How Much Should You Pay for a Lead?

There exists no marketing word more abused than the term "lead".

So let's agree up front that a "lead" is not a suspect, a telephone list of companies in a certain industry or any person who has not raised his hand and said: "I'm interested, tell me more."

This means that "leads" are generated in some way by any medium and have gone through some qualification process showing interest in the product or service offered.

Step 1 - Agree on the Cost Per Sale Allowable 

The first step is to establish the CPI (Cost Per Inquiry the same as CPL for Cost Per Lead). And before that step, the process must first begin with an allowable CPS (Cost Per Sale).

The marketer and the CFO must agree on how much the average sale is worth to the enterprise and how much the company is willing to pay for a new contract or sale.

I ask this question: "Dear CFO. If I had 1000 new contracts I could sale to you, how much would you be willing to buy them for? Give me a good price. Because the more you can afford to pay for them, the greater number of contracts beyond the 1,000 I will be able to sell to you."

The ultimate number you need is exclusive of overhead, product costs, refurbishments, bad debt, commissions etc. So it is now the CFOs responsibility to calculate the available budget for promotion only. This is the number marketers are looking for and is commonly referred to as the CPS (the Cost Per Sale).

Remember that paying commissions without the support of lead generation and advertising is the coward's way out for many companies.

What I mean by that is some companies let the distributors or straight commission sales people take all of the marketing risk and pay after the sale AFTER it is made.

But with lead generation, the company must now learn how to invest in the marketing piece by spending money PRIOR to making the sale. Some companies never manage to get beyond straight commission and end up with low market share, small sales volumes and lower profits.

They have essentially put their futures in the hands of a few sales people or distributors and end up loosing control of their destiny.

Frankly, any company worth its salt should know their allowable Cost Per Customer.

This CPS number is an even more important number to agree upon than the CPS. But sadly, that is rarely the case. That's why marketing gets cut when times are rough. Company leaders sometimes do not see the marketing budget as a critical, long term investment.

The key to all of this is that you are quantifying success BEFORE you embark on any new business venture.

Step 2 - Determine the Cost Per Lead Allowable

Now to the CPL. The CPL relies upon the allowable CPS and the projected conversion rate.

For example, if you have an allowable CPS of $100 and a projected conversion rate is 10%, then your allowable CPL is $10 per lead. And so the formula goes. The trick is the balance the lead quality with the conversion rate. 

If you get better quality leads that you can convert at 50%, then your allowable CPL increases to $50 per lead.

But beware. It is possible to over-qualify your leads thus reducing your overall sales volume. You risk coming in below plan.

You would use a different allowable CPL for ALL media including the online, direct mail, Direct Response TV, outbound telemarketing and so forth. Why? Because the conversion rates vary dramatically from one medium to the next. The constant is your Cost Per Sale.

Step 3 - Treat your leads like gold even if they don't convert on the first effort 

Bear in mind that you may not be able to convert a large number of your leads on the first pass. So plan repeat contact to maximize your conversion rate over a 12 month period (or longer/shorter depending upon the sales cycle for your product). In the above scenario, you paid $10 or more for each lead, so you need to get back your investment with a longterm contact strategy.

In BtoB, I have seen allowable CPL's of $1,500 or more. So installing an effective CRM (Customer Relationship Marketing) software program with ongoing training in its use will make a big difference in your program's success over time.

When you think about it, marketers should start all new business opportunities with this type of financial pro forma.

Step 4 - Use your new allowables to help in setting up your annual budget

Once you know the CPL, CPS and or the CPC (Cost Per Customer - subject of another post), then you can develop your marketing budget BEFORE even considering your offers or media strategy. If you need 5000 new contracts over the next 12 months, then your promotion budget should be 5000 X $100 CPS or $500,000.

Posted on May 13, 2010 and filed under Lead Generation.