by Michael Mothner
Founder & CEO, Wpromote

This month we will take a look into what I believe to be one of the most misunderstood, ambiguous and sexy terms in the world of online advertising: Performance Marketing. Everybody from mom-and-pop affiliate marketers to vertical lead-gen firms and SEM companies lay claim to this term, so I think it is high time for us to cut through the confusion and make a little sense of things.

What is it and why is it great?

I define Performance Marketing as marketing in which the advertiser ultimately only pays for results; be it leads, phone calls, e-commerce sales, whitepaper downloads, newsletter signups or whatever metric is agreed upon by the advertiser and marketer.

The value here is obvious: with pay-for-performance marketing efforts, companies are able to remove risk from their advertising, and for the first time marketing budgets can directly relate to sales. The application of a performance marketing model may be considerably more complex than this, but the concept of paying for results is powerful, seductive, and if executed correctly, profitable for both advertiser and marketer.

We’ll take two real-life examples. For the last several years Wpromote has worked with HP Computer on a performance basis. We run large-scale PPC campaigns with our own dollars, and get paid a percentage of actual sales generated. HP is thrilled, paying only for sales generated, with absolutely zero risk. Performance marketing is not just for Fortune 500 firms, however. Take the local plastic surgeon; he doesn’t understand online marketing, but he does know the value of an office consultation. So we run search engine campaigns for him to drive office consultations, and he pays us each time one is scheduled.

Time for some definitions

While the simple elegance of pay-for-performance marketing is easy to digest, the truth is it is a concept with a variety of implementations and a plethora of players. Let’s spend a little time with some basic definitions:

Advertiser – An advertiser is the company paying for results, in the form of leads, sales or signups.

Affiliate – An affiliate refers to a marketer (which could be a solo at-home affiliate or a larger organization) that gets paid by an advertiser for delivering the performance metric: leads, sales, etc. An affiliate could achieve sales through PPC, SEO, email marketing, social networking or his own website properties (blogs, review sites, coupon sites).

Affiliate Network – An affiliate network is an organization that is the middleman between a number of advertisers and affiliates, and handles tracking, payments and matchmaking between affiliates and advertisers. Examples include Commission Junction, AzoogleAds, Linkshare and dozens of others.

Arbitrage – I included this term because it largely describes how the Performance Marketing model operates. The performance marketer is able to leverage technology and expertise to create an arbitrage opportunity between two types of metrics. For example, affiliates, lead gen firms, and SEM agencies operating on a performance model will purchase paid search clicks on a CPC (cost per click) model from Google, and then be paid for leads on a CPA (cost per acquisition) model. If it costs me $10 in CPC costs to generate a lead that I am paid $15 for, then the arbitrage profit is $5. These arbitrage opportunities create a very unique win-win opportunity for advertisers and marketers alike.

CPA – Stands for “cost per acquisition”. Many affiliate networks refer to themselves as performance networks or cpa networks because they deliver results to advertisers on a cpa pricing model.

Lead Gen – Lead gen or lead generation firms sell leads directly to advertisers, usually focused on a specific vertical. Examples would include QuinnStreet, ServiceMagic in the home improvement industry or LowerMyBills in the financial services arena. The differentiating factor is that the leads driven are generally driven through websites controlled by the lead gen company and therefore the end user (the person filling out the lead) does not have knowledge of the advertiser before being contacted by them. Therefore, the quality of the lead here generally skews lower, though lead cost can also be less expensive.

Publisher – This is actually used interchangeably with affiliate, primarily when interacting with affiliate networks. For example someone might say, “our network of publishers will drive lots of leads to your company.”

SEM – This is an abbreviation for Search Engine Marketing and it is used as the umbrella term for PPC and SEO. Though it does not directly relate to Performance Marketing, it does play a role in many performance campaigns. For example, SEM firms, such as Wpromote, may provide performance based services for clients, where we drive leads thru PPC marketing and SEO to clients and are paid only upon delivery of a lead. We take the risk, and profit in the difference between the raw lead cost and the price paid by the client.

Super Affiliate – This is an ambiguous but oft-thrown-around term that refers to affiliates that drive a large number of leads to advertisers.

What next?

Performance marketing is a multibillion dollar a year industry that largely goes under the radar of mainstream consumers and advertisers alike. However, in these trying times, the concept of advertising dollars being tied directly to results is something that resonates with businesses large and small. We have been happy to see that the Performance Marketing industry is not showing any signs of slowing down!

Now that we all have a basic understanding of the concepts and primary players in the Performance Marketing world, next month we will dive into some specific examples of how performance marketing can help businesses achieve amazing things, from sole proprietors to Fortune 500 companies.

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2. Google’s CPA Experiment: The Search Insider Weighs In
3. Phone Tracking… Can You Hear Me Now?
4. Performance Trumps Position
5. The Curse of Search Marketing Accountability