Performance Marketing: What Is It and Why Does It Matter?

With the worldwide annual spend on Internet marketing nearing $120 billion, it’s no surprise that different approaches to online marketing are becoming available, including performance marketing.

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What is performance marketing, though, and why does it matter today?

Keep reading to learn all about performance marketing, from how it works to how it compares to digital marketing. Plus, get insight into the risks of performance marketing and how it can affect your company’s long-term success and profitability.

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What is performance marketing?

Performance marketing revolves around a pay-as-you-go pricing model.

what is performance marketing

It’s all about maximizing your marketing budget and your bottom line.

Clients only pay performance marketing agencies when the agency produces profitable or agreed-upon results. This means sales, leads, conversions, and other beneficial marketing outcomes are only paid for when generated.

The tactics typically used in a performance marketing campaign include:

Lead generation

Say your business wants to grab the attention of your target audience to earn leads.

You might enlist the help of a marketing company to bring your branding to more individuals by having these marketers promote your business to prospective customers. The hope is that users will complete a form to learn more about your company and become a lead.

Product or service purchases

A performance marketer can also focus on generating sales.

If you operate a restaurant, for example, a performance marketer may produce ads or content that highlights the dishes served at your location. The goal is to motivate consumers to visit your restaurant or make a reservation, resulting in a sale for your company.

Application downloads

Companies with mobile apps can also use performance marketing to encourage app downloads.

Apps are common among businesses in a myriad of industries, including technology, food, ecommerce, and more. Performance marketers can promote your app to generate downloads. These downloads can lead to more sales and revenue for your business.

While performance marketing can focus on a variety of tactics to drive results, the primary goal revolves around revenue. If an agency doesn’t achieve your goals, then they don’t receive payment.

This payment model, however, can pose challenges.

How is performance marketing different from digital marketing?

Any marketing campaign aims to move consumers through your buying funnel. That’s why a marketing strategy can encompass a variety of areas, from brand awareness to lead generation to brand loyalty.

With the introduction of performance marketing, however, many companies are wondering how it differs from digital marketing. It’s not a digital marketing segment, like personalized marketing, but a whole new approach to online marketing.

performance marketing vs digital marketing

When you develop a digital marketing campaign, you:

  • Pay on a monthly basis for your service
  • Set a series of short and long-term goals
  • Develop a strategy for driving results now and in the future
  • Collaborate with a team of digital marketing professionals

In comparison, with performance marketing, you pay on a per-result basis. While the payment model is the most significant difference between performance and digital marketing, it’s resulted in some unintended consequences, which offer zero benefits to businesses.

A few examples of these drawbacks include:

  • Fabricated results to secure payment
  • Shady strategies or tactics to create results
  • Emphasis on vanity metrics
  • Focus on immediate results, versus short and long-term gains

Whether your performance marketers create an upsurge in your number of retweets or app downloads, these efforts may produce the numbers you desire but without a long-term impact. In each of these examples, there is zero focus on long-term strategies, like brand loyalty.

As a company, it’s essential to understand the differences between performance marketing and digital marketing. It can help your team explain to company decision makers why one approach is more valuable than the other.

What are the advantages of performance marketing?

When it comes to performance marketing, businesses try it for a few reasons, including:

1. Experience real-time ROI measurements

With performance marketing, it’s easy to track and measure your results, like in digital marketing.

the advantage of performance marketing

As with digital marketing, every time a user clicks on your ad, signs up for your email subscription list, or engages in any performance-related act that you set out to achieve, you’ll know that you fulfilled your goal immediately.

That makes keeping track of your return on investment (ROI) at any given moment easy and straight-forward. You’ll also know how much you’re financially responsible for when it comes to paying for your performance marketing campaign.

2. Optimize KPIs

Your key performance indicators (KPIs) play a vital role in your company’s ability to achieve its goals. Whether your KPIs consist of your customer turnover rate or your percentage of sales from new clients, performance marketing allows you to target these metrics directly.

Since your performance marketers are focused on driving higher performance levels in your business, you can optimize your clicks, impression, leads, and various other performance markers.

It’s worth mentioning that KPIs are a part of digital marketing too.

When you partner with a web marketing agency, you discuss what your company wants to achieve with Internet marketing. This discussion includes a review of your KPIs, which your dedicated account manager can use when setting marketing goals.

