Performance Marketing: A Complete Guide

What is Performance Marketing?

In very brief terms, performance marketing is a form of online marketing where you can track your marketing costs at the level of each order. In the offline world, statistical models were used that could tell marketers with some degree of accuracy whether their advertising campaign increased sales or was just money thrown into the air.

In marketing, there’s an old saying: “Half the money spent on marketing is wasted; we just don’t know which half.”

This absolutely doesn’t apply to performance marketing. Thanks to relatively precise measurement, data, and advanced algorithms, you can achieve the marketing results you need.

Since you can monitor your marketing costs at the level of each order, you can ensure that you’ll be profitable.

Moreover, the money you spend on performance marketing almost immediately returns in the form of orders (this applies mainly to e-shops). You can thus very quickly finance further development and growth since the money returns almost immediately.

Why is it Important?

Unlike SEO, performance marketing can bring immediate results. Just add a payment card, set up campaigns and measurement, and you’ll get as much traffic to your website as your wallet can handle.

Even Amazon spends $10 billion annually on performance marketing, just to prevent other large e-shops like Temu from getting ahead.

It’s important to realise that the advertising spaces used in Performance Marketing are the most lucrative on the entire internet.

Imagine it like the World Ice Hockey Championships or the World Cup. During commercial breaks in matches of our athletes, only a few advertisements run. These are usually betting companies. Those who want to save on marketing that year and not pay for expensive advertising during sports matches will very quickly lose market share. People will simply forget about them, and the competition will show their advantages.

The same happens in Performance Marketing. Not being among the first search results in Google or not appearing to potential customers in social media feeds means the competition will do it.

You may have the best brand campaign, but you always need to be seen in the right places and in search when your customers want to find you. Otherwise, the competition will do it, and you’ll be left with nothing.

Key Concepts and Terms

In Performance Marketing, you’ll often encounter abbreviations like PPC, ROAS, CPA, CPL, CPM, CTR, CR, AOV.

Although all of these are important, there are three even more important ones on which all Performance Marketing is built. And they don’t even have anything to do with marketing. It’s margin. If you don’t know your margin and its three levels, all other abbreviations in Performance Marketing will be useless because you’ll lose money anyway.

Gross Margin

Formula: (Selling price of products – Purchase price of products) / Selling price of products

Gross margin expresses what percentage of the selling price is your gross profit. The more, the better. Although this is the most basic principle in business, many entrepreneurs confuse margin with markup.

Gross margin can never be more than 100%. That’s only possible if you got the product for free.

If you want to be profitable in Performance Marketing, your gross margin should be at least 60-80%. Many e-shops can only dream of such margins, and that’s exactly why their online business is declining. They can’t be profitable. Such high margins aren’t impossible to achieve, but you need to look for other suppliers and products.

Without a healthy margin, no one in online marketing can save you.

Contribution Margin

Formula: (Selling price of products – Purchase price of products – Order processing costs) / Selling price of products

Contribution margin is what remains in your company after you send out an order.

Here, order processing costs like postage, packaging, packaging materials, any gifts and similar items are deducted from the gross margin.

In short, it’s the profit on the order after costs that arise when you process and send the order.

Contribution Margin After Marketing Costs

Formula: (Selling price of products – Purchase price of products – Order processing costs – Marketing costs per order) / Selling price of products

From the gross margin, we deduct order processing costs and marketing costs for obtaining the order. This is what remains to pay for all fixed expenses you have in the company. And this is often the stumbling block for e-shops. Their marketing costs per order (credit + specialist work) are higher than their contribution margin.

This means they’re losing money on each order. There are e-shops that have repeat purchases and don’t mind being at a loss on the first orders from a given customer. But these are really minimal.

AOV (Average Order Value):

Average order value is the total revenue of the e-shop divided by all orders for a given period. Although this metric doesn’t show the whole truth about how much customers spend with you on average, it’s sufficient for rough calculations.

You might have an 80% gross margin on small items. But if customers spend an average of £10, you’ll never be profitable. The average order value should be £60 excluding VAT.

