As an agency that specialises in generating leads for businesses, a key question we ask of prospects and new clients is “how much can you afford to pay to acquire a lead?” Nine times out of ten they won’t know the answer, and more often than not they’ll say “can’t you tell us that?”. The reality is, if you don’t know what you can afford to pay to acquire a lead, then there’s a lot of other important things you don’t know about your business such as your average sale or client value, your average profit margin, or how many leads you need to close a sale.
Now, this lack of information isn’t necessarily your fault. Maybe you’re in marketing and the account department or business owner aren’t particularly forthcoming with data such as average profit margin. Or maybe you’re the business owner and you’re just to busy with the 101 other more important tasks on your list than sitting down and figuring out these kind of numbers. Believe me, I understand your predicament. However, regardless of where you sit I will say this; taking the time to understand these numbers is going to put you in a much better situation to build a marketing and lead acquisition strategy for your business.
If you’re on the fence on whether to take the time to work this out, here’s what we say:
In this guide we’ll step you through a relatively simple process for finding out what you should be willing to pay to acquire a lead.
What is a lead?
The definition of a lead will vary for every business, but it’s important that you do define it. To give you a basic starting point, Investopedia describes a (sales) lead as;
A sales lead is a prospective consumer of a product or service, created when an individual or business shows interest and provides contact information.
There are a few key variables within this definition that will make each businesses interpretation of a lead different.
The prospective consumer; some businesses will consider any prospective consumer a lead, while others may have a more stringent interpretation e.g. they need to be in a certain geographic area.
Shows interest; some businesses may accept any level of interest as a lead, others may require the contact is interested in buying within a certain time period or have finance in place to be considered a lead.
Provides contact information; this is where we see the most variance. Some will consider simply providing an email address to constitute a lead, while others require name, email, phone and postcode.
For me, the rule of thumb I like to follow when setting lead criteria is that whatever the industry or product/service type, a prospect is considered a lead if they’ve provided enough detail to be contacted by a salesperson and has a realistic chance of transacting within 6 months.
Who is this relevant to?
This guide has been created primarily with businesses who require leads to sell their product or service in mind. In other words their sales cycle isn’t typically instant, and some kind of sales process will need to take place before a transaction occurs. Examples include:
- Real estate/developers
- Financial services
- Home improvement
- Medical e.g. dentists, cosmetic surgeons
- Higher education
- Luxury goods
- Law firms
If though your business is more retail focused or an e-commerce store, the techniques discussed can still be used, you’ll just need to adjust some of the metrics to suit your situation. For example, you might call every site visitor a lead, and work out your cost per lead budget based on how many visitors you need to generate a sale.
Hitting the sweet spot with cost per lead targets
Setting the right target for your cost per lead is really important to the success of your lead acquisition strategy for a couple of reasons.
Paying too little; if you’re not budgeting enough to acquire leads, there’s a strong chance that your competitors will be grabbing prospects before you get the chance. Let’s Adwords as an example of how under budgeting can directly effect your performance. If your budget is too low on Adwords, it’s likely that your impression share for targeted keywords will be low, which means your competitors will be getting more impressions than you, and hence more clicks and leads. It is a commonly accepted principal in digital marketing that whoever is willing to pay the most to acquire a lead will acquire the most leads, hence why it’s important to make sure you’re not hamstringing your campaign with too low of a cost per lead target.
Whoever is willing to pay the most to acquire a lead will acquire the most leads
Paying too much; having a cost per lead target that is too high can be just as damaging as having one that’s too low. If you’re paying too much for leads, your cost per sale will be higher than it needs to be and you’ll be eating into your profit margin, or even worse making a loss.
So you know it’s important to find the sweet spot with your target cost per lead, now let’s get to work on figuring out where that sweet spot lies.
Data you’ll need.
Below is the data you’ll need to have on hand in order to figure out what your target cost per lead should be. If you’re a business owner you should have direct access to this information, otherwise your accountant should be able to provide it. If you’re in marketing and don’t have access to it already you might have to ask for it.
