Calculating Lead Cost: How Much Does Your Organization Spend to Generate A Lead?
In a recent survey, Lead Generation Poses Biggest Challenge for B2Bs, by BtoB Magazine, “generating more leads” was cited by B2B marketers as their number one challenge. There are many articles out there touting ways to quickly generate more leads – bur fewer sources that talk about what really matters: the cost of the leads you generate.
Lead cost varies widely from industry-to-industry. According Madison Logic's infographic on a cost of a lead, if you’re looking to reach marketing people you should expect to spend an average of $35 per contact. But in the healthcare sector the average lead cost is $65 a person.
So what is your cost per lead? If you don’t know, read on and learn how to calculate it.
Calculating the cost of a lead is easy; it’s the total cost of your lead generation program divided by the number of leads generated. For this first example, let’s use an imaginary company called Hooli and focus on their average lead cost over the course of a single year.
The first number is relatively easy to come to. Wikipedia defines lead generation as “the initiation of consumer interest or inquiry into products or services of a business.” How many people engaged with Hooli to discuss purchasing their products and services? That would be the number of leads generated.
The Different Channels of Lead Cost
Now let’s talk about costs. There are a few different type of costs you’ll want to consider (not all are applicable to every lead generation channel):
- Media Placement/Distribution
- Campaign Creative
Almost every lead generation campaign has some type of media placement or distribution cost associated with it. For instance:
- if you’re using an in-house email list to generate leads you are likely paying your email marketing service provider on the basis of number of emails sent or number of contacts in your database
- If you’re doing search engine marketing, you’ll likely be paying a certain amount for each click – the total expense you incur for all clicks would be your cost here
Telemarketing and/or Physical Address List(s)
Often times you’ll be purchasing or renting a list for your acquisition efforts; this is another cost that needs to be included in your calculation. For instance:
- If you’re renting a third-party list to obtain addresses for a direct marketing campaign, you’ll have the cost of the list as well as the postage cost of the send to take into account
- You might also rent a telemarketing list
I didn't talk about renting or purchasing an email list here because using a purchased email list is NOT a good idea. Most, if not all, reputable ESPs (including Pinpointe) have a strict policy that only permits sending emails to permission-based contacts. That means no purchased lists, association directories, traded lists or shopping lists – period! And if you send campaigns to Canadian-based emails from a purchased list, you risk getting a $10 million dollar fine by violating the Canadian Anti-Spam Law (CASL).
This most often comes into play with telemarketing, where you are paying people to make outbound phone calls on your behalf. It can also come into play however, if you hire an agency to assist with your search engine marketing or optimization.
Campaign Creative Lead Cost
If you’ve created an email message or a display ad to put in front of your audience to get their attention, the cost of developing that should also be included in your calculation.
Incentives are an immediate reward, before the sale, that you offer to people who you want to become leads. A common incentive to get someone’s contact information is a white paper. Research shows potential customers are most engaged in your business in the first 48 hours following the download. You might also offer an incentive, like a gift card, to qualified prospects who are willing to sit through a demo of your product. Either way, the cost of this should be included in your calculation.
Other Expenses Related to Lead Cost
I’ve covered the main costs above, but if you incur other costs to generate leads, then you should include those as well. If you’re collecting leads at a trade show, you might have the cost of the booth space and the booth itself to take into consideration (if you’ll be using the booth over a number of years you can split the cost between those years).
So let’s say that Hooli has gathered all its data; now it’s time for the calculation:
Here you can see that the average lead cost for 2015 was $1.30– Hooli spent $1.30 for each lead it generated. (Yes, this is much lower than the estimates provided by Madison Logic above; that is to make the math simpler and also to illustrate that lead cost can vary widely).
My last blog post, "How to Calculate Lead Value|How Much is a Lead Worth to Your Organization?," was about calculating the value of a lead for Hooli; let’s bring those numbers into the equation to show you why the cost of a lead matters.
Good news! The overall value of a lead exceeds the overall lead cost by $0.19, so the lead generation program is in the black!
But as we saw in my last post, while an aggregate number is a good start it’s important to dig deeper.
In that post, we went on to break the value of a lead down by source:
Here we found that leads from Source A were more valuable, they generated more revenue per prospect, then leads from Source B.
Now let’s do the same type of breakdown with the lead cost calculation.
Here you can see that the Source A leads cost a lot less on a per-prospect basis than the Source B leads. Now let’s see what the relationship is to the value of the leads from each source.
As you can see below, the value of the Source A leads exceeds the cost of generating them. That’s good.
But Source B leads actually cost more than they return in value – a lot more. The company is actually losing $2.00 on every lead they get from Source B. That’s bad.
This type of information is why it’s important to dig deeper. What should Hooli do? It’s pretty obvious – they should either:
- Look for ways to increase the revenue generated from the Source B leads, or
- Look for ways to decrease the cost associated with generating Source B leads, or
- Stop generating leads from Source B
Typically option C, stop generating leads from Source B, is the right answer. With a variance this large, it’s unlikely that Hooli will be able to make Source B a profitable lead generator.
At the same time, Hooli might want to look into ways to generate more leads from Source A, which is profitable. For instance, if the leads currently being generated are coming from a display ad campaign on a partner’s site, Hooli might want to look into adding rentals of the partner’s email list to the mix.
Hooli might also want to do some analysis to determine how the Source A leads differ from the Source leads – and then look for new sources to test that are more like Source A (and less like Source B).
As I illustrated in my previous post, there are many ways to dig deeper into these calculations. You might also look at the lead cost:
- By channel (email versus display advertising)
- By creative
- By channel and by source
- By channel, by source and by creative
One note on channels: different channels can also have very different lead costs. A recent B2B Demand Generation Benchmark report by Software Advice found that the Social Media (non-ads) and In-house Email Marketing channels were the lowest cost in terms of lead generation. The highest cost? Print, radio & TV advertising and Trade shows & events.
The more granular you get the more you will learn about your program – and the more information you will have to help you optimize performance. Give it a shot and let me know how it goes.
[Tweet “Calculating Lead Cost | How Much Does Your Organization Spend To Generate a Lead”]