Google Ads keeps adding formats faster than most accounts can evaluate them, and Demand Gen and Performance Max get lumped together because both lean on automated bidding and broad placements. The split that actually matters is what stage of the funnel each one is built for.
Demand Gen: built for attention
Demand Gen runs on visually-led placements across YouTube, Discover and Gmail. It is built to introduce a product to an audience that is not searching for it yet, which makes engagement rate, not conversions, the number to watch in the first weeks. On a cold-audience launch I ran, interaction rate landed at 20.34%, well above format benchmarks, before a single conversion event mattered to the read.
Performance Max: built for conversions, at a cost
PMax pools Search, Display, YouTube, Discover, Gmail and Maps into one campaign optimised directly against a conversion goal. It performs well when there is enough historic conversion data to train on, and it performs badly as a way to "try everything at once" with a new account that has no signal to learn from.
The rule of thumb
If the goal is awareness with a new audience, run Demand Gen and judge it on engagement. If the goal is conversions with a data history to draw on, run PMax and judge it on cost per result. Running PMax as a discovery tool, or Demand Gen as a direct-response channel, is where most of the wasted spend in Google Ads actually comes from.