Average purchase quantity; how many time will a customer or client buy from you on average? This will vary depending on the type of business you have. If you’re a property developer selling apartments or new house and land packages, it’s likely the average purchase quantity would be once. If you’re a dental clinic, your average patient might visit you 5 or 6 times. If you have clients on monthly retainers, I would consider each month a purchase, and the average number of months a client stays on board to figure out the number of purchases i.e. 12 months would be 12.
Average sale value; what is the average dollar value of a sale for your business? If you don’t already know this number, a simple way to calculate it is to take your total revenue for a set period e.g. the last 12 months, and divide it by the total number of sales. If you have clients on retainers, you could take your last months revenue and divide it by the number of clients you have (you might want to take the average from a number of months to make this more accurate).
Average pre-lead cost profit margin (%); what is your average profit margin per sale excluding lead generation costs. For this exercise you should include any expenses including fixed marketing expenses such as marketing staff salaries in the pre-lead cost calculation. Lead cost expenses should include anything directly attributable to the lead campaign e.g. ad spend, creative development by an agency, campaign management by an agency etc. Here’s an example for making the calculation:
- Total revenue for x period – $1,000,000
- Total pre lead cost expenses for x period – $800,000
- Pre lead cost profit margin – 20%
Based on the total revenue for x period of $1,000,000, and total pre lead cost expenses of $800,000 we know that the pre lead cost profit is $200,000. Therefore we can calculate the average pre-lead cost profit margin as being 20%.
Average leads per sale; how many leads to you need to get to make a sale? In other words what is your lead to conversion ratio. Let’s say you received 1000 leads over a set period of time, and in that same time period you made 100 sales, that makes your average leads per sale 10.
Growth strategy; to save you trying to figure out what percentage of your profit you want to spend on getting leads, we’ve created three simple options for your growth strategy, you just need to choose the one that makes most sense:
- Maintain – If your business is running nicely and you don’t want sales to drop off or grow too much, this is a good option for you. At this level we’ve allocated a third of pre lead cost profit to generating each lead, meaning two thirds of your profit would be retained in the business.
- Growth – You want to grow sales, but you’re not looking to set records or do anything crazy like double your customer base in 6 months. At this level we’ll allocate two thirds of pre lead cost profit to generating each lead, leaving a third to be retained as profit in the business.
- Aggressive – You’re looking to grow the business aggressively and take market share from your competitors. At this level we’re allocating the full pre lead cost profit to generating leads leaving no profit behind. This might sound risky, but generating this kind of growth will typically cause your business to generate more referrals than before due to your client base growing while your fixed costs should stay the same. You can always take your foot of the pedal once you’ve attained your sales goal as well.
Right, now you’ve got the information you need let’s go ahead and calculate your target cost per lead!
Calculating your target cost per lead
To make things nice and easy we’ve put together a free target cost per lead calculator for you to work this number out. Simply input the info from the last section to find out what your target cost per lead should be!
Remember to keep track of your metrics and come back to this calculator to make sure that the target cost per lead continues to makes sense. For instance, if you were just using Adwords to generate leads and then started using Facebook as well, you might find that the number of leads per sale has gone up, which would mean that your target cost per lead will go down. Or you might have implemented a marketing automation strategy and found that your lead to sale ratio has halved, which would mean your target cpl will be much higher. In any case, I’d recommend checking back quarterly or at least bi-annually to make sure your target cost per lead is on point.
Start Generating Leads!
Now that you know what your target cost per lead should be, it’s time to start generating those leads! How to generate leads and which channels to use is for another post, but if you’re struggling with your current lead generation strategy you could always look at getting a free consultation from a reputable agency who specialise in lead generation (wink wink). Whether you work on a new strategy in house or engage an external party, your chances of success will be much higher now that you know what your target cost per lead should be.