What Is Performance Marketing? Definition and Beginner's Guide

Performance marketing is a marketing strategy that is driven entirely by the measurable aspects of a campaign, such as clicks or conversions.

“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” When the legendary 19th-century merchant John Wanamaker said this, he captured the angst of generations of business owners. Marketing and advertising clearly work—but how, and to what extent?

Performance marketing aims to solve this tension by focusing on the part of marketing that performs in a measurable way. The term, first introduced in the mid-1990s shortly after internet marketing, was a stroke of branding genius by marketing companies. If they have the choice, why would a business owner invest in anything other than marketing that performs?

If business owners don’t have a clear understanding of what performance marketing is (and isn’t), they are likely to end up no better off than our friend John.

What is performance marketing?

Performance marketing is a results-driven approach to digital marketing, where advertisers pay only when specific actions or outcomes are achieved. These actions can include clicks, leads, sales, or other desired customer behaviors. Performance marketing relies on various channels, such as affiliate marketing, pay-per-click (PPC) advertising, social media advertising, and search engine marketing (SEM).

As a concept, performance marketing evolved from various direct-response marketing practices. Affiliate marketing was an early and influential channel, followed by PPC.

Is performance marketing the same as affiliate marketing?

Performance marketing is a broader term than includes any online marketing channels where advertisers only pay when a specific action is completed. Affiliate marketing is one of the channels under performance marketing. 

Not all types of digital marketing, or even digital advertising, are performance marketing. Here are some other common types of marketing that might be mistaken for performance marketing:

Affiliate marketing

Affiliate marketing is a subset of performance marketing. It’s highly trackable and you can make decisions based on performance.

Performance marketing is active: You create and constantly iterate on campaigns to reach your audience. Affiliate marketing is passive: You simply set the parameters for who qualifies to be an affiliate and how much you’ll pay them for a customer. Affiliates could even run performance marketing campaigns on your behalf.

Affiliate marketing involves several key groups working together:

• Retailers/Merchants: These are the businesses selling products or services. They create the offers and pay for the marketing efforts.
• Affiliates/Publishers: These partners promote the retailer's products or services through various channels like websites, blogs, or social media.
• Affiliate Networks/Third-Party Tracking Platforms: These intermediaries connect retailers with affiliates and provide tracking, reporting, and payment services.
• Affiliate Managers/OPMs (Outsourced Program Management): These professionals or agencies manage affiliate programs on behalf of retailers, handling recruitment, optimization, and relationship management.

Each of these groups plays a crucial role in the marketing ecosystem, working together to create, promote, track, and optimize marketing campaigns based on measurable results.

Brand marketing vs. performance marketing

With brand marketing, the primary goal isn’t measurable: It’s to spread a brand message, feeling, or experience. For example, large brands might run social ads that mirror the message of their TV ads. Although marketers may track the results of a brand marketing campaign, unlike performance marketing, the goal isn’t to optimize for a measurable result.

How does performance marketing work?

Google and Meta (which owns Facebook and Instagram) are the two common platforms for running performance marketing campaigns in the United States. For example, if you’re a store that sells natural soap bars, you might start by spending $1,000 per month on Google to reach people searching for “natural soap” or “organic skin care.” If the ads targeting “organic skin care” drive the most sales, you could shift your budget toward only those keywords, or expand your budget to drive even more sales.

While performance marketing is often associated with paying per result, the billing model doesn’t actually determine whether something is performance marketing. As long as campaign decisions are made based on measurable results, it can be considered performance marketing. 

Market validation

Performance marketing works best when you have validated that there is a need for your product and you understand who your customer is. In other words, going from $5,000 per month in sales to $500,000. If you are just launching and trying to gain your first customers, optimizing for a cost-per result might not be the best thing for your business.

Digital advertising can certainly be used for market validation, but the campaigns should be built like a series of scientific tests instead of like a performance-chasing race car.

What are the benefits of performance marketing?

