Lead generation is crucial to businesses, but figuring out the value of a lead can often be confusing. Big box companies boast about their proven strategy offering a higher conversion rate. Your return on investment (ROI) determined that was a lie. So, what should you be paying for a lead? Well, before we get there, let's cover some basics.
A lead is a someone who has expressed interest in the product(s) or services that your company is offering.
Lead generation is the process of how you get a lead to express interest in your company. Some examples of lead generation include the use of landing pages, running ads on social media (even a simple post on social media), really anything that marketers and businesses can use to capture a person's contact information.
A core concept of digital marketing, the sales funnel is a model which maps a buyers journey to becoming a paid customer. It all starts by building awareness which then piques the potential customer's interest, which then leads to the decision phase. The decision phase is where a company encourages the potential customer to make a decision. The last portion of the sales funnel is the action phase in which the action is normally the purchase of the goods or services. So, how do you get a potential customer (a sales lead) to begin their journey through the sales funnel so your company can reach it's sales goal? That is done through lead generation.
Marketing and advertising is done with the intent of attracting leads, otherwise what's the point of spending the money? The leads you're advertising to could new clients, reeling back in former customers, marketing to your current customers to continue along the path of repeat business or even all of the above.
With that being said, what are you spending per month on marketing and advertising? The first step to determining the value of a lead is to figure out your current cost per lead by looking at what you're currently spending. How much you spend on marketing and advertising each month may fluctuate , especially during the COVID-19 (novel coronavirus) pandemic. Even without a pandemic, it's best to regularly look at your budget and re-evaluate how much you should be spending per lead.
To help with calculating lead value, you'll want to look at your current spend/budget for the following:
You may also want to take a look at your Google Analytics to determine what your lead current conversion rate is as well. Now that you've gathered all the necessary information, let's look at how you calculate lead value.
You've got a list of numbers in front of you on what you spent during a certain period on marketing and advertising. During that same time frame you'll need to identify how many leads your company received, even if they didn't convert to a paying customer.
Cost Per Lead (CPL) Formula: Total amount spent on marketing and advertising / the total number of leads = Actual Cost Per Lead
Based on the formula, if we were spending $1,000 per month on marketing and advertising and during that month we generated 10 total leads, for example, our formula would look like this: $1,000/10 = $100. This means our Cost Per Lead is $100 per lead.
You should periodically review your cost per lead as the number may fluctuate based on things like the economy and the COVID-19 (novel coronavirus) pandemic.
Let's say you're using the SalesGig platform and don't know how much you should be spending per lead. Keeping in mind that things like COVID-19 or even seasonal trends may cause that number to fluctuate and the CPL should be reviewed periodically to ensure accuracy. The next number we want to calculate is the lead value. If it costs you $100 per lead and you're only drawing in $50 in profit, are you really meeting your sales goal?
Lead Value Formula: Total sales during specified period ÷ Total number of leads = lead value
If out total sales during the same period as our last example was $20,000 and we had 10 total leads, that means the lead value is $2,000 and a pretty nice conversion rate. Your lead value is an important factor in determining what you should be spending and how you should gear your marketing efforts.
Now you've identified your CPL and the value of the lead, but what is the maximum you should be spending on a lead? The answer is pretty standard no matter who you ask - you should be willing to pay up to 100 percent of the gross profit realizing that you can benefit further through word of mouth referrals and repeat business.
Gross Profit Formula: Price of Product x Gross Margin = Gross Profit
For instance, 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 answer on regarding the value of leads. As you determine (and re-evaluate periodically) you'll want to keep all of this in mind. Your conversion rate, lead value, CPL will all change with the economy. If you offer a product or service that is seasonal, you'll notice a drop or spike in the number of leads you receive during that period and will once again need to re-evaluate your conversion rate, lead value, etc. to make sure you're still on target with the number you should be spending for leads through your marketing efforts.
Your marketing team can help you determine the value of your leads and whether your leads are bringing enough profit and value to your company. If you need help providing qualified sales leads to your sales team, SalesGig can help. Our platform connects companies with referral partners to provide warm introductions to qualified leads. Referrals are the highest converting form of lead generation with the highest lifetime value. Join the SalesGig network today and meet your new referral partner.
SalesGig creates seamless lead generation with limitless opportunities by connecting companies with referral partners. Sign up today and get connected.
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