What is the Value of One Lead? Better Measure Your Marketing.
How do you measure your marketing performance and cost?
How Much is One Lead Worth?
The value of one lead varies depending on the lifetime value of one sale weighed against the cost of obtaining that sale. As a general rule, we usually say a lead is worth 20% of the net profit on one sale.
Using leads as a unit of measurement is the best way to track your marketing performance.
First off, let’s define a lead, as different business types have different products or services that can be measured. If you sell a product online, a lead (as it pertains to this article) would be a qualified visit to your website, before the sale is made. If you sell services, it gets a little more difficult to determine the cost of a lead – but a lead is a customer contact brought to you by a marketing piece, before it gets turned over to your salesperson. If you own a retail store, it’s more difficult to track, but consider store visits, along with website hits and phone calls, as leads. Basically, we’re calling a lead a potential sale, before it hits the sales stage, as the effectiveness of a marketing piece can’t include the effectiveness of your sales staff, retail store, or website.
Why is breaking down marketing cost and return by leads more effective than simple dollars and cents? You can separate your marketing from your sales, and better identify successes and failures in each. I’ve heard quite a bit about how poor an advertisement is performing, when it’s a killer ad and generates a lot of phone calls or online submissions. “The leads aren’t good leads,” they say, when really, the sales staff or the product itself is at the core of the problem. But the company doesn’t see the total dollars coming in increase in proportion to the cost of the new website or ad, so the marketing gets the blame. Or conversely, they’ll run an advertisement and see total sales increase, when really, the source of the increase is seasonal, reputation, or some other form of marketing or general increase in demand.
How do you track leads?
Another problem I run into is that people don’t, or don’t know how to, track leads effectively. With a website, it’s easy to track the leads coming in because they’re often stored in a database. But even then, the source of the lead gets pretty tricky to track. With phone calls, it’s often difficult to figure out the reason the person is calling without directly asking them. So, here are a few ideas on tracking where leads come from:
- Always make sure to have Google Analytics set up to thoroughly track your web traffic and sources.
- Even then, due to privacy concerns, GA will identify a majority of your incoming traffic as “Direct,” so create unique landing pages for each advertisement or promotion and track landing page visits.
- Put a custom tag on all advertising links to your site (such as Google Ads or third party ads).
- Make sure all ads have a unique call tracking number. There are several services that offer this, or even using something like Google Voice to create new numbers can be effective.
- Don’t be afraid to ask your customers what compelled them to call you.
- Again, don’t be afraid to ask your customers how they heard about you and keep track.
- Actually count your daily traffic and compare days with no marketing to days after your ads are published.
After capturing the data, you’ll have to track and analyze it to really get an overall view of marketing performance. There are quite a few programs, called CRM systems (customer relation management) that you can use to track leads, contacts, sales and more. While you can get overwhelmed with the idea of utilizing one, a CRM can be make a big difference in business tracking and decision-making. Here’s an article over at Forbes on choosing the right one. Quite a few of them are quite excellent; the most important thing is not which CRM is best, but which one is the best fit for your business.
So… how much is one lead worth?
Now that we’ve decided that tracking marketing by leads is important, how do we attribute value to a lead? At the end of the day, an ad or website needs to generate actual dollars. It can get a little bit complicated to properly valuate a lead, but let’s come up with a simple formula for someone selling a service:
- 100 leads come in over the course of the month from various sources.
- Out of those 100 leads, 35 of them booked actual work – that’s a 35% conversion rate.
- Each job pays, on average, $500.
- The salesperson makes a 10% commission.
So, each lead is worth, following a formula of:
Lead Worth = (Average Job * Conversion Rate) * (1 – Commission Rate)
In our example, this gives us:
Lead Worth = (500 * 0.35) * (1 – 0.10) = (175) * (0.9) = 157.50
So in our hypothetical scenario, we come up with an average lead worth of $157.50 – each phone call or web submission is worth that much, regardless of whether or not it converts. Using this formula, you can also see how the ability of your sales staff directly affects your bottom line. If your conversion rate is lower than industry average, you’re directly affecting the effectiveness of your marketing. In this example, if the conversion rate had been 40% instead of 35%, each lead would have been worth $180.
So, if our example company ran an ad in a magazine (here’s a post I wrote on whether or not you should advertise in magazines) at the cost of $3,000 and it brought in 10 total leads, you can easily determine whether or not the magazine was worth the money. At a cost of $3,000, our example company makes only $1,575 – they made back just over half of the money they spent, a pretty sizable loss on the investment.
If they built a website for $5,000, and over the course of a year got 200 leads from it, then you can see how much ROI ($31,500 in sales from that $5,000 expenditure, or a $26,500 gain) they got.
