What Cost Per Lead Should I Target?
Cost Per Lead (or CPL) is a common metric marketing agencies and marketing directors use to measure and report their results. But what exactly does that number mean? What is a good cost per lead benchmark for your industry?, How much can you afford to pay per lead? This article will help you and your marketing team determine your cost per lead and provide you with a framework to calculate a CPL that will support your business goals.
Cost Per Lead Definition
It’s very important to make sure everyone is on the same page when discussing your cost per lead metrics. What your salespeople consider a lead and what your marketing team reports as one may be materially different. For example, your sales team might consider a lead a call or contact form submission from an individual who appears to be qualified to buy your products or services. Conversely, your marketing agency might report all contact forms submissions and phone calls as leads, ignoring whether they are qualified. Because some contacts likely contain duplicate leads or inquiries that aren’t related to sales, the number of leads the marketing team reports will differ from the number of leads the sales team thinks it’s getting. What’s most important is to understand these distinctions and define cost per lead the same way for reporting purposes. If marketing delivered five leads, and the sales team defined two as qualified, you need to choose which to count as leads. Most organizations will choose to use the marketing team’s number because it is less subjective.
Why Is CPL Important?
The cost per lead is one of the two numbers you need to calculate your marketing cost of sale. For example, if your cost per lead is $100, and you need five leads to make a sale, your cost per sale will be $100 x 5, or $500. If your marketing team generated 5 leads, you would expect to make 1 sale. Let’s suppose you decide to only count qualified leads. Your sales team reports two qualified leads, but they will close 50% of them. In this case, the cost per lead is $250, but the cost per sale remains the same – $500.
Without knowing your cost per lead and conversion rate, it’s hard to make good decisions about how much you should spend on marketing efforts. The conversion rate will be higher for the more qualified leads, so you will end up with the same cost per sale regardless of how you define leads. Just remember to track these numbers consistently over time.
Tracking this information, you will understand how an increase or decrease in your lead flow might affect sales and be able to model and forecast the impact of raising your advertising budget. Using the example above, if you want to make 2 sales from your inbound marketing campaigns, you will need to find ways to generate 5 more leads of similar quality and will need to double your marketing budget to $1000.
Cost Per Lead Example
How much you can afford to spend to acquire your customer depends on how much your products and services cost and the lifetime value of a customer. For example, if you are selling a product that costs $500 and there are no additional opportunities to sell anything to that customer, you can’t afford to spend $100 per lead if one out of five of your leads turns into a sale. In this case, you need to look for opportunities that may result in lower cost leads. However, if you are selling a product for $10,000 that only costs you $5000 to make and deliver, chances are you can afford to spend more than $500 to get the sale. If you could afford $1000, then you could spend up to $200 per lead, assuming that one out of five of these leads continued to convert. In this case, you might look for opportunities to acquire more leads with a cost per lead of up to $200.
Cost Per Lead Formula
How much you can afford to pay per lead will depend on the lifetime sales value of your customers, how much it costs to deliver products and services, what other costs you incur to sell and service the customer, and your target profit margin. Advanced cost per lead calculators would also take into consideration inflation and additional sales opportunities you might have through referrals. But to keep it simple, use the cost per lead formula below:
Cost Per Lead = (Expected Total Customer Sales – Cost of Goods Sold – Sales Costs – (Expected Total Customer Sales*Profit Margin))*Conversion Rate
Let’s suppose you expect to sell the average customer $10,000 of products over the lifetime of your relationship, and your Cost of Goods Sold is $5000, other sales and administrative costs associated with the sale are $2000, your target profit margin is 20%, and you expect to close 20% of your leads. You could afford $200 per lead in this scenario.
$200 = ($10,000-$5000-$2000-($10,000*.2))*.2
Automatically calculate your cost per lead in this cost per lead calculator below.
Choosing Advertising Platforms with the Best CPL
Assuming you have the cash flow to support marketing investments and these assumptions are correct, you should look for lead generation opportunities that will continue to close at a rate of 20% with a cost per sale of $1000 or less. If you can find sources that close 25% of the time, you can afford to pay $250 per lead. If they only close 10% of the time, you will need 10 leads and will only be able to afford $100 per lead.
Tracking Cost Per Lead
Keeping track of cost per lead and conversion rates across platforms can be done manually, but it’s time consuming and prone to errors. Marketing analytics software like Jess lets you bring all of your data together, so you can identify lead source, qualify leads, and calculate cost per lead all in one place. With easy to read marketing reports, you can see at a glance where you’re overspending or getting the best ROI from your marketing efforts.
Not sure how to calculate your cost per lead? Contact us and we will walk you through it!
Note: image used with this blog post was created by Jorge Franganillo is licensed under the Creative Commons Attribution 2.0 license.
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