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Performance-based marketing: how to get a return on every cent invested in advertising budgets

Tuesday, April 20, 2021

A startup is a business where the founders count every cent — regardless of whether this cent is out of their own pocket or the investor’s pocket. In this sense, spending on marketing is a challenge for a lot of people. The advertising budget may be a significant part of the entire project budget, but will the strategy work, and will the customers come? To save money, many teams try to smooth out the risk of “draining” the budget and search for customers manually: directly, write / call, hoping that, perhaps, their product will interest a potential partner. Let’s not argue — this is a working option, but only at first. The point of a startup is to grow and scale quickly, and for this, the manual search team’s efforts alone are not enough.

Startup Jedi

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Where is the exit?

There is a way out: performance-based marketing — an approach that, with proper study, will teach you how to work with the advertising budget so that, in the literal sense, every spent dollar will bring income. The approach itself originated in the United States, and where, if not there, do they know how to count money and earn it?

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What is performance-based marketing?

Performance-based marketing is marketing that aims to achieve a specific and financially measurable result in a short time.

This marketing concept involves a comprehensive approach to promoting the product and making a profit. All marketing tools are combined for a common goal that is measurable both numerically and — most important -financially: it is not so much, for example, the reach and number of leads that are taken into account, but their impact on the company’s revenue.

By implementing performance-based marketing, the project is united in the literal sense: the team becomes one with a single KPI, otherwise, the magic will not work. The work of each project participant affects the overall result, so it is important to harmonize and establish all processes and interactions, so that the work is conducted smoothly and everyone is aware and interested in achieving a common goal.

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The difference between performance-based marketing and classical one

The difference between performance-based marketing and classical one

The main difference between performance-based marketing is that the result is not only measurable, but also achievable in a short period of time.

If you look at it in a comprehensive way, the distinctive features of performance-based marketing are:

  1. Measurability. The effectiveness of any channel is tied to digital indicators: performance-based marketing is directly related to digital promotion and is rarely used for offline promotion — this is due to the fact that performance marketing requires constant monitoring of performance and, accordingly, the use of deep analytics tools. The latter is easily “linked” to a website or mobile app and then provides visual data. But if we talk about offline tools (the effectiveness of posters, billboards, flyers), then many indicators are more difficult to calculate and the accuracy of the calculations will be much lower.

  2. Actuality. In the present time mode, you can and should influence (change the content policy, landing page design, channels where the advertising campaign is launched) any company’s indicators — this is what helps to increase their effectiveness.

  3. Focus on results. Performance marketing is aimed at ensuring that the client makes a target action — makes a purchase of a product.

  4. Payment for the result. Bonuses / payment for the team’s work are linked to the achievement of the planned indicators.

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Performance-based marketing basics

According to the differences in performance-based marketing, it is possible to talk about its principles. These are above all:

  • Tracking the budget for each advertising channel and its operational reallocation — if the difference in effectiveness is significant, it makes sense (see the “Actuality” item above) to reallocate money between the most effective channels;

  • Evaluation of business performance indicators — there are several dozen of them, the most well-known and commonly used ones will be described in a special section below;

  • Synchronize all marketing channels and tools to achieve targeted results.

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How to switch to performance-based marketing

How to switch to performance-based marketing

Step 1. Start by setting goals — keep in mind the SMART approach: goals must be specific, measurable, and time-bound. In the case of performance marketing, they are somehow related to sales growth. What can be the goal? Sales, completed registrations (leads), company calls/manager call requests, app downloads, subscriptions. Examples of more complex goals: increasing the Customer Lifetime Value (LTV/CCTV), increasing the Conversion Rate (CR), increasing the Return on Investment (ROI).

SMART is an approach to defining a business goal that involves selecting a desired outcome that meets the following characteristics (SMART is an acronym where each letter is the first letter of key goal definitions): the goal must be Specific, Measurable, Achievable, Relevant, Time-bound.

Step 2. Next, you need to analyze the project’s current performance, competitors, and the market as deeply and in detail as possible, and consider the pros and cons of the product. Also, you should have current information on the target audience, the top search queries for the product, the semantic core, and the effectiveness of all traffic sources.

Step 3. Based on the analytical data, you need to build a comprehensive marketing strategy — choose the most effective advertising tools and channels. Examples of tools: contextual ads, SMM (targeted ads), marketplaces, e-mail marketing, native and viral ads, mobile marketing, re-marketing, affiliate programs. The basic task here is to understand which of these will get the best product results, and then develop and apply a strategy.

Step 4. A component point of the strategy — creating a media plan: how exactly the selected ads channels and tools will be used. The media plan contains information about when and where the ad will be placed, and what budget is allocated for each of the promotion channels.

Step 5. After the ad campaign is launched, the performance evaluation process begins. The effectiveness of a channel is measured by the return on the money invested in its advertising. Using correctly, performance-based marketing really allows you to get the most out of every cent invested. When working with ads channels, analyze in real-time the quality of applications, the ratio of the budget spent on developing channels and the revenue the company has received from them. This will allow you to track the customer’s path through the sales funnel, determine the average check-in each channel and profitability for the reporting period.

