How Much Should You Pay for a Sales Lead?
When planning a B-to-B lead generation program, you need to deliver leads to your sales team at an affordable price. A neat way to determine in advance how much you can spend on a lead is to calculate the allowable cost per lead for your campaign. This number can then be used as a benchmark for evaluating campaign investments, and deciding which ones are likely to work. If a campaign is looking like it’s not affordable, then you’ll want to make some tweaks, like find a stronger offer, or narrow your targeting.
Begin by calculating your cost per inquiry. Assemble the total direct campaign costs, including all fixed and variable costs that can be directly attributed to the campaign. Include creative and pre-production work, cost of developing and producing content, and the normal variable costs of campaign development and execution. Divide this amount by the number of expected campaign responses, and voila! There’s your cost per inquiry.
Then, estimate the costs associated with qualifying a lead. Don’t try to determine this number on a per campaign basis — it’s too hard. Instead, calculate an average qualification cost for inquiries over a set period, such as a year. Gather up all your inquiry-handling costs, including the direct headcount involved in inquiry capture, fulfillment, qualification, and nurturing. If your back-end processes are outsourced, gathering the data is as simple as adding up the bills. After you have a number for the year, divide it by the number of inquiries handled in the year. This number will serve as your average cost to qualify an inquiry.
Finally, go talk to your counterparts in finance and sales to gather several data points. You need the average order size, namely, the total revenue divided by the total number of orders. (If this number swings wildly, do the calculation by product category.) You need the margin (or its opposite, the cost of goods sold) and the direct sales expense per order, calculated by the total sales expense divided by the total number of orders.
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).
This number is then compared with the allowable cost per closed lead ($2,500), which is a simple calculation of the net margin per order minus the cost of sales (hypothetically set here as $3,500). In this example, the campaign looks promising, because the expected cost per converted lead is $500 less than the Allowable Cost per Lead.
If you put this information in a spreadsheet and play with it, you can quickly see how much leverage there is on the back-end, meaning after the inquiry has come in and you are working it through qualification and nurturing. A few efficiencies on qualification rate and conversion rate work wonders on campaign ROI.
A version of this article appeared in Biznology, the digital marketing blog.
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.