Most business owners, CEOs, and executives know that lead generation is the lifeblood of their company. However, many don't know the real cost of each lead; hence they cannot distinguish between a profitable and an unprofitable lead generating channel.
Most businesses do not have unlimited funds, so your lead-generating campaign needs to be measurable, predictable, and profitable (self-sustainable).
Why Knowing Your CPL Is Important?
Most business leaders agree that sales have the most significant impact on their business, so spending hours tracking and analyzing final sales numbers are well worth the effort. However, a similar level of attention is not dedicated to lead generation.
When was the last time you reviewed and analyzed your lead generation strategy? Is it still profitable? Are there better (more effective) alternatives? How does one lead-generating channel compare to another? These are all questions that cannot be answered without understanding your cost per lead (CPL).
Small businesses should pay special attention to CPL because they only utilize a handful of channels to generate leads; hence they cannot afford to fund poorly performing and unprofitable campaigns.
Simply put, if you do not know how much you are paying per lead, you are currently wasting precious resources (money, time, and people). More specifically, you are likely funding at least one (possibly more) poorly performing and unprofitable lead generation campaigns.
How To Calculate Your Cost Per Lead (CPL)
If you are not familiar with the term, CPL is the total cost of attracting one lead. For example, if we spent $5,000 to attract 250 leads, then your CPL is $20.
As you can see, the formula is very simple - you take the total cost of a campaign and divide it by the number of leads you attracted to your business. That being said, calculating the total cost is anything but simple. For example, should the total cost include some or all resources used?
While there are some unique cases where you should include every resource used, for most companies, it is counterproductive. For example, you shouldn't add a percentage of your website's hosting cost to your Google AdWords campaign. Of course, your Ad will need a landing page, but your website has other goals as well.
When calculating the lead generation cost, we suggest you only include resources that are truly unique to the campaign. Otherwise, it will be almost impossible to compare multiple campaigns.
For example, if we calculated the total lead cost for the Google AdWords campaign, we would typically include:
- Cost of the Ad
- Cost of the landing page (if it's specific to our Ad)
- Professional help (e.g., contractors, developers, designers, digital agency, etc.)
- Cost of tools/software that we need to manage and optimize the Ad
E.g. $1,200 (Ad spend) + $300 (landing page implementation) + $50 (A/B tool) = $1,550
NOTE: You can certainly include internal costs, but we only recommend you do so if you use advanced time and resource tracking tools. For example, if you know exactly how many hours your employees spent on a particular campaign, and which specific tools they used.
Now that we covered the cost let's look at leads. What exactly is a lead? A lead is not a website visitor, Twitter followers, or a LinkedIn connection. In other words, just because someone showed interest in your business or product, it doesn't automatically make them a lead.
A real lead is willing to exchange information with you so that you can continue the conversation.
For example, when you collect information via a contact form, whitepaper download, newsletter signup, webinar, quote request, free-trial, evaluation, estimate request, etc.
As previously mentioned, "showing interest" does not automatically qualify you as a lead. A lead needs to take the next step - provide you with enough information to continue the conversion (e.g., email address or a phone number).
Let's assume that our AdWords campaign attracted 25 leads. In other words, 25 potential customers discovered our product via Google AdWords. They clicked on the Ad, read our landing page and give us their contact information.
Campaign Cost: $1,200 (Google AdWords spend) + $300 (landing page implementation) + $50 (A/B tool) = $1,550
Cost Per Lead (CPL): $1,550 (AdWords campaign) / 25 (number of leads) = $62.
At this point, it should be evident that calculating CPL is simple, as long as you have clear boundaries around "total cost" and what makes someone a "real lead."
How Much Should You Pay For A Lead?
As you can imagine, the cost per lead (CPL) varies significantly from industry to industry and from business to business. For example, we worked on lead generation strategies that cost $3 per lead, but also strategies that cost $250 per lead.
For example, a small online store with an average transaction of $10 has a very different cost per lead limit when compared to an enterprise software organization with an average sale of $100,000.
One of the best ways to determine how much you should be paying per lead is to know your Customer Lifetime Value (CLV). Customer Lifetime Value is the financial value of your customer during their entire relationship with your business. For example, if your average customer stays loyal to you for two years and spends $500 during these two years, then your CLV is $500. And if your profit margin is 20%, then your cost per lead should not exceed $100.
However, there are some exceptions to this rule. For example, to capture market share quickly, you may need to run some unprofitable campaigns (e.g., Uber). Nevertheless, in most cases, your lead generation campaigns need to be profitable (self-sustainable).
All online lead generation campaigns leave an extensive digital footprint, so it's relatively easy to calculate CPL. Therefore, you should know your cost per lead (CPL) for all your lead generation channels - email marketing, pay-per-click advertising, search engine optimization (SEO), social media, and so on.
Lead generation is the lifeblood of your company, so you must have a clear picture of which campaigns are profitable and which are not. And now that you know how to calculate CPL, there are no excuses.
Related: White Paper - Lead Generation
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