Leads cost money, but exactly how much should you be spending?
The more complex your marketing plan and strategy, the more complex your calculation for cost per lead (CPL) will be. But it’s an important KPI (key performance indicator) you need to keep an eye on. When you’re paying a fixed sum per lead, you want leads of quality that will bring value back into your business- here’s what you need to know…
It can be worked out by taking the total amount you spend on marketing (or an individual tactic) and dividing it by the number of leads that were generated.
The CPL figure can be useful for determining how effective certain campaigns are performing, or how well your overall marketing plan is doing in comparison to previous years. It can also help you see how well your various lead generationchannels are performing.
As with any statistical analysis, you need to understand the story that the numbers are telling you. Knowing what you are looking at, what it all means and how best to use it for future decision making, are all important questions.
The most likely use for CPL will be to see how well your various lead generation tactics are performing and if they’re worth doing. The tricky part lies in getting accurate data to work with in the first place.
Take the cost of your marketing team for example. Unless you make them track their activity to the minute (and even that has its problems), it can be difficult to obtain exactly how much time has been spent on various campaigns.
When dividing the cost of marketing materials, it can often be equally unclear, as a specific piece of content may be used across different channels and campaigns. That means determining the cost per lead will depend a lot on how your company is structured and how well you track individual costs.
The more accurate your data is and the more segmented, the easier it will become to get relevant information for your KPI reporting.
In order to get to the bottom of it, you need to:
- Determine what you would like to know
- Look at the data you can obtain, how detailed it is and how useful
- If the previous two points aren’t clear cut, then you may have to decide on a compromise between what you want to know and what you can actually find out
- A final step may be that you need to collect more useful data
To use a cost per lead value as a valid KPI, you need to have some benchmarks in place to compare it to.
If you have data of your own going years back, then go ahead and dive in. This is the best possible source of information, as it’s your own data and you can determine its validity easily.
Comparing the same data sets for different time periods is going to be useful for any kind of KPI. If you have the same data source and use the same calculation then you can compare CPL, such as for every January over the last 5 years. This will not only be accurate but you’ll clearly be able to see any trends and will know exactly what happened to influence the number.
But what can you do if you don’t have your own data to wade through?
Unless today is your first day in business, you will have some sort of data. Use that as your starting point. Look at the quality of the data. Will it be able to tell you the full story moving forward?
If you only have three months’ worth, then compare those three months. Just keep in mind the small timeframe and avoid basing too many big decisions on it.
If you have a couple of years’ worth and have recently started using inbound marketing, then find the data that will help you understand the cost per lead, in comparison to what you have done before.
Do some research and see if you can find useful information from outside your own business too, either from within your industry, demographic, or another vertical.
Different parts of your cost per lead calculation
When looking at the numbers, you need to understand what may influence each of the various numbers. That’s because the next stage is about looking at ways to improve on them, so you can improve your cost per lead figure.
You can categorize these broadly as:
- Attraction phase: the cost of getting any lead into your sales funnel
- Qualification phase: the cost of finding out whether it is a good lead or not
- Selling phase: the cost of converting opportunities into closed sales
These categories can be particularly useful when you are comparing traditional sales methods with new methods.
The number and quality of leads coming in will vary greatly, depending on the method used to generate them. If you are buying highly qualified leads from a vendor, they will come with a hefty price tag. If you run your own lead generationmachine, using inbound/content marketing tools and tactics, then you can separate the two in terms of reporting cost. That will give you a clearer picture of what costs more, brings in better leads and is ultimately the best option.
Again, in this scenario, if you look at how costs develop in the various phases, you’ll get some interesting insights. Usually, the cost of qualifying a lead generated online before passing it over to sales, will run quite high. But the selling phase is then likely to be much quicker and more efficient, simply because the leads are hotter. (Or not, see what the numbers tell you).
Comparing apples with apples
A word of caution, especially when thinking about numbers, KPIs and cost comparisons – the bigger your organization, the more likely it is that you have greater resources available for data gathering and reporting. It’s only natural. But if you aren’t there yet and you’re currently setting up systems, be mindful that you always need to compare apples with apples.
A good question to ask of every dataset is: does this data influence any other numbers in my overall analysis? This question should help you avoid duplication, which is one of the biggest culprits of misinterpretation.
How deep do you want to go?
When analyzing data, one thing will naturally lead to the next. Marketing might be thrilled to have created thousands of leads at a low cost, but the quality may not be very good.
A lot of resources may be needed to wade through the leads to toss out the many bad ones. Meaning that in the end, those leads may not be so cheap after all.
Before changing tactics impacting the cost of a lead
Take a look at your reporting needs. Determine what data you will need upfront to be able to analyze the effectiveness of your planned changes.
As an example, you may be wondering whether it’s worth investing in Lead Forensics software, which helps businesses to identify anonymous website visitors and turn them into leads and opportunities.
The cost of our software will form a part of your cost per lead analysis. You, therefore, need to make sure you include it in your reporting, in such a way that it will give you the information you need.
Knowing which leads converted via the software is key to this, so make sure you know from the beginning how you will report on where your clients are coming from.
The interesting part in this scenario is that using our software can help you bring down the cost of the qualification process, as visitors to your website aren’t just arbitrary leads you’ve picked up somewhere. They will have clicked on a link and come through to your website, an action that is likely saying “this interests me”. Of course, people visit websites for all sorts of reasons and not all visitors will be potential leads, but they’re more likely to be than a random selection.
Now your options are to set up your website in such a way that these visitors will convert and so become known to you. Or in the case of Lead Forensics users, you’ll be able to see who they are straightaway (without them converting) and if they’re a potential lead/client, can pick up the phone right away. That gets rids of the need for long nurturing campaigns.
When you look to compare the cost per lead of using our software, versus not doing so, you need to decide upfront which numbers will give you the most useful information. Which costs need to be allocated to what, in order to deliver the correct data?
Unfortunately, there is no clear-cut formula here as it depends on lots of different variables, but you get the idea.
In summary, knowing the cost of a lead is important for every business. To be able to make correct assumptions and informed decisions that impact the future, make sure you understand the data you are interpreting and know all the implications.
To find the answer to the question ‘how much should a lead cost?’ you need to find out what it’s worth to you. Your direct competitor may have a very different number (if you were to know it) but they may also be set up very differently.
If you use benchmarks outside of your own business, then always do so with caution and make sure your internal numbers remain top notch.