This is a simplified formula, but you can easily modify it to include the cost of running a lead – add in numbers for the employee time managing the website or answering the telephones and deduct that from the value (assuming you otherwise wouldn’t be paying for that time). For instance, if you build a website and now have a monthly cost to maintain it that you didn’t have before, or you have to hire a part time associate to answer telephones that you didn’t have before you began advertising.
So, instead of setting your marketing budget based on a total dollar volume or just a general feel of things, take the time to calculate the value of each lead, and run your marketing based on the number of leads and return on investment. You might find ways that you are wasting money, and ways where you could invest more to receive an even bigger return.
Average Marketing Budgets by Industry
While we recommend, for most small businesses, budgeting your marketing based on the value of a lead or sale, it's interesting to look into marketing budgets of more established businesses. A small business is typically in growth mode, so the budget should be determined by overall ROI, not on a percentage of annual revenue. But once you're established and have long-term trends, you may consider shifting to a percent-based budgeting strategy.
Here are the average budgets, as a percentage of revenue, for companies of varying sizes and verticals.
source: Wall Street Journal
Consumer Packaged Goods0%
Tech Software / Biotech0%
Is your marketing justifying its cost? Use our ROI calculator to find out.
I’ve been working in marketing for well over a decade now, and there’s been one commonality I’ve noticed. Whether I worked for a small startup or a national corporation, there was a huge disconnect between the marketing dollars spent and the return of those dollars.
For product sales, it’s fairly easy to say that “we spent $10,000 on this ad and sold $20,000 worth of widgets using the coupon code”. But what about a service business that generates sales and leads from generalized marketing efforts? How can you assign a value to a phone call received from a magazine or a web submission from an online ad?
Well, we’ve developed a simple way for you to do just that. Using this simple form, you can enter values to find out how much a lead is worth, and whether or not a marketing product or service you’re considering can pay for itself, let alone turn a profit.
Customer Monthly Revenue
Each customer brings in a certain total revenue over the course of their relationship with your business. Whether it’s a predetermined fee, per-hour cost, or a purchasing pattern, it’s good to know how much money the average customer brings your business on a monthly basis.
Average Customer Retention Time
How long does your average customer continue to buy from you? If it’s a contract, it’s easy to break this down. Otherwise, take some time to see how long retention lasts, on average, and you may find opportunities to increase the length of the relationship.
If you have a sales team, odds are you are paying them a commission. This is separated in this form because it’s calculated based off revenue as opposed to profit.
Profit Percentage Per Sale
Do you know how much each product or service you sell produces in actual profit? This is a very important number to know for any business. By breaking down each sale and its associated costs, you might find that your profit is not what you thought, or you might identify products or services that you can focus on to find a better profit margin. In sales of items, this is usually called the “markup.”
Total Revenue per Customer over Lifetime
This is the overall value, before costs are deducted, of each of your customers. While we try not to think of our customers as dollars and cents, it’s important to gauge the long-term viability of a product or service.
Total Profit per Customer over Lifetime
This is the profit you’ll receive for each customer over the lifetime of their relationship with you.
If you get 100 phone calls, how many of those turn into paying customers? Many businesses don’t track conversion rate, which means they are unaware of what is probably the easiest part of their sales process in which to measure improvement. You might find that a member of your sales team isn’t performing, or an ad you’re running isn’t as effective as others.
Lead Value – Revenue
This is not the value of a customer, but rather the value of a phone call or email. In marketing, it’s good to know this number, which allows you to determine (by using our form) how many inquiries a marketing piece needs to produce.
Lead Value – Profit
We separate out lead value from a revenue and profit standpoint because at times, you want to determine the risk of a marketing piece or service. While it’s good to know that the ad will be paid for, it’s better to know whether or not it will return a profit.
If you have an employee and want to determine how effective they are, this would be their monthly salary (including taxes and other costs). If it’s a marketing retainer, you would enter the monthly fee. And if it’s an ad, mailer, etc., enter the one-time cost.
Number of Leads to Break Even – Revenue
This is the number of leads that a marketing product or service would have to generate to break even, based strictly on revenue. If you don’t feel that you can get this many phone calls or emails from the marketing, then you should opt not to purchase it. If it can generate the sales indicated here, it might be worth the risk to explore and at the very least, you’ll increase awareness for your brand without risking too much.
Number of Leads to Break Even – Profit
This is the number of leads you’d need to have the marketing product or service paid for, strictly from profit. This means that your costs are completely covered, and if you can generate this many phone calls or emails (or sales) from the marketing piece, it’s a great investment!