How performance marketers think about Creators

Performance Marketing - A brand spends $X with the intent of driving >$X in profit measurably tied to that payment. This applies to Creators, but also to paid ads, search, etc.

• Example: A fun sock company spends $1,000 on some Instagram posts that include tracking links in bio. They track the users who click through those links, and eventually see those users buy $5,000 worth of socks. The margins on the socks are 50% after manufacturing and shipping costs, so they make $2,500 profit on a $1,000 spend. Success!

Since there’s no 100% accurate way to predict how much of a product a given Creator might sell, brands often use some variation of a simple formula to calculate potential ROI when making offers:

Average Views x Expected Conversion Rate x Price = Revenue

Let’s say a brand is marketing with Creator A, who gets 10,000 views/video, and Creator B, who gets 20,000 views/video. The brand assumes 1% of viewers will purchase a $10 product. Now remember - revenue isn’t profit. The brand has to spend on making the $10 product. Let’s say they spend $5 on cost of goods (COGS) - a 50% margin. But wait - they are also spending part of that $5 on the Creator, to get that sale! Maybe they want to make 50% after that spend. 

Creator A: 10,000 x 1% x $10 = $1000 in revenue x 50% COGS x 50% marketing = $250 with $250 spent on the Creator

Vs

Creator B: 20,000 x 1% x $10 = $2000 in revenue x 50% COGS x 50% marketing = $500 with $500 spent on the Creator

Brands often think about this using the CPM (cost per thousand impressions) metric, as it’s easy to calculate and measure against.

For Creator A, with 10,000 views, $250 / (10,000 / 1000) = $25 CPM

For Creator B, with 20,000 views, $500 / (20,000 / 1000) = $25 CPM

So the brand knows that in general, if they are calculating ROI against views, they want to pay a maximum CPM of $25.

If Creator A asks for $100, great! That’s a $10 CPM, which is less than $25.

If they ask for $300? Sorry. That’s a $30 CPM and doesn’t make them profitable enough to spend.

That’s the simplest way to understand how performance marketers are thinking about how they pay Creators.

But wait! There’s more!

For more sophisticated brands, Expected Conversion Rate (i.e. the % of viewers who will buy) is a function of Engagement Rate (i.e. the % of viewers who like, comment, share a post). The general belief is that the higher the engagement rate, the higher the conversion of viewers to buyers.

What if Creator A had an engagement rate of 5% but Creator B had an engagement rate of 2%?

Creator A: 10,000 x (0.05) = 10,000 x 0.05 = 500 engaged viewers

Vs

Creator B: 20,000 x (0.02) = 20,000 x 0.02 = 400 engaged viewers

The assumption is that the engaged viewers are representative of potential customers.

Maybe the brand believes that 20% of engaged viewers purchase:

Creator A: 500 engaged viewers x 20% x $10 = $1000 x 50% COGS x 50% marketing = $250

Vs

Creator B: 400 engaged viewers x 20% x $10 = $800 x 50% COGS x 50% marketing = $200

That means that on Creator A, they need to spend less than $250 (50% of $500, the marketing allocation) and on Creator B, they need to spend less than $200 (50% of $400).

That means the CPMs the brand is calculating against change too:

For Creator A, with 10,000 views, $250 / (10,000 / 1000) = $25 CPM.

For Creator B, with 20,000 views, $200 / (20,000 / 1000) = $10 CPM.

Now you start to see how it gets tricky!

Creator A has a smaller viewership, but the brand is willing to spend more relative to that viewership because of the engagement rate.

Every brand that does performance marketing has different math around these variables. Many even have additional variables that we haven’t even discussed (e.g. different conversion rates by platform, audience demo, content genre, etc.)

Performance marketing is all math. It’s not about how good your content is or how much work it takes to make it - they only care about that insofar as it contributes to the profitable performance of the content (for example, better content may perform better if they repurpose it as an ad). 

Their goal is to make a certain % profit from the spend. They have formulas that let them estimate how much they will make based on a Creator’s metrics, and they are going to plug you into that formula and pay you up to the maximum that it puts out.

If a brand offers you $100 and you ask for $300 and they say no, it might be because whatever formula they are using simply says they won’t make a profit on $300. 

The other thing to keep in mind is that performance-based marketers will only renew a brand deal if they see the ROI they were hoping for. If they expect a $500 profit and your post only drives enough sales to make $400, they are unlikely to renew at the same terms. You will either need to give a lower price or move on.

This isn’t a bad thing - it’s business. Most of the companies that use this strategy are small businesses who don’t have tons of extra cash to spend on brand hoping that it pays off in the long run. They need to sell product to make payroll, so go into these discussions with the empathy that comes from understanding that.

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