And why so much? Here’s where two other important metrics come into the equation: CR and CPC.

CR (Conversion Rate)

Conversion rate is what percentage of visitors to your website make a purchase.

It’s typically between 0.5-5%. Yes, only 1 in 200 people on your website will order your products or services.

You can improve conversion rate mainly on the website. It depends on a variety of factors, including website usability, product details, customer reviews, checkout, photos, and videos.

CR = Number of conversions / Number of ad clicks

Improving conversion rate from 1% to 2% improves your campaign results by 100%.

Therefore, it’s good to look for opportunities to improve Performance Marketing performance mainly on the website. You don’t even need to touch the campaigns, but with website adjustments, you’ll be able to achieve profitable campaigns.

CPC (Cost Per Click)

Average cost per click determines how much you pay on average for a website visitor. Auction and ad quality determine how much you pay per visitor. For some keywords, you pay £0.02 per click, for others up to £5.

There isn’t much you can optimise here. The market wins and you just accept the market price.

But why is this an important metric? Because thanks to CPC and CR, you can calculate CPA.

CPA (Cost Per Action)

Action is essentially a conversion. In the case of an e-shop, it’s a purchase. If you’re selling a service, it’s a submitted form. Cost per action determines how much you paid in marketing to get your target action.

This is an extremely useful metric and is derived from CPC and CR.

CPA = CPC / CR

So if you pay an average of £0.20 per click and the conversion rate is 1%, your CPA will be £20.

Remember how important CR is? If the conversion rate increases to 2%, CPA will only be £10.

Here we can return to Average Order Value. If you’re selling cheap products with good margins, but AOV is only £10 and you paid £20 in marketing for the order, it’s clear you’ve immediately lost money.

If you have an average order value of £60, with a 50% contribution margin you’ll earn £30. After marketing costs of £20 per order, that will be £10 profit. The problem is that each order has a different value. There are e-shops where orders are for £1,000 and orders for £20.

An e-shop wants to be profitable on most orders. That’s why the ROAS metric exists.

ROAS (Return on Ad Spend)

This ratio expresses how many pounds in revenue one pound spent on marketing generates.

ROAS = Revenue excluding VAT / Marketing costs * 100

ROAS includes everything mentioned above. That’s why it’s one of the most used metrics in Performance Marketing.

PNO or Share of Costs to Revenue

PNO expresses exactly the same thing as ROAS, just in reverse form. It’s the percentage share of costs to revenue.

PNO = Marketing costs / Revenue excluding VAT * 100

E-shops often set a PNO of 10%. However, this is a completely incorrect approach. For an e-shop with a 10% gross margin, a PNO of 10% will mean a net loss. For an e-shop that has an 80% gross margin, such a low PNO will significantly slow down the e-shop’s growth. Therefore, target PNO is calculated based on margins.

POAS (Profit on Ad Spend)

POAS = Contribution margin / Marketing costs * 100

If you want to survive in a cutthroat market, optimizing campaigns for the best profitability is crucial because many factors affect your margin and your company’s goal is to make money rather than generate revenue. Setting up this metric is technically more demanding and requires specialist work.

However, you have assurance that your campaigns are optimising your profit.

MER (Marketing Efficiency Ratio)

Although we’ve already mentioned PNO, it’s usually evaluated for each advertising channel separately. And the management cost isn’t taken into account.

The customer journey is rarely straightforward, and often multiple advertising platforms attribute the same conversion. If you added up the order values from individual advertising systems, you might suddenly have revenue larger than it actually was. That’s why MER is used.

In MER, you add up all marketing expenses (including PPC specialists’ work) and express them as a ratio to revenue.

MER = Sum of all marketing costs / Revenue * 100

This way you’ll see exactly the effectiveness of your marketing.

CAC (Customer Acquisition Cost)

Your revenue comes from both regular and new customers. You already have regular customers in your email database and they purchase because they know you. Your marketing expenditure on Performance Marketing should focus on acquiring new customers.

