How Much Should You Pay for a Sales Lead?
Let’s look at an example of how this works. The chart works through some hypothetical numbers to arrive at a cost of lead closed and an allowable cost per lead, and compares the two. Your goal is for the cost of a closed lead to come out lower than the allowable — obviously. If it’s higher, you lose money on the campaign.
To get to Allowable Cost per Lead, it’s not actually necessary to know how many inquiries will be generated, qualified, and converted. But you do need to know the cost per inquiry, the cost to qualify an inquiry, the qualification and conversion rates, the net margin per order, and the direct sales expense per order.
|Comparing your cost per closed lead to your Allowable Cost per Lead: A hypothetical example|
|Cost per inquiry (campaign cost/# responses)||$100|
|Average cost to qualify an inquiry (lead management costs/inquiries per year)||$50|
|Total cost per inquiry qualified (cost per inquiry + cost to qualify)||$150|
|Lead qualification rate||25%|
|Cost of qualified lead (cost per lead/qualification rate)||$600|
|Lead conversion rate||30%|
|Cost of a closed lead (cost of qualified lead/conversion rate)||$2,000|
|Average order size (annual revenue/# orders)||$10,000|
|Net margin per order (revenue per order x margin, 60%)||$6,000|
|Allowable cost per lead (net margin per order – direct sales expense, $3,500)||$2,500|
In this hypothetical example, say the campaign spent $15,000 and generated 150 inquiries. Whatever the cost and the responses, the important number is the cost per inquiry. Here, we have hypothesized it as $100. Separately, the average cost to qualify an inquiry for the year was calculated at $50. We divide the qualification rate (25 percent) into the total cost per inquiry qualified ($150) to calculate the cost of a qualified lead. Then, we divide that by the conversion rate (30 percent) to get the cost of a closed lead ($2,000).
Ruth P. Stevens consults on customer acquisition and retention, and teaches marketing at companies and business schools around the world. She is past chair of the DMA Business-to-Business Council, and past president of the Direct Marketing Club of New York. Ruth was named one of the 100 Most Influential People in Business Marketing by Crain's BtoB magazine, and one of 20 Women to Watch by the Sales Lead Management Association. She is the author of Maximizing Lead Generation: The Complete Guide for B2B Marketers, and Trade Show and Event Marketing. Ruth serves as a director of Edmund Optics, Inc. She has held senior marketing positions at Time Warner, Ziff-Davis, and IBM and holds an MBA from Columbia University.