There's no sign of digital marketing slowing down. If you use performance marketing to your advantage, you'll see the following benefits:

• Cost-effective campaigns: When you run a performance marketing campaign, you only pay for actions like clicks and leads. Every dollar spent contributes to results, so you spend it more wisely.
• Measurability: Metrics like conversion rates, click-through rates, and cost per acquisition are tracked in real-time, so you can evaluate and optimize campaigns quickly. 
• Targeted reach: It's possible to fine-tune campaigns to target specific audiences, ensuring that the right people see the right ads at the right time.
• Flexibility: If you need to pivot strategies, performance marketing campaigns can be easily adjusted based on ad data. You can scale up or down according to your needs without much effort. 

4 main types of performance marketing

Modern businesses invest in four main types of performance marketing:

Social media advertising

Social media advertising includes running ads on TikTok, Facebook, Instagram, Twitter, LinkedIn, and more. Typically, these campaigns are set up with a funnel structure: at least one campaign to reach new people (called prospecting) and at least one to reach people who have visited their site but not yet converted (retargeting). Not all social media advertising is performance marketing—when not used to drive conversions, it can also be used for brand marketing or market validation.

Search engine marketing (SEM)

Search engine marketing refers to running advertising campaigns to drive traffic from search engines such as Google or Bing. These campaigns are usually structured based on the types of searches they target. For example, a business might have campaigns for the type of product they sell, competitor brands, and their own brand.

Search engine marketing is almost always performance marketing by nature. It is also entirely separate from Search Engine Optimization (SEO).

Influencer marketing

Historically, people haven’t always considered influencer marketing to be “performance” marketing. But in recent years, that’s changed. Influencers have gotten more business savvy, and the growth in both influencer management tools like Gatsby and influencer partnership platforms has allowed brands to properly track and iterate on their influencer partnerships, making it truly performance driven.

Native advertising/sponsored content

Similar to influencer marketing, but instead of paying an influencer to speak about your brand, you pay a publication to write about it. As the marketer, you get a high degree of creative control over what they publish for you. Some publications call it native advertising, others sponsored content, but the strategy is the same. Note that in most countries, publications have a regulatory requirement to disclose that the content is sponsored.

Performance marketing examples

• Pay-per-click (PPC) advertising: This is a form of performance marketing where advertisers pay a fee each time their ad is clicked.
• Email marketing: This is a performance-based marketing tactic in which advertisers send emails to their target audience with the goal of driving sales or leads.
• Social media marketing: This is a performance marketing strategy that uses social media platforms to reach potential customers and deliver marketing messages.
• Search engine marketing (SEM): This is a performance marketing strategy involves running advertising campaigns to drive traffic to websites from search engines.

How to measure performance marketing

Performance marketing is about chasing the best results. Since we’re spending money, it’s all about your cost-pers. There are four key cost-per metrics that matter for your performance marketing campaigns:

Cost per thousand impressions (CPM)

Cost per thousand impressions refers to the cost for an advertiser to generate 1,000 views of their ad. The acronym CPM’s origin is cost per mille, with “mille” being the French word for thousand. Advertisers and marketers use 1,000 instead of just cost per 1 impression because the cost for a single impression can fluctuate wildly up and down, but is steadier over a thousand people.

This metric primarily tells you how expensive it is to advertise on this platform, and it’s related to how competitive it is to reach the people you want to reach. For example, the CPM to reach people who are interested in “natural skincare” will likely be higher than the CPM for “beauty”, because the former searcher is more intentional, so more advertisers will bid on that audience. 

Cost per click (CPC)

Cost per click (CPC) refers to the cost to get someone from your ad to your website. This metric has a couple of gotchas to be aware of: On Google, a click refers to someone clicking through to your site, but on Facebook, it refers to any click on your ad, even clicking Like. To compare apples to apples across platforms, performance marketers will typically track link clicks on Facebook. 

CPC has an inverse relationship with an ad’s click-through rate (CTR). Advertising platforms want to show ads that people actually want to click, so if your ad is engaging, they will effectively “reward” you with a lower CPC. In addition to monitoring CTR, CPC can help tell you which ads are best engaging your audience.

