When planning your marketing budget and strategy, do you start with the end goal in mind? Today, we want to talk specifically about calculating the value of a lead and how that knowledge will direct the rest of your energy and focus. Understanding the value of a lead for your organization provides the foundation on which your successful marketing campaigns build. This will simplify and even eliminate the ongoing discussions around the optimum budget and where to invest your team’s time and resources.
Follow these simple steps to calculate the value of a lead.
Step 1: Find Cost Per Lead
Let’s start by finding the average cost per lead for your organization.
Cost per lead can be an indicator of the success of your marketing efforts. This number projects lead value and other growth forecasts.
Cost-per-lead formula: Total cost to acquire leads ÷ Total leads acquired = Actual cost per lead
For example, if you spent $1,000 on marketing and received ten leads, your equation would be 1000 ÷ 10 = 100.
Cost to acquire leads = how much money you spend on marketing in your assessing time period. This can include any tools used and staff time.
Step 2: Find Lead Value
With that number, we can extrapolate the value.
Learning the lead value will give you a snapshot of how much money you are spending to generate gross revenue for your business.
Lead value formula: Total sales value (revenue) ÷ Total leads = Total lead value
Example: In the time period you are analyzing, you received $15,000 in revenue. Your lead volume was 10. So, your equation is: 15000 ÷ 10 = 1500
Tip: Not all leads are created equal.
One variable that often drives lead value is the source of the lead. That said, calculating lead value by source can show which sources produce the best leads. Once you know which sources create the best/ worst leads, you can make budgeting decisions.
If your lead value is lower than your cost per lead, then you have a problem. This means you are spending more to attract business than they are spending with you. Therefore, it costs you money to work for that client. If this is your finding – first double-check your math – but then re-evaluate your marketing plan and the customers you are attracting with it.
There is no right or wrong number here – we worked with one client that was thrilled with a $250 cost per lead structure as they offer a high-investment product with a value close to 6-figures. Likewise, we have worked with retailers that maintained a $6 cost per lead requirement.
Step 3: Find Lead-to-Sale Conversion Rate
Next, you’ll use the information you gained to find your conversion rate. Your conversion rate will show you how likely it is that a lead will turn into a sale.
Lead-to-sale conversion rate formula: Converted Leads ÷ Total Lead Volume = Lead-to-sale conversion rate
Example: If 3 of the 10 leads agreed to do business with your company, the equation is 3 ÷ 10 = .30 (30%)
The higher this percentage is, the better.
Tip: Again, not all leads are created equal. Find the lead-to-sale rate with all the sources you use to generate leads.
Once you know which sources are most/ least likely to generate leads that convert, you can make budgeting decisions for the future. Some sources are needed to fill the top of your sales funnel and will, by default, have a much higher cost to conversion.
How can you use these metrics to make business decisions?
With this valuable information, we can use the data points to make smarter business decisions.
- Set your marketing budget based on the number of leads you need to generate to achieve your sales goals.
- If your goal is revenue-based, use the Lead Value Formula (step 2 above) to calculate how much you need to invest to achieve your goal.
- If you need to make $100,000 in New Business sales, and your lead value is $1,750, you need to invest $57,200 into lead-generating marketing efforts.
- Evaluate and rank lead sources
- Increase, reduce budgets or even eliminate tactics that are not generating leads that convert or that are not assisting in a conversion.
- Use the value of a lead metric as an internal benchmark for your marketing team. Compare month-over-month, quarter-over-quarter, or year-over-year the quality of the leads you are generating.
- The higher the average revenue generated per lead, the more efficient your strategy becomes
If you could use further help obtaining qualified leads, we are eager to help your business grow! Contact a KeyMedia Solutions digital expert today!