Determining Target Cost Per Lead

How much is a lead worth? This is a question I get almost every day. The other question I get is, “How much is a lead going to cost me.” But I think that’s really irrelevant until you know what the lead is worth.

It’s actually very easy to figure out. I’ll just run through the math really quick. You take a business and you say, “What is your average customer value?”

Let’s give an example of business‑to‑business sale. Let’s say they a sell a $100,000 annual contract, or something like that. That’s the top‑line revenue. Then, you want to discount that and take out the cost of goods sold, and take the gross profit. That’s what’s left over.

Let’s just say its half, so $50,000 of gross profit is what a customer relationship is worth. There’s your number. That’s what we’re looking to get to. How do I make sure that I make that $50,000 back?

Then we look at what percentage of people do I close? What percentage of leads come in the door that actually signed a $100,000 contract and I make $50,000 on?

Just for easy numbers, let’s say it’s 10%. That leaves us with $5,000. A lead in that situation is worth $5,000. Now, that would mean that that lead would take 100% of your gross profit, so it’s not a good buy.

We usually discount that by half, and then you’d be doubling your money. If you want to be conservative, you discount it by half again because you’re thinking, “We want to make sure that we’re really getting 1 out of 10 quality leads.”

A lead in this scenario that I just gave would be worth $1,250 up to $2,500.

When you’re doing your numbers, they’re probably not as simple as the ones I just laid out. Look at what your customer value is. What’s your cost of goods sold? What percentage does your sales team actually close?

Then, discount it so you make a profit. Ultimately, you can come up with a fairly easy number that will inform you, “If I can get a lead for this amount of money, it’s a good deal.”

Then you can build all your marketing campaigns around that. You can look at your organic campaign. You can look at your paid campaign. You can look at your print ads. You can track leads from TV or radio. Examine all of your different funnels.

Make sure that you’re hitting or exceeding that target cost per lead that you’ve set for yourself in advance.

This is one of my favorite exercises to do with a customer. I love to help them develop that target cost per lead, and really start building strategies around that. Once you do that, you can harness the power of your business’ engine because you know what makes it tick.

If you’d like some help coming up with your target cost per lead or executing on the campaigns once you go through the exercise, I’d love to be a partner for you and a resource to help grow your business and develop that engine.