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Productivity indicators in performance-based marketing

Productivity indicators in performance-based marketing

A list of the most widespread performance indicators of a particular channel and/or tool:

Traffic — you can view the number of sessions/views/clicks for a certain period of time. This is a so-called “rough” indicator since it does not reflect the quality of these actions. At the same time, traffic allows you to track the ups and downs of customer activity, analyze the reasons. Most often, traffic is tracked daily, weekly, monthly, and quarterly.

Conversion Rate, CR — conversion rate, the ratio of website visits during which the user performed the targeted action (subscription, purchase, left contacts) to the total number of visits. This indicator measures the effectiveness of converting regular visitors into customers on a particular channel. CR also generally provides insight into the effectiveness of marketing efforts and is considered one of the most beneficial metrics. In formula terms, the conversion rate looks like this:

CR = number of converted sessions / total number of sessions x 100

Return on Investment, ROI — return on investment, an indicator of the return on investment in the project as a whole, with which you can determine the return on investment and understand how (not) profitable the project or product is:

ROI = (revenue — cost) / costs x 100%

Return on Marketing Investment, ROMI, is a ratio that shows the return on investment of your marketing campaigns. In simple terms, ROMI demonstrates the profitability or otherwise of your marketing policy. The formula for ROMI is as follows:

ROMI = (profit - — marketing budget) / marketing budget x 100%

Bounce Rate, BR — “bounce rate”, allows you to find out the percentage of visitors who left the landing page a few seconds after the first viewing and did not perform any target actions on it. It allows to evaluate the effectiveness of the landing page content, and increase the content relevance to the demands of the target audience. With the help of BR, you can find out the problem pages of the site, the sections of the landing page where visitors leave the site.

Cost per Action, CPA — the cost of the client’s target action (subscriptions, purchases, etc.):

CPA = cost of ad placement / number of targeted actions

Cost Per Order, CPO — the cost of the order, the cost of the company to attract one customer who has completed the target action. One of the main parameters that reflect the effectiveness of an advertising campaign. The lower the CPO, the higher the profitability of the marketing campaign.

CPO = advertising budget / number of purchases

Average order value, AOV — the average receipt for one order. Allows you to calculate the return on investment in the amount of the number of orders: for example, there may be several products in one order. The indicator allows you to compare the size of the average check at the current moment with the same indicator in the previous period or with the indicators of competitors/market averages. AOV is a complex concept that includes the audience’s purchasing power and loyalty, the effectiveness of the company’s marketing strategy, and the psychological profile of the average buyer.

AOV = total of all purchases  /number of purchases

Customer lifetime value, LTV or CLV — the customer’s lifetime value, the total profit that the company receives from one customer for the entire time of its interaction (=friendship) with him. The indicator helps to estimate the amount of investment required to retain the client and to predict the future expenses of the company. To calculate this indicator, there are a number of approaches and formulas, one of the most common:

LTV = average receipt x frequency of repeated purchases x duration of interaction with the client (for convenience, the base unit can be taken as 1 month)

In total, there are several dozen different performance indicators — it is essential to choose those that will be useful for your project, taking into account its business model, marketing strategy, and campaign goals.

As a rule, up to 10 key indicators are tracked within a single campaign. For e-commerce projects, such indicators as conversion rate, average receipt, lifetime customer value, and bounce rate are usually used. For corporate site traffic, bounce rate, lead cost, refunds, conversion. For an online store-bounces, traffic, refunds, average receipt, conversion.

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Analytics tools

Analytics tools

The process of calculating metrics is greatly simplified by services for analyzing traffic and site traffic. As a rule, such services allow you to track almost all the necessary indicators, but for better detail, referral links, coupon codes, and individual phone numbers are also used.

Top 3 most well-known and convenient:

Google Analytics

A free and multifunctional service that allows you to create detailed statistics about site visitors. With Google Analytics, you can define goals, track the effectiveness of advertising campaigns, process traffic data, and find new sources of the target audience.

Yandex. Metrica

A free service that allows you to evaluate site traffic and analyze user behavior, measure site conversion, get data on what percentage of visitors have made a target action on the page, and view the actions of site visitors in the “live video” mode.

Roistat

A marketing platform and end-to-end business analytics service that allows you to work with traffic, conversion, sales, average receipt, site usability, configure and conduct contextual advertising, and compile summary reports.

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Resume

Performance-based marketing is an approach in marketing that involves focusing on a specific and financially measurable, achievable result in a short time and requires constant work with analytics. At the heart of performance-based marketing is flexibility: if one of the channels performs worse or, conversely, better, the budget is recalculated in real-time.

To switch to performance-based marketing, you need to set SMART goals, conduct a deep analysis of the current performance of the product, develop a marketing strategy based on this, and then track the effectiveness of each tool and channel in real-time.

There are dozens of indicators for tracking channel performance, the key ones are traffic volume, conversion rate, return on investment, return on marketing investment, bounce rate, target action cost, order cost, average receipt, lifetime customer value.

There are a number of tools for tracking indicators, the most commonly used and well-known — Google Analytics, Yandex. Metrica, Roistat.

20 Apr 2021

 

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