Cost per conversion 

Your cost-per-conversion metric is going to be specific to your business. For ecommerce stores, it’s typically an average order value (AOV). This is the average dollar amount spent each time a customer places an order. Or, you may focus specifically on sales to new customers, which is typically referred to as a customer acquisition cost (CAC). In B2B marketing, you might use cost per lead (CPL) instead. 

This is the most important number for your performance marketing program. If you hit the right AOV or CAC, then your campaign is ready to scale and you can reliably drive more sales. If you can’t hit your number, then you’ll lose money.

How do you do that (very important) math? Simple:

CPS model: CPS < gross margin. If you are spending to generate individual sales (including returning customers), then your cost per sale needs to be less than your average gross margin from that sale. If it’s more, then you’re essentially paying to lose money. If you’re unsure what your gross margin is, use a profit margin calculator.

CAC model: CAC < CLTV (customer lifetime value). If you are spending to acquire new customers, and you know those customers will return to buy more products without ads in the future, then you can spend up to the total value of the customer over time (average gross margin per order * average number of orders). This is a more sophisticated model, but it’s important for stores that have long-term relationships with their customers.

Limitations of performance marketing 

Performance marketing is the spiritual successor to a much older industry: direct response advertising (typically in newspapers or direct mail). Thinking of performance marketing as “digital direct mail ads” can help you understand its limitations:

Doesn’t focus on brand building

Performance marketing is highly targeted and conversion focused, meaning identifying the subsegment of your market most likely to convert and nurturing them through multiple touch points. In other words, if you want to introduce your brand to a large number of people, it’s not the best strategy.

Risk of brand dilution

Performance marketing is call-to-action (CTA) driven. In other words, nearly every performance marketing ad asks the viewer to do something (“Get started,” “Claim offer,” “Shop styles,” etc.). For businesses that want to build brand equity (or hype), too much performance marketing can dilute your message and lead to audiences tuning you out.

False certainty in attribution

Performance marketers still can’t say with certainty exactly how much revenue their ads drove. Part of this is due to recent changes in privacy policies: Many browsers restrict advertisers’ ability to see action users take (such as converting). Savvy marketers are starting to use holistic reporting models that build on CAC and CLTV, such as MER, to make campaign decisions.

Performance marketing is incredibly powerful—millions of merchants have used it as the primary way to scale their business. By understanding its key levers, channels, and pitfalls, you can set yourself up to join their ranks.

Performance marketing FAQ

What does a performance marketing person do?

A Performance Marketing Specialist is responsible for developing and executing marketing strategies designed to increase customer acquisition, revenue growth, and brand awareness. They oversee campaigns across a variety of performance marketing channels, including search engine marketing, email marketing, display, and retargeting. They track performance metrics and optimize the campaigns to maximize performance. They also monitor emerging trends and technologies and keep up with industry best practices.

Is performance marketing the same as paid marketing?

No, performance marketing and paid marketing are not the same. Performance marketing is a form of online marketing that focuses on results and ROI, while paid marketing is a type of performance marketing that involves paying for clicks, impressions, or conversions.

Is performance marketing the same as SEO?

No, performance marketing isn't the same as SEO. Performance marketing focuses on strategies where you pay only when certain actions are taken. SEO involves making adjustments on a website to improve its organic search engine rankings.

What's the difference between performance marketing and digital marketing?

Performance marketing is part of your digital marketing strategy. It focuses on campaigns where you pay based on actions like clicks, leads, or sales. Digital marketing includes all online marketing activities, such as performance marketing, SEO, content marketing, social media marketing, and email marketing.

What is meant by performance marketing?

Performance marketing is a type of online marketing where advertisers pay marketing companies or advertising platforms for performance-based results. This means that the advertiser pays the affiliate for each lead, sale, or other action taken as a result of their marketing efforts. The advertiser only pays the affiliate when their marketing efforts have produced a result, making it an effective way to manage advertising costs.