How performance marketers think about Creators

(4 min read) A technical deep-dive into how brands decide to spend their performance marketing dollars

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Why is it that Brands aren’t always willing to pay Creator’s quote? If they have all that money, what’s another few hundred (or thousand) dollars?

Many brands are engaging in a form of influencer marketing that is based on performance. They don’t care about the value of the content or having the Creator associated with their brand - they care about how many sales a given Creator drives for the price.

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.

Many Creators make lots of money from performance marketing deals. If your audience is super engaged and will purchase when you tell them to, you may be a great candidate for these deals, because if you perform, brands will renew over and over for as long as you do. That may not be the case for brand-driven marketing, because campaign creative may change season to season.

Takeaways

  1. Always ask a brand what their goals are, what metrics matter, and what a win looks like. You can even ask them if they’re looking for performance or brand value. Understanding their goals and success metrics will help you decide if it’s worth doing and how to negotiate.

  2. Only take performance campaigns if you have an engaged, passionate audience that is likely to buy - either based on the product or based on your recommendation. Otherwise, you’re unlikely to get repeat business, you may harm your reputation, and you’re going to waste your social capital.

  3. If you take a performance campaign, do everything you can to make it successful. Profitable sources of customers are hard to come by for any business, so if you become one, brands will spend with you over and over to keep the business flowing.

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My mission is to enable a million people to find freedom in the Creator Economy.

This was an extended version of a previous LinkedIn post! Follow me on LinkedIn for more actionable insights on the business of Creators. 

My firm, Partner with Creators, is a fractional go-to-market team for the Creator Economy. If you’re struggling to work with Creators, get in touch here.

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Written by Avi Gandhi, edited by Melody Song,
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