A question that comes up constantly for us is “What lead cost/CPA/CPL should I have?”; and since the answer varies greatly on lead type/quality, sales method and industry we decided to condense it into something dubbed the Lead Cost Formula, complete with a lead cost calculator(end of post for the calculator).
Now a few disclaimers: 1) some of the variables are highly subjective 2) this is only our opinion (obviously biased towards internet leads and online advertising) and 3) if this idea exists in a different form or version somewhere else, this is only our perspective on it. But regardless if the numbers involved are concrete, especially for customer value, the following should provide an excellent idea of not only what kind of lead cost is reasonable, but also the performance that your sales and operation teams will need to achieve to turn a profit. Furthermore, this calculation can apply to any business B2B, B2C and in any industry so long that the sales funnel can be defined. We challenge you to find an exception.
Lead Cost Formula
Step 1. Let’s begin by defining our terms:
- Lifetime Customer Value: Net value of your average Customer
- Revenue Rate: Percentage of Deals that turn into Customers
- Turnover Rate: Percentage of Leads that turn into Deals
- Lead: an online request for information, inbound phone call, or other prospect
- Sales Funnel: The process of transforming marketing, through sales, into customers and revenue.
Let’s ignore how the leads are generated for the moment. It should be very clear that the Turnover Rate depends heavily upon both the quality of your leads AND sales staff. The Revenue Rate depends heavily on both the efficiency of your Sales process AND your Operations process. For simplification we lump together items such as invoicing, qualification etc into sales, and retention, Q&A, fulfillment etc into Operations. As an advertising and marketing agency, we are often in a difficult position trying to diagnose where revenue issues come from in the Sales Funnel. For example, it is very possible to have good leads dying on the vine in a bad sales process, but it is equally possible to have a killer sales team struggling with low quality leads. We have even seen good leads, good salespeople but awful operations management killing deals.
But optimizing sales and operations is the topic of other articles. We’ll assume that the focus is external- and try to answer what is the right lead cost for your company today. Try our Lead Cost Formula calculator below to find out how much you should be paying for your leads.
Edit: I had a nicely formatted little script that calculated the lead cost on the fly. However, WordPress is making a gigantic mess of both the Jquery and PHP solutions to implement it. I will have to find a way to upload this later, but for now:
Lead Cost Formula:
Max Lead Cost = (Customer Value ) * (Revenue Rate) * (Turnover Rate)