Calculating the True Value of a Lead
Digital marketing revolves around acquiring and converting leads. In order to analyze whether or not your marketing efforts are working, you need to know not only how many leads are being generated, but how much each lead is costing your organization and how much revenue each lead is bringing in.
Many organizations focus on simple cost per lead (CPL) — the total amount of money spent on lead acquisition divided by the number of leads generated in the process. If you spend $10,000 on an email campaign and bring in 100 leads, then each lead cost you $100. The reality is slightly more complicated. Here’s what to consider.
Cost Per Lead Complications
Most leads will have interacted with your brand and marketing on more than one channel before becoming leads, so you can’t ascribe each lead entirely to the most recent touchpoint. You can divide your entire marketing budget by the number of leads it brings in, but that won’t give you any insight into the relative efficacy of each channel. You might be losing money on one campaign but generating very positive returns on another that balance out in aggregate. More analytics and testing is necessary to generate more specific numbers.
Basic Lead Value
In theory, lead value is a simple calculation as well. Simply divide the total sales from a given set of leads — say, the leads generated in one year — by the number of leads. If you bring in 100 leads and make a total of $100,000 from them, each lead was worth an average of $1000.
Again, the reality is more complicated. Lumping the data from a quarter or a year’s worth of leads together to generate one flat number doesn’t give you much actionable insight into the value of one particular lead, so you need a method that digs a little deeper into the numbers.
One side note: for the purpose of this article, we’re only considering the monetary value of a lead. The definition of “converting” a lead varies depending on a variety of circumstances — if you’re launching a new product or opening a new location, you might value awareness or social engagement more highly than pure revenue — and putting a dollar amount on one of these alternate metrics is much more difficult.
Determining Lead Value
For now, we’ll focus on how much revenue a given lead is likely to generate. There are a few key factors to consider:
- Business model: your calculations will change substantially depending on the nature of your business. If you sell large, one-time products like cars or real estate, you likely won’t need to think much about the possibility of a repeat purchase. If you sell a commodity or your business is based on recurring subscriptions, then the lifetime value of a customer will play a larger factor.
- Lifetime customer value: the basic lead value model only takes into consideration the initial purchase, but many customers will become loyal repeat customers if treated well. If you expect customers to purchase from you again and again, the value of a lead goes up (though you’ll also have to consider the additional cost of maintaining their loyalty)
- Renewal and churn: if your business is subscription-based, you’ll need to consider the likelihood that your customers stick around after their initial purchase for another year (or five). This factors into lifetime value as well — the higher your renewal rates, the higher your LTV.
- Conversion rate: not every lead will turn into a sale. If you’re closing 25 percent of your leads, the average lead is worth only a quarter of the average value of a closed lead.
The next step in your analytics will be to break these numbers down by product, service level, marketing channel, and possibly even factors like seasonality and location. The more advanced analytics tools on the market can analyze these trends for you to generate detailed predictions about the value of a given lead, allowing you to compare revenues and costs much more precisely.
Here’s an example. You spent $25,000 on an integrated marketing campaign and generated 500 leads at a simplified cost of $50 per lead. From past data, you know that your sales team tends to convert 20 percent of your leads and that the lifetime value of a customer is around $1000.
For this campaign, your average lead value would be as simple as multiplying the $1000 LTV by 20 percent to generate a number of $200 per lead. Subtract the $50 cost and you should generate $150 in profit per lead or $75,000 in total profit from the campaign.
Testing and Iteration
The key takeaway is that the more data you’re collecting, the better you’ll be able to assign value, ROI, and marketing return to each lead. You might find that leads from social media are less valuable than leads from email or that leads from small companies aren’t worth pursuing. The more you learn, the more you’ll be able to iterate and adapt your strategies to bring in better leads.