The calculation is simple:

CAC = Marketing expenses / Number of new customers

LTV (Lifetime Value)

If you’re fortunate enough to have a business made up of returning customers, you’ll definitely be interested in how much money such a customer brings you.

LTV = Average profit per order * Average number of purchases * Average customer retention duration

LTV serves to determine how much you can maximally pay for customer acquisition. That is, what your maximum CAC can be.

These metrics have the advantage that you can afford to bid much higher amounts in advertising systems than the competition because you know it will return in the future.

An example is Booking.com. If Booking.com had to be profitable on the first order, they could never afford to pour so much money into Google Ads. However, they know that customers will continue booking with them for several more years, so they can lose money initially, knowing it will return in the future.

Various loyalty programs are used to achieve higher LTV.

Performance Marketing Channels

Unlike SEO and social networks, in Performance Marketing, you can very well manage and plan your reach and traffic. Performance Marketing channels typically use PPC (Pay Per Click). Each click costs you a few pence, and based on your budget, you can calculate expected traffic.

Note that not all paid channels use PPC. With some, like Meta Ads, you pay for impressions. This works similarly with YouTube advertising.

The most commonly used advertising platforms are:

• Google Ads

Although Google Ads includes several advertising networks like Search, Shopping, Display, YouTube, it’s most commonly associated with the first two mentioned. The principle is simple: if someone searches for a word related to your product, you show them an advertisement for your website. The advertiser who pays the most will be in the highest position.

• Bing Ads

Bing Ads works identically to Google Ads. However, it doesn’t have the YouTube network. The only difference is that Bing Ads works in the Bing search engine.

• Meta Ads

Meta Ads are advertisements on social networks Facebook and Instagram. It’s a popular channel due to the number of users of individual advertising networks. And also due to the sophistication of algorithms.

Unlike search advertising, which is more about “technical” setup, on Meta Ads, creative is decisive. Videos, photos, banners. Thanks to them, you can achieve really good performance.

• TikTok Ads

TikTok Ads the creative is decisive. However, on TikTok, only video formats work.

Strategies

In Performance Marketing, you’ll often hear the term “Campaign Strategy”. It sounds very sophisticated, and you’ll often hear it from your PPC specialists. “We’ve changed the campaign strategy.”

However, there isn’t that much magic behind it. In principle, you’re interested in several strategies associated with Google Ads, Meta Ads or Bing Ads. You would hardly encounter them with price comparison websites.

Manual Cost Per Click

With manual cost per click, you set how much you want to pay maximum per click. It might seem like the best strategy, but if you bid too little in the auction, you can easily end up getting no clicks at all.

And if you do happen to get some clicks, they might not be from people you need. This strategy is hardly used nowadays.

Click Maximisation

For a given budget, you get the maximum number of clicks. Sounds great, but clicks don’t pay your bills. Therefore, this strategy is only used when launching campaigns to find out what the cost per click prices are and to get initial conversions.

Conversion Maximisation

The algorithm brings the maximum number of conversions for a given budget. The campaign should have one main conversion to work properly.

With this setting, you’re already tracking business account goals, but you’re not doing it financially efficiently yet.

Conversion Value Maximisation

Works similarly to Conversion Maximisation. With one difference – instead of maximising the number of conversions, you maximise their value. This is especially popular with e-shops where each order has a different value and you naturally want only the most valuable ones.

Target Cost Per Conversion

Accounts that acquire leads are the ones who typically use this strategy. If you’ve calculated the average value of a closed deal, its profitability and conversion, you can determine what’s the maximum amount you can pay for a lead. Then you can tell the algorithm that this is the maximum amount you want to pay for a lead.

Target Return

With target return, you tell the algorithm how many pounds it should generate in revenue from each pound spent on marketing. It’s also a budget-limiting strategy, where the budget is spent only as long as the algorithm meets the target return.

