Will Pay-for-Performance (P4P) Marketing Work With a Low Price Product or Service?

I receive regular inquiries from businesses seeking to partner with Skyworks Marketing on a 100% Pay-for-Performance (P4P) basis.

However, one aspect, in particular, can work against a business seeking such a partnership: Having a low priced product or service. You see, even with a high margin, particularly in a competitive market, such as weight loss, health, finance and insurance (as well as many others), there is not enough mutual opportunity.

Now, don’t get me wrong, competitive markets, per se, are not unattractive. In fact, the reason they’re competitive is because a lot of money is being made in that space. It simply takes more time and/or resources to compete in such an environment.

For example, a product that costs less than $50.00, even if it has a 90% profit margin, is not going to make enough profit, after the media buying, to make an attractive partnership from our perspective.

Of course, this could be profitable in the long-term with selective advertising and some very diligent (and lucky) social media strategies. But in my experience, to rise above the noise in a competitive market in a reasonable amount of time, ongoing media buying is what’s going to make it happen more predictably. (And even so — it’s still not guaranteed!)

A low-cost product or service means that advertising will eat up most or all of the profit, especially in the early phases. In fact, it will likely not be profitable until/unless a critical mass is reached whereby enough sales are being made on a big enough scale, which drives the media costs down and/or consumers are referring others en mass.

One effective solution is to offer more expensive services that would also be purchased by the buyers of the low-cost service afterwards. That’s a tried and true model to sustain the business via advertising. In such a case, it becomes important to calculate the value of a new customer or client to determine the workability. For example, if 30% of your buyers purchase an additional product or service within a certain amount of time (say 90 days), then that additional 30% could potentially become the actual profit stream.

In fact, it’s not unusual for some companies (particularly in the infomercial world) to lose money on their upfront sales (the sales that directly result from the infomercial). They simply make their profit on the upsells and follow-up sales.

Regardless, there’s still a testing evolution involved to establish proof of concept. And whose going to do the testing?

If you present the idea to a Venture Capital firm, or a Pay-For-Performance partner, like our company, the merits of your idea will be weighed against a number of variables, which boil down to risk vs. reward. The better a case can be made that your business is a low-risk, high-reward opportunity, the more likely you would be funded by a Venture Capitalist or that you might be deemed a desirable Pay-for-Performance partner, in which we would invest resources.

The reality is that in many cases, the great idea that you are proposing to gain support and resources for your business, is probably not as low-risk, high-reward, or even as unique, as you might envision.

Even if you are interested in a “partial” Pay-for-Performance partnership, whereby you are putting up media money and paying a reduced fee for marketing services, it may still not be worth investing our resources to prove the validity of your entrepreneurial vision.

Please do not interpret these words as a suggestion that such a product or service cannot be driven to a big success in any other way than buying media. There are definitely other ways to achieve success. It will simply take longer.

Wishing you much success!