Leads are vital to your business. They are the lifeblood that keeps your business afloat. While organic leads are always preferable, many companies supplement those through other means. You need to deliver quality leads to your sales team at an affordable rate so, what should you pay for a lead?
First, let’s recap what a lead is: a person who has a problem or need that your company can address. They may have even expressed some interest in the products or services that your company offers. For more in depth information, see our blog What is Lead Generation which defines what exactly a lead is and why lead generation is important.
There are many formulas out there, quite a number of them are confusing and frustrating. The first value we’ll look at is your marketing expenses. Are you advertising in print, mailers, Pay-Per-Click, etc? All of the items that you’ve spent money on to draw in potential clients to your business (leads) are a part of your marketing expenses. For the following example, we’ll say that your marketing expenses totaled $1,000 resulting in 10 leads.
Now that we’ve assessed what you’re spending on marketing, let’s look at how many leads you’ve received from your marketing efforts. For this example, we’ll say you’ve received 10 leads.
Cost Per Lead Formula: Total amount spent on marketing & advertising ÷ Total number of leads generated = Actual cost per lead
In our example, the equation would look like this: 1,000 ÷ 10 = 100. So, your cost per lead would be $100 per lead.
Let’s say you’ve been using SaleGig’s platform to pay for referrals/leads from trusted professionals. How do you know if you’re paying the right amount for the lead? The Cost Per Lead equation should always be re-evaluated periodically because the amount you spend to acquire a lead as well as the amount of leads you bring in will change. However, for now let’s talk about determining the value of a lead.
The value of the lead, simply put, is how much revenue each lead is bringing to your company. After all, you want to make sure that you’re making a worthy investment. For this equation, we’ll look at the total sales value which is the total amount of revenue brought in during the specified time period. Let’s say you brought in $20,000 for our example. We’ll keep it at 10 leads as determined in our previous equation.
Lead Value Formula: Total sales during specified period ÷ Total number of leads = lead value
Our equation based on the example would be this: $20,000 ÷ 10 = $2,000. So, each lead has brought in $2,000 in business and their lead value would therefore be $2,000. In this example, your $1000 investment has given a 200% return.
Using the cost per lead formula above is a great starting place, but there is still one piece missing. Many people ask, what is the most you should spend on a lead? To maximize lead input, you should be willing to spend up to 100% of the gross profit. This investment can reap later rewards in repeat business, word-of-mouth referrals, and increased motivation from your lead connector.
Gross Profit Formula: Price of Product x Gross Margin = Gross Profit
Example: If the service or product you’re offering is valued at $500, and you have a gross margin of 40%, your gross profit would equal $200 (your expenses for delivering the goods are $300). So, the maximum you should pay for a lead would be your gross profit, and in this example, this would equal $200.
There is no one size fits all for what you should be paying for a lead, and expectations can vary greatly by industries and operating costs. Knowing your gross profit (the most you should be willing to spend) and your cost per lead using the formulas above can set you up for success in lead generation, both in the SalesGig platform and beyond.
SalesGig creates seamless lead generation with limitless opportunities by connecting companies with referral partners. Sign up today and get connected.
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