Expert advice

Never set the most advanced strategies like Target Cost per Conversion or Target Return in a new account. Start with Click Maximisation and gradually work your way up to more advanced strategies once you have enough conversions. If you skip these steps, campaigns might shut down or won’t be effective.

Setting Goals in Performance Marketing

Calculate your gross and contribution margin. Approximately 40% of your contribution margin should go to marketing. If you have a 40% contribution margin (that’s what remains after paying for product purchases and expenses associated with order processing), and you want to give 40% of that to marketing, your target PNO will be 16%. Converted to ROAS, that will be 625%.

Target ROAS is what you give to the algorithm. If your ROAS is higher, you can add budget and scale the account. If you’re not meeting target ROAS, there’s no point in putting more money into marketing because you’ll be creating a loss.

When acquiring leads, you focus on cost per conversion. For example, you install air conditioning. On average, you have £2,000 per job, your margin is 20%, so £400. You can close 1 out of 5 leads. From your margin, you want to give max 30% to marketing. That’s £120.

Since you have a 20% success rate of closing deals, you can give maximum £24 per lead. The calculation is 120*20%=24.

Your target cost per conversion will therefore be £24. Again, if the algorithm meets this and you’re paying less per lead, you can add budget and scale. If you’re paying more per lead, try to optimise the account and achieve the set goal before adding budget.

Target Audience

In marketing, target audience is often used. It tends to be described demographically, by interests, or by marketing persona. Some marketers then try to use this in Performance Marketing as well.

For search ads, your target audience is someone who searches for keywords related to your product. If you’re selling children’s clothing and someone types “pink children’s dress” into Google, it doesn’t matter if it’s a mother, father, or parents’ friend buying a gift for the child. What’s important is that they’re searching for what you need. You can serve them at that moment and sell them what they currently need.

For advertisements on social networks, targeting used to rely more on demographics and interests. This no longer applies. Your creative is your targeting. The creative describes the problem your product solves, and the algorithm with enough data will figure out who to show the ad to.

Therefore, spend more time thinking about the creative (video or banner) than searching for the right target group.

Channel and Tool Selection

Proper channel selection will ensure your campaigns work as expected. There’s a simple rule for their selection. Is there demand for your product and are people actively searching for it? Choose search advertising like Google Ads or Bing Ads.

Do you have a new product that solves a problem for customers, but they don’t know it yet? Choose social media advertising. Are you selling more expensive products (hundreds of pounds) that people know and actively search for? Try price comparison websites.

At some point, you’ll add other advertising channels anyway. You don’t want to be dependent on just one platform because if your account gets blocked, you’ll lose a significant part of your revenue.

Campaign Optimisation (+A/B testing, data analysis and interpretation, continuous strategy adjustment based on results)

In Performance Marketing, you’ll encounter the term campaign optimisation. But what does it mean? You’re trying to bring better results for the same amount of money.

Activities that will help improve your campaign results:

• Keyword Exclusion

This only applies to search advertising. Campaigns will often show for words that are only marginally related to your products. Or people will want more information about the product and aren’t ready to buy yet.

You want to remove such words from campaigns because they unnecessarily spend credit and don’t bring desired results.

• Testing New Ad Texts

Text plays a significant role in people’s decision whether to click on your ad or not. Mention free shipping, extended warranty, or a discount in the ad and you’ll see many more people clicking on the ad.

• Excluding Poor-Performing Products

Not all products will sell. That’s a fact. Maybe you have a high price against competition, maybe you have a poor product description. If people click on the product but you’re not getting conversions, it’s better to exclude it from ads. Again, you’ll save considerable funds that can be used more effectively.

• Creative Testing

Even the best creative will become stale after time and ad performance will decline. That’s when it’s time to change the ad. Continuously test several types of ads and when your winning ad loses performance, you can replace it with a new one.

