What Is A Good Cost Per Lead?
All businesses tend to go about lead generation in slightly different ways, and quite often it’s the size of the company that dictates the approach. Small businesses and startups often utilise the business owners, especially in the early days, before they take more of a back seat and a managerial role when the company expands; while larger companies will have their own in-house new business teams tasked with identifying leads and then approaching them to find out whether or not there might be an opportunity to pitch for business.
Whichever approach you take it’s important to pay attention to key metrics, or KPIs, which ensure that you’re not investing too much time, or money (or both), into your lead generation process which eventually leads to losing money rather than winning business and growing.
One such metric which all businesses need to pay attention to is the cost per lead (often abbreviated to CPL in marketing or business speak.) This is a fairly universal metric used by companies looking to keep a tab on their marketing spend and ensure the ROI equation is measuring up. It’s understandable really. After all, if it’s costing a business £10,000 to generate a lead that results in a dead end or a £5,000 contract, you are hemorrhaging money rather than making it. You need to be right on top of your cost per lead data and if it’s not going in the right direction it’s time to start looking at your lead generation tactics and processes to establish what’s going wrong and what you need to do about it.
So what does a good cost per lead look like, and how do you set a figure that represents a good cost per lead versus a bad one? In this article we’ll take you through a few things to consider, and how to calculate a good CPL for your business.
Your Cost Per Lead is unique to your business
First and foremost, don’t go basing your cost per lead performance on that of a friend’s business, or a competitor as in reality, your own business’s cost per lead is all that matters. Don’t waste time worrying about how the business down the road is boasting that their cost per lead is less than yours. Each business and every situation is different, and one business might be willing to spend that little bit more on lead generation than another or perhaps targeting larger contracts, skewing their figures.
The value of a lead to your business always depends on three main factors:
What your conversion rate from a lead to a sale is
What your average order value from a sale is, and
What the average lifetime value of that customer will be
These three factors are different for every business based on what you sell, the likelihood of repeat business or customer retention, your price points and how good your salespeople are at converting.
Two businesses that look identical from the outside may need completely different cost per lead levels to thrive, as one may have a much lower conversion rate, or may not focus on repeat business from the customer in the future.
What is a good cost per lead?
As we’ve mentioned, no two businesses are alike, even in the same sector. Everyone offers something different and each has their own budget, method and strategy for lead generation.
What this means is that there is no solid figure that is viewed across the board as a good cost per lead. Simply, a good cost per lead is a number you can hit regularly through your sales and marketing efforts. It ensures that you can hit your sales targets, achieve your aims and hit both your growth and profit margins.
How to calculate your cost per lead
There are a few formulas that you can use to calculate your target cost per lead, and the one which you use will depend on the target profit margins on your business combined with your growth targets. When you have worked out your ideal cost per lead you can start to figure out your overall marketing budget for a campaign knowing exactly how much you have to spend on the campaign, or lead generation in general, before it starts negatively impacting the business.
The simplest way to calculate your cost per lead is to take your sales target, your average conversion rate and your average order value, and then apply the following formulas:
Target Revenue - Costs = Net Value
e.g. $5,000 - $1,000 = $4,000
Net Value - (Target Revenue x Target Profit Margin) = What you can afford to spend
e.g. $4,000 - ($5,000 x 20%) = $3,000
Number of Sales / Lead to Sale Conversion Rate = Number of leads you need to generate
e.g. 50 / 20% = 250
What You Can Afford to Spend / Number of Leads You Need to Generate = Cost Per Lead
e.g. $3,000 / 250 = £12
Of course, there is a quick and simple way of calculating what your cost per lead has been historically, and the easiest way to calculate your cost per lead is:
Total Campaign Spend / New Leads = Cost Per Lead
This will then give you a figure that you can work with. Does it seem higher or lower than you might like? If it’s costing you too much to generate new leads it’s time to re-evaluate your lead generation process so that you can start increasing your revenue as well as your new business opportunities; or if it’s lower than your target CPL you know that you have the potential - should you wish - to invest more into your marketing campaign or even go after higher-value new business opportunities that might cost that little bit more to pitch for.
How to calculate your cost per lead With Clarity Stack
If maths isn’t your strong point and you just want to know if a Clarity Stack subscription represents a good return on your investment resulting in a lower cost per lead, then you’re in luck.
With Clarity Stack your cost per lead is very easy to calculate: all you need to do is take your subscription cost, and divide it by the number of leads you receive across that period, and you’ve got your cost per lead – simple!
For example, if you’re on a quarterly package at $740, and you receive 72 leads across that period, your cost per lead would be $10.27. (The total campaign spend divided by the number of new leads in that period as outlined above).
When you compare this to the likes of Google AdWords, placements on Facebook ads, cold calling, and other methods, we’ll always be one of the best value lead generation services out there in terms of cost per lead.
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