Driving Results: Performance Marketing, a Definition - Jonathan Shapiro

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What if advertisers could accurately predict the return on their marketing investment before running a campaign? What if they could pay media outlets (publishers, radio stations, etc.), only when the target consumer took a desired action, e.g. when they completed a sale or requested more information about the advertiser's product or service? And what if while the campaign was running, the marketer could change campaign elements - the mix and price of the media, the creative used, the sales process, etc. - to optimize sales related to a given advertising program? If advertisers could do all this, they would be running a true Performance Marketing campaign.

In the simplest terms, what sets Performance Marketing apart from traditional advertising is that in Performance Marketing, the media provider (the web site, TV station, magazine, etc.) shares the risk of the advertising by accepting payment when, and only when, a consumer takes a desired action. But this simple difference does not do justice to the complete approach to marketing that Performance Marketing has become. Over the past decade, Performance Marketing has evolved into a complete system for optimizing campaigns and maximizing the return on marketing investment (ROI) an advertiser can expect. To fully understand Performance Marketing it is useful to review its history.

Note: Online Performance Marketing is the focus of this series. However, the principles can be applied to any media where the publishers will share risk and results are measurable.

The Meaning ofPerformance Marketing 1.0 "I'll pay you for a sale"

Online Performance Marketing was popularized way back in the 1990's (yes way back in Internet Time ;), when Amazon launched their affiliate program and paid publishers, or affiliates as they became known, a % of actual sales from customers the publisher sent to Amazon. In the new "performance" model the advertiser (Amazon) only paid the media (the web site publisher) for the performance of a specific consumer action (a purchase). The key differentiators of this form of advertising to traditional media advertising were:

- The publisher took allthe economic risk because they only got paid if their audience clicked on an Amazon ad and actually purchased from Amazon.

- The consumer performance that triggered payment was a sale and only a sale.

- Advertisers like Amazon had a guaranteed profit or return on their marketing investment. Amazon paid 5%-7.5% for every dollar spent through traffic from affiliates. This meant their marketing cost was capped at 7.5% of sales - a very favorable rate for a direct merchant.

- Publishers captured no value for brand enhancement from ads on their site. If a visitor to the publisher's site saw numerous ads for Amazon, but never clicked on one, and later found Amazon through a search engine, the advertiser got $0 for building consumer awareness of Amazon.

- Pricing was established as a flat fee per sale or % of total sale revenue. There was only modest negotiation on the part of the publishers as they had few alternatives.

Performance Marketing 2.0. "I'll pay you what an action is worth, if the consumer takes the right action"

Since those early days of the Internet, Performance Marketing has evolved. Specifically, the kinds of consumer actions that trigger a "performance" payment have grown. As more advertisers enter the performance market, publishers are able to find offers that produce fairer payouts for access to their audience.

The types of consumer actions that trigger a "performance" payment, in addition to a sale, now include:

- Clicks - payment for every click from an ad on a publisher's site to an advertisers (and yes we include Google paid search in this definition).

- Submits - payment when a consumer submits sufficient information to an advertiser or an advertiser's agent such as Lending Tree to begin a sales conversation (e.g. a credit card submittal for a Netflix trial offer).

- Calls - payment for a call to the advertiser from a specific publisher's ad.

- Downloads - payment when a consumer downloads software from a publisher's ad; for example when IAC pays for the download of their Ask Toolbar.

- Leads - payment for the transmission of a customer data set (name, address, email, phone number, preferences, etc.) and the consumer's explicit permission to be contacted by an advertiser.

What these new "performance marketing" models share with the original fee for sales model is that the publisher is assuming some of the risk of the advertiser being successful in attracting the desired action or consumer performance.

However, because the performance payment trigger does not have to be an actual purchase, the advertiser is now sharing the marketing risk with the publisher. For example, the University of Phoenix (UofP) can pay a web site such as www.CollegeReview.com each time a potential student submits their contact info (a lead) and asks UofP to contact them about an enrollment. But not every submittal will result in an enrollment. UofP is taking the risk that a sufficient number of the submittals will convert into paying students to justify the total cost of submittals. UofP is willing to take this risk because they can predict, after running millions of lead submittals through their sales process, and doing the appropriate statistical analysis, how many leads will convert into enrollments. And since they know with statistical precision what the conversion rate will be, and they know from their accounting department the value of an enrollment conversion, they can calculate what they need to pay for each lead submittal to ensure they earn a profit on their marketing.

It is this statistical "modeling" of the sales process, of how consumers travel through the marketing funnel that enables UofP and other performance marketers to succeed. They determine the value of a specific consumer action by using a variety of analytic tools to reliably predict how specific actions turn into sales. The value they are willing to pay for a given consumer action is often referred to as their "allowable." The allowable represents the maximum amount the advertiser is "allowed" to pay for the action and still expect to make a profit. As long as the performance advertiser pays less than his or her allowable, and their statistical models accurately predict conversion from action to sale, they can invest marketing dollars with near certainty that they will be making profitable investments.