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3. Pay as you go

Rather than paying an upfront cost for your services, performance marketers charge your business every time your designated action occurs. Smaller companies, like start-ups, often like this model because it’s friendly to smaller budgets.

pricing model for performance marketing

Depending on your agency’s pricing model, however, this strategy can become pricey.

If the agency drives an unprecedented amount of sales, for example, it can leave your business with an expensive bill that exceeds what you’d pay on a monthly basis to a digital marketing agency.

The pay-as-you-go pricing model is also volatile for agencies. If they don’t drive results for their clients, it can force them to close. That leaves your business without an agency, as well as a campaign without management.

What are the disadvantages of performance marketing?

Performance marketing comes with several disadvantages and risks, including:

1. Fraudulent results

While it may seem appealing to only pay for marketing work that leads to action, this also leaves open a window of opportunities for marketing firms to take advantage of your business and budget too.

One of the most significant drawbacks of a performance marketing campaign? Fraud.

performance marketing fraud potential

As these agencies rely on results for payment, it can push them to create or drive low-value results. For example, if you’re unfamiliar with online marketing, an agency may convince you to focus on vanity metrics, like website traffic.

With black-hat tactics, the agency drives a substantial amount of traffic to your site. As they’ve accomplished your marketing goal, they can receive payment. That traffic, however, doesn’t result in sales or revenue for your business.

Due to this downside of performance marketing, many companies must adopt a proactive approach to monitoring your campaign. You must confirm that your agency is working for you, and not themselves.

2. Us vs. them mentality

Whenever you hire a performance marketing agency, it’s a shaky business relationship. The agency needs to meet your quota for payment, which abandons the traditional partnership of an agency and a client in digital marketing.

In digital marketing, an agency works as an extension of your team with a short- and long-term view of driving success. With performance marketing, however, the working relationship creates an “us versus them” mentality.

The focus on immediate results can also lead to a team of individuals that have zero interest in your company’s long-term goals or aspirations, like expanding your business or growing your team.

Whenever you hire marketers to help your business reach its objectives, you want an agency that works as an extension of your team. This extension demonstrates that agency’s investment in your success.

With performance marketing, however, it’s rare to form a partnership. These agencies have one objective: meet your quote and get paid. While that works for some companies, it not what most businesses want from a marketing agency.

3. High costs

When you partner with a trusted digital marketing agency, there is cost transparency. Each month, you know what your company will pay, which can ensure your business adheres to your marketing budget.

In a performance marketing campaign, however, your monthly costs can vary widely.

performance marketing cost risks

Say your performance campaign leads to a tremendous amount of user actions. Every click, app install, or social media follow racks up your final total cost. In some cases, those actions, like a follow on social media, doesn’t result in immediate profit.

That can result in marketing costs that exceed your monthly and yearly budget. It can also financially strain your business, especially if you’re a small company. Due to the price consistency of digital marketing, companies often prefer it.

4. Vanity metrics

Since performance marketing focuses on creating measurable results, any marketers who lead a performance campaign can fixate on vanity metrics. If you’re unfamiliar with online marketing metrics, they can direct your focus to them too.

However, vanity metrics don’t nurture meaningful results because they focus on a numbers game that doesn’t relate to your business or its bottom line. This level of deception demonstrates a more significant problem with performance marketing.

You want to use a form of online marketing that doesn’t require your team to analyze every result with a critical eye. When your company partners with an agency, you shouldn’t have to worry about trusting or believing your agency either.

The nature of performance marketing, however, poses these risks.

Is performance marketing worth it?

While performance marketing offers some benefits, as well as an attractive pricing model for select businesses, it poses numerous risks. If your company’s thinking about performance marketing, you need to weigh these downsides against potential gains.

It’s also critical to think about your short- and long-term goals when it comes to your business. Focusing on immediate results, rather than taking an aerial view of your company’s growth can result in an unsustainable model that won’t survive market downturns.

is performance marketing worth it

That’s why digital marketing is often the preferred choice for businesses today.

With digital marketing, you create a long-term road map for your company’s success. Plus, you work one-on-one with a dedicated team of marketers that invest themselves into your success today and tomorrow, which can make a significant impact on your company’s future.

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If you want to work with a digital marketing agency that cares about you and your business like their own, WebFX is here for you. Feel free to contact us online or give us a call at 888-601-5359!