How to Calculate Lead Value|How Much is a Lead Worth to Your Organization?
“You are out of business if you don’t have a prospect!”
Author, Salesman and Motivational Speaker
A prospect, also known as a lead, “is a potential sales contact: an individual or organization that expresses an interest in your goods or services ”. While we can all agree that having leads for your product or service is preferable to not having leads, there’s no doubt that some prospects are more valuable than others.
So how do you determine the average value of a lead? And how do you determine which of your leads are high-value prospects and which are worth less – or are truly just worthless?
I recommend starting with a fairly simple calculation: total revenue generated divided by the number of individual leads in your database.
Let’s look at a fictional company – why not call it Hooli? We’ll walk through this calculation at a basic level and then go deeper. Here’s the key information we’ll need to start:
2015 Total Revenue: $3,272,816
2015 Leads: 2,205, 663
Using the calculation above we can divide the revenue ($3,272,816) by the number of leads (2,205,663) to get 2015 average revenue per lead of $1.48. This is the annual value of a lead to Hooli.
Some notes on these figures:
- For the purposes of this exercise, revenue should only include money that you can attribute to leads. So if you sell a division of your company to another company, the revenue generated from that transaction should not be included in this calculation.
- Your quantity of leads will likely fluctuate over the course of the year due to list growth (names coming on file) and attrition (names leaving the file due to bounced email addresses and unsubscribes, among other things). With my clients I take the average number of contacts on the file during the period.
This is a basic view of what a lead is worth. It’s a good start, but if you’re serious about lead value you need to go deeper.
Advanced Lead Valuation
Remember how we said that not all leads are created equal? One element that often drives lead value is the source of the lead.
Let ’s say you have 2 sources of leads – the first (Source A) are people who provide their email addresses to download a white paper on your website. The second (Source B) are people who dropped their business card in a fishbowl at a tradeshow where you had a booth.
The overall average value of a lead remains the same; but if we segment the leads by source we see there is a variance in performance:
While the overall average value of a lead remains $1.48, here we see that the leads from Source A generate an average of $1.64 in revenue per lead, while Source B leads are generating only $0.90, on average, per contact.
So a lead from Source A is more valuable than a lead from Source B.
Another element that impacts the value of a lead is how long it’s been on the file; newer names tend to perform better than contacts that have been hearing from an organization for a while.
Looking at the same data set, here’s a valuation based on performance by time on file might look:
Here you can see that leads on the file less than a year generate an average of $2.94 in revenue per lead, while contacts that Hooli has been communicating with more than 3 years are returning just $0.67 per contact.
You can even cross-reference lead source by time on file to get an even more granular read on the value of the leads on your list:
Here you can see that not only do Source A leads generate more revenue in their first year, they hold their revenue-generation value better that Source B leads do in subsequent time periods.
These are very simple examples. You might have 20 or even 200 or more sources of leads, and you might break your ‘time on file’ down into a larger number of more granular groups. But you get the idea.
You can also do this type of segmentation analysis based on any number of variables. You can segment by individual products or product types purchased; you might find that some lead sources drive significant revenue for one product line, while other sources provide more highly qualified leads for a different product line. Knowing what product or service to promote to leads from different sources on your file is a way to optimize revenue.
Now you know how to calculate what a lead is worth to your organization. But how can you actually use this in your business decision-making process?
One key way to use this information is to evaluate and rank the lead sources you’re using. In the example above all the lead sources are pretty good – all are generating an average of $1 or more of revenue in the first year. But what if you had a lead source that generated just $0.01 in revenue for each contact? That would be a source of low value leads – and it’s likely that the time, effort and/or cost it takes to generate the leads isn’t worth it for the return.
And remember when we spoke of worthless leads? If the average revenue per prospect is $0.00 that would definitely be a source that was providing you worthless leads – best to stop looking there for prospects altogether and put your resources elsewhere.
There are even more practical implications to the value of a lead if you’re paying for these names – as you would be in a co-registration situation. Here you know the baseline average cost of a lead from each source (this would be before the creative costs) – and if the average return is less, you’re losing money on every lead from this source. Definitely time to focus your lead generation resources elsewhere.
Finally, you can use the value of a lead metric as an internal benchmark for your marketing program – to 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 program is. If the average revenue generated per lead number is decreasing, you need to look for ways to either (a) increase the quality of your leads or (b) improve the effectiveness of your marketing promotions to drive a higher conversion rate.