The application of rigorous analytics to marketing is the second point of differentiation between traditional advertising and performance advertising. While much of traditional advertising is measured, little of this measurement is translated into specific sales results. Thus the famous John Wanamaker problem, "Half my advertising is wasted. I just don't know which half." Performance marketers solve the Wanamaker problem by using analytics to tie the consumer action to eventual sales.

It is easy to see why this model is attractive to advertisers. If they accurately estimate their "allowable", their profits are almost guaranteed. As a result more advertisers have entered the market wanting to pay for different types of actions. But within this model what was not guaranteed was that any publishers would be willing to carry their advertisements or "offers" as they are commonly referred to in performance parlance. Another difference between traditional advertising and performance advertising is that because publishers or affiliates are bearing the risk, they make no guarantees that a particular advertiser's offer will be publicized. If the offer "works" or provides the publisher a reasonable fee for the exposure the publisher is providing, they will run the offer. But this means any single advertiser's ad must compete with every other advertiser's offer to get exposure to the affiliate's audience.

What evolved, especially in the fertile field of the online world, where tracking and measuring consumer actions and tying these actions to sales is relatively easy, were affiliate marketplaces such as NeverBlue, Azoogle and MediaWhiz's Monetizeit division. These markets exposed advertisers to thousands of online publishers at once and gave publishers the opportunity to choose from many different advertised offers. Advertisers, confident in their ultimate profits, would compete for placement, a.k.a. distribution, in the publisher's media by adjusting their "payouts" or the amount they were willing to pay the publisher for a given action. From roughly 2002 onward, online performance marketing grew as affiliate networks made it relatively easy for advertisers and publishers to find each other.

The meaning of Performance Marketing 3.0 "l'll buy all forms of advertising and marketing available to me that provides a predictably positive return on my marketing investment"

Performance Marketing 2.0 also points to the future evolution of performance marketing. It is possible, albeit difficult, to use statistics and other analytic tools to tie all marketing, even branding efforts, to the ultimate consumer performance – the purchase. What winning performance marketers of the future will do is invest the resources necessary to understand the value of each point in the marketing funnel and the associated consumer behaviors. They will then build portfolios of both online and offline media that move potential customers into and through the funnel at rates that provide maximum sales while maintaining desired profit levels. The bottom line is that even brand campaigns will have a bottom line. Performance Marketing 3.0 will be defined as advertising efforts that have demonstrable and repeatable positive returns on marketing $$ spent. Simply put if you spend $1 on marketing you should get $1.X in profit back.

The Implications for Brand Advertising,

So where does this leave brand advertising?

- Accountability will grow as tools and techniques for measuring the performance of brand efforts become more prevalent.

- As accountability increases, the John Wanamaker problem -- Half of our advertising doesn't work but we don't know what half – gets solved for all media types.

- Once solved, marketing $$ previously spent on unproductive efforts (i.e. marketing that generates < $1profit for each $1 spent) will be re-allocated or eliminated.

- In the near term, branding budgets are likely to shrink (just talk to the Magazine industry ;)

- HOWEVER, as the true value of branding (and all advertising) is better understood - remember even Wanamaker felt half of it worked - marketers that can demonstrate positive returns on specific efforts will expand their budgets for these efforts to grow share, sales and profits.

The implications for brand advertising extend to all forms of marketing. Everyone today is smitten by social media, mobile and other newfangled marketing gadgets. Over time, all marketing will have to pass the performance test. If Twitter can generate a positive return then marketers will use it. However, if it turns out that having 140 character musings about "my life experience with product X" does not readily translate into what all advertisers want – sales – it will not and should not get much investment of the CMO's time or money.

The above is a bit of an over simplification. Performance Marketing 3.0 agencies understand the basic premise that marketers should want to do all the marketing they can if it has a positive return. It's like buying $10 bills for $5. Performance marketing agencies are responsible for perfecting the technology, tools and processes to manage the complexities of this ideal and make the over simplification above a reality for our clients. For example, American Laser Skincare – formerly known as American Laser Centers - was able to double their revenue in 16 months while increasing their program's profitability in both absolute and relative terms. This kind of financial performance is not always possible. But when performance marketing 3.0 is done well, it becomes probable.

Jonathan Shapiro, CEO of MediaWhiz, is responsible for setting the company’s strategy and guiding operational execution. He has led the integration of MediaWhiz’s suite of marketing services, spearheads the development of new and unique capabilities and ensures that the organization can deliver continuously improved results for its performance marketing clients. Jonathan can be reached at jshapiro@mediawhiz.com.

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MediaBizBloggers is an open-thought leadership blog platform for media, marketing and advertising professionals, companies and organizations. To contribute, contact Jack@mediadvisorygroup.com. The opinions expressed in MediaBizBloggers.com are not those of Media Advisory Group, its employees or other MediaBizBloggers.com contributors. Media Advisory Group accepts no responsibility for the views of MediaBizBloggers authors.