Design and Testing of Creative Elements

Performance marketing, especially on social media, is based on creative. Creative can be banners or videos. The most commonly used types of creatives are:

• Press Screenshot: The entire ad is based only on a screenshot of an article in a reputable magazine that writes about your product.
• Us vs Them: In the ad, you compare the advantages of your product/service against the competition. You don’t need to name specific brands, just talk about standards in the given market. For example, with clothing, you can focus attention on how long the clothing lasts or that you provide free exchanges.
• Features Point Out: In the middle of the banner will be an image of your product with its main advantages written around it.
• Testimonials: The ad displays reviews from your customers. Again, it’s a very simple form of advertising to create, but very effective.
• Founders Ad: If you’re just starting out and don’t have reviews or media coverage, you can create an ad featuring the company owner telling the story of why they founded the company and what problem their product solves.
• UGC: User Generated Content types are videos that don’t look like ads. They’re shot on mobile phones like regular videos. In them, a customer explains how your product helped them. This type of video is very effective because it looks authentic and credible.

There are dozens of other types of ads. Get inspiration from competition, what ads they use, which ads run the longest, and try to create something similar for your product/service. It’s very likely that the ad will work for you too and you’ll save a lot of time and money on testing.

Data-driven Marketing

Performance Marketing is based on data-driven decision-making. Every change in campaigns, every creative change, or strategy change must be justified by data. You need to first collect data, then correctly interpret and analyse it, and finally draw conclusions based on which you’ll make decisions.

If you want to try new practices and tactics, you can. But always set measurable goals by which you’ll evaluate the success of your activities. Stick to data and you won’t make a misstep. If you just mindlessly change settings thinking you’ll improve results, the opposite might be true.

AI and Machine Learning Integration

AI and Machine Learning play a really big role in Performance Marketing and can be used in several ways:

Bidding and Targeting

All smart strategies work based on machine learning. Anyone who uses them soon finds out that they achieve much better results than most specialists.

They also save hours of manual work, so you have time to focus on more important activities in managing online business.

Writing Texts

Input a landing page into ChatGPT and use prompts to guide the chatbot to get the right format. Usually, you’ll get results so good they can be used in advertisements. The advantage is also that ChatGPT knows the individual text formats, best practices in writing them, and text length limitations.

Within seconds, you get texts almost like from a professional copywriter.

Creative Generation

Generative AI will help you create banners and unique photos. It will also help with video script design. You often save hours of time that you would spend in photo banks.

Data Analysis

AI and machine learning can be used in data analysis too. Just insert an image of statistics into ChatGPT and you can get recommendations for account changes. However, here you’ll only get such recommendations as the data you input into the chatbot. In short, it will rarely see the complete picture about the account and blindly following recommendations might harm your campaigns more than help.

Machine learning can be used, for example, in creating revenue predictions, customer segmentation, or dividing products according to performance.

Here you’ll usually need advanced statistical programs like SPSS or Python.

Measurement and Reporting (Principles, Tools)

Measurement

In every advertising channel, you must have conversions uploaded. Conversions are, for example, purchases or form submissions. These are the main business goals and are called macro-conversions. There are also micro-conversions like adding to cart, starting checkout, or beginning to fill out a form.

Micro-conversions can help algorithms figure out more quickly what visitors to bring to the website. Make sure you’re sending correct data to conversions, otherwise you’ll have skewed results and will make incorrect decisions in settings.

Tools

Each advertising platform has built-in reporting. In these systems, you have the most data and can relatively easily click through most essential reports. The problem arises if you want to have a more comprehensive picture.

Here you need to use external tools like:

• Google Analytics 4: The most widespread tool for measuring website performance. Here you see how individual visitors interacted with different ads and how they led to conversions. Due to cookie restrictions, this tool is becoming less and less accurate.
• Google Looker Studio: It’s a data visualisation tool. Using connectors, you can pull data here from many advertising and analytical systems, SQL databases, or even Google Sheets. This way, you can have all important reports in one place with access for responsible persons.
• Google Sheets: Google Sheets is often used for reporting too. If you need to create a specific overview, functions in Google Sheets can make your work much easier and show interesting trends. There are other paid tools, but their functionality is the same as the capabilities of the above-mentioned tools.