are an advertiser investing in ad space in print material (magazines and newspapers come to mind), it is impossible to determine just how many readers actually see or even read your ad. Companies have realized this and, rather than pay full price for an ad without getting any indication of its performance in return, are now turning to more cost-effective, interactive and measurable online advertising. Marketers and advertisers are now incorporating verifiable consumer actions and responses as an integral and important component of their digital advertising strategies. This is what performance-based marketing is all about.

What is Performance Marketing?

Performance marketing is an interactive advertising method where the advertiser pays according to how an ad performs. The marketer or advertiser pursuing this option typically does not pay a set price; the pricing model is such that the amount to be paid varies with how well the ad performs on the advertising vehicle. For instance, the total price paid by an advertiser for an ad might be calculated based on (1) the frequency of which the ad has been viewed on a webpage, (2) the number of times it has been clicked by the site’s visitors, (3) how often the ad generates a lead or a sales or (4) a combination of some or all of the above.

Unlike traditional advertising, where the usual objective is to drive brand awareness, the goal of performance-based marketing campaigns is to drive action. In determining the amount payable for a performance-based marketing campaign, user or consumer action is a key factor in deciding that amount. In all performance-based advertising, the most crucial part is to track and measure the ad’s performance; collating and analysis of the results will then provide the advertiser insights on what to do next, in the areas of ad optimization as well as leveraging on existing opportunities.

A major benefit of performance marketing is that marketers only need to pay for successful transactions, rather than a fixed price as is usually the case for traditional advertising. Structuring the pricing model to be as such allows the marketer to utilize and consume digital marketing services on a “pay-as-you-go” basis where the level of investment is commensurate with the financial returns. Add to that the ability to view the results real-time, and you can instantly calculate the return on investment (ROI) at any time. Furthermore, there is no need to pay a single cent if the network running your ads does not supply you with measurable results. With a simplified pricing model that produces measurable results and one does not tax the marketer excessively, it is not difficult to see why performance marketing is becoming the preferred tool of choice – this is especially so, with the rise of digital media and ad networks.

Pricing models in performance-based marketing

In the market, there are plenty of digital advertising networks providing performance marketing services. Generally, every digital marketing agency or network offers one or more of the following four pricing models: CPM, CPC, CPL, and CPA. Let’s examine each model briefly.

Cost Per Mille (CPM)

CPM, the acronym for cost per mille, refers to the cost of every one thousand impression. In this pricing model, the advertiser is charged based on the number of times the target audience sees his or her ad. The problem with this CPM model is that the advertiser is charged a fee, even if the target audience does not click on the ad; after all, the key idea behind this approach is to create impressions only. CPM may not be suitable for all advertisers, especially those who wish to get the target audience to perform some kind of action (usually purchase). That said, the price is often very low, as the figure is averaged across a thousand impressions. The network also provides the advertiser with statistics on the number of impressions delivered to the target audience, either on a real-time or on an hourly basis. Among other things, the advertiser can also layer its own third-party tools and analytics software on top of the network-provided statistics, perhaps to monitor the frequency of which the ad has been displayed.

Cost Per Click (CPC)

CPC, which is short of cost per click, builds on CPM and goes one step further. The CPC model charges the advertisers only when the visitor clicks on the advert. This brings the visitor closer to making an action – an outcome desired by the advertiser. However, competition for high volume keywords is often intense, and hence one can expect to pay a higher price under the CPC model than the CPM model. Again, just like CPM, you can track the clicks your ad is enjoying by leveraging on the ad network’s statistics, or use your own tools and software to do so.

Cost Per Lead (CPL)

CPL, or cost per lead, is a performance marketing pricing model where the advertiser only pays for qualified leads that a campaign generates. Qualified leads save advertisers and salespeople more time, and provide a higher sales conversion rate. It is, amongst all three pricing models discussed so far (CPM, CPC, and CPL), the most advertiser-friendly pricing model. The reason for this is apparent – you pay only when you receive a qualified lead which you can follow up and have a higher chance of making the sale, unlike CPM or CPC where you pay for clicks or impressions whether they are beneficial to your campaign or otherwise.

Cost Per Action (CPA)

The fourth type of performance marketing pricing is the CPA, or cost per action, model. When running CPA campaigns, the advertiser only pays for a completed, sales-related action: signing up for a subscription, performing a credit card transaction in an e-commerce scenario, or authorizing some kind of payment would constitute a completed action. CPA is likely to be palatable to advertisers, as they pay only when the sale is made and can easily tag performance marketing costs to revenue. For any CPA campaign to be effective, it often encourages the visitors in some way to make a purchase or sign up for a particular offer.

Conclusion

Performance marketing, when deployed sensibly to suit an advertiser’s needs, eliminates the risk of paying a high price in return for potentially ineffective advertising. The four pricing models discussed earlier allow you to only pay for results as and when they happen. The fact that performance marketing is measurable and provides statistics readily means that you can track and refine your campaigns as they go along. However, as with any marketing tool, you must still perform due diligence and plan ahead before using any. Without proper planning, it becomes easy to lose money even if you are going for performance marketing methods which are generally more cost-effective than traditional marketing approaches. To enjoy a higher chance of success, it is important to enlist the consultancy of a competent digital marketing agency, which will help ensure your targeting is precise, and that your ads are relevant to that target. 

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