Maximum Cost per Lead - How to Get Started.
Before we dive into determining the maximum cost per lead that you're willing to invest, let's first examine your current cost per lead and understand the distinction between a regular lead and a qualified lead.
What is a lead?
A lead is like a golden opportunity for your business - it's a potential customer who has shown a genuine interest or intention to purchase your products or services. Imagine someone who willingly shares their contact information with you through a download or contact form. So, it's important to note that not every visitor to your website can be considered a lead - duh.
Leads vs. Qualified leads
Not all leads are created equal or exhibit the same level of interest in your business solutions. A qualified lead is someone who meets specific criteria, such as fitting into one of your target customer segments and having the necessary budget. Determining the criteria to qualify leads requires collaboration between your sales and marketing teams to identify what truly makes a lead of high quality.
How to use the MakeWaves lead qualification framework.
Determining qualified leads is crucial for the success of your organization. While it's great to have an increase in the number of leads, if your sales team doesn't see them as valuable, it won't lead to any meaningful growth. So, how exactly do you calculate your current cost per lead?
Well, the calculation is actually quite simple:
Total Cost per Lead = Total Cost / # Total Number of Leads
You can look at the cost per lead at different levels. Namely at the level of a channel, campaign or your bottomline.
- CPL per channel: Total Google Ads cost / Total number of leads from Google Ads
- CPL per campaign: Cost of campaign 1 / Number of leads from campaign 1
- CPL bottomline: Total Marketing Cost / Total number of leads
To do this, you do need historical data within a certain time period of certain metrics such as:
- Revenue achieved through new business
- Total costs (ad spend, internal costs and external costs)
- Number of leads and sales
- ...
However, knowing your current cost per lead doesn't give you any insight into the maximum amount you're willing to invest in each lead. So, let's delve into how you can determine your maximum cost per lead in the following section.
What is your maximum cost per lead?
Determining your maximum cost per lead requires access to sales and marketing data, as it is crucial in understanding how much you are willing to invest in acquiring a lead. Without these insights, it becomes challenging to accurately determine the maximum amount you are willing to pay for a lead.
To simplify this process, MakeWaves has developed a user-friendly Max Cost per Lead Calculator that allows you to input your own data and calculate your maximum cost per lead. These steps eliminate the guesswork and provides you with a clear understanding of your lead acquisition costs.
By utilizing this calculation, you can make informed decisions about your marketing budget and allocate resources effectively. Don't let the lack of historical data hinder your ability to determine your maximum cost per lead. Take advantage of the MakeWaves Max Cost per Lead Calculation steps and optimize your lead generation strategy today.
STEP 1 - Calculate the sales value per new lead and new customer
-> Average sales value per customer or lead = Sales via New Business / #Customers or #Leads
example: €1,000,000 turnover / 10 new customers = Avg. sales value per customer of €100,000
STEP 2 - Calculate your lead-to-sale ratio.
-> Lead-to-Sale Ratio = # new customers / # new leads
For example: 10/100 = 10%
STEP 3 - Calculate the total marketing and sales cost you incur
-> To. Acquisition Cost = Ad Spend + Internal Marketing/Sales Cost + External Marketing/Sales Cost.
For example: €24,000 + €201,000 + €30,000 = €255,000 total acquisition cost.
Ad Spend = your marketing budget used to advertise. Both online and offline.
Internal costs = for example the salary cost of your marketeers and/or sales people.
External costs = for example the cost of an agency or other external party.
STEP 4 - Calculate your total 'profit' after marketing cost
-> 'Profit after marketing' = Sales via New Business - total acquisition cost
For example: €1,000,000 - €255,000 = €745,000
What is the reason behind this approach?
To accurately determine the maximum cost per lead in your marketing efforts, it's crucial to view your sales and marketing as a unified force. Both departments have the shared objective of driving new business and impacting your overall profitability.
Determining the maximum cost per lead or sale is greatly influenced by the average value that a new customer brings to your organization. This value is calculated based on the total revenue generated by your customers.
Taking into consideration the entire cost picture, including marketing expenses, internal resources, and external parties involved, allows you to make well-informed decisions about the maximum cost per lead. This comprehensive approach ensures that you are considering all the factors that contribute to generating new customers and ultimately impacting your bottom line.
So why wouldn't you consider the overall investment required to acquire a customer?
Focusing solely on your advertising spend would provide an incomplete perspective, as it fails to consider the entire cost involved in acquiring new leads and customers. Your own employees, resources, and external partners that you enlist to attract leads and customers also come at a cost. Therefore, it is our belief that it is crucial to take these factors into account when determining the maximum cost per lead.
STEP 5 - Calculate your average acquisition profit per new customer
-> Average acquisition profit per new customer = Profit after marketing / # of new customers
For example: €745,000 / 10 = €74,500
STEP 6 - What % of your Average acquisition profit per new customer are you willing to pay to convert a lead to sale?
Decide what % you are willing to invest in bringing in a new customer.
For example: 20% then your maximum cost per sale is €14,900
STEP 7 - Calculate your maximum target cost per lead
If you know that your lead-to-sale ratio is 10%, then you know that your maximum cost per lead in this case is €1,490.
Because -> €14,900 x 10% = €1,490
Et voilà... You've just calculated your maximum cost per lead, taking into account the total acquisition cost and the profit margin you retain from that.
Bonus: What if you don't have daTA?
In case you find yourself without access to the necessary data or insights, fear not! There is an alternative method to calculate your cost per lead and gauge whether it should increase or decrease.
Let's see:
STEP 1 - Calculate your average Cost per Click
-> Ad Spend / Number of Clicks
For example: €10,000 / 10,000 clicks = 1 euro per click
STEP 2 - Calculate your lead conversion rate.
-> Number of clicks / Number of lead conversions
For example: 10,000 clicks / 100 lead conversions = 1%
STEP 3 - Calculate your cost per lead
-> CPC / Conversion rate
For example: 1 / 0.01 = €100 cost per lead.
If you know that the margin of your product is €800, then you know your cost per lead is about right.
But since you don't know this way how many leads on average proceed to purchase, you can't really draw many conclusions about this metric. Whether it is good or bad, in this case, depends on the sales conversion rate.