Is evaluating lead generation methods giving you sticker shock? Or maybe you’re experiencing the opposite problem, providers promising dozens of leads for low, low prices. Cost per lead varies widely by industry, target market, and lead quality. So how do you evaluate fair prices?
While the cost per lead is absolutely an important factor in evaluating your lead generation, if you’re choosing vendors or strategies solely based on rates, you’re likely sacrificing quality. Let’s look at factors that determine your ideal cost per lead, and why knowing this number can be more complicated than it seems.
Not All Leads Are Created Equally
Before you even think about how much your leads cost, you have to understand that not all leads have the same value. For example, you can buy leads from brokers who simply scrape names and contact information from public sources such as Google or LinkedIn. These are the equivalent of leads that, in the pre-digital age, might have been copied from a phone book. These leads are neither highly targeted nor qualified. The price might impress you but low-quality leads are less likely to convert. No conversion, no ROI.
How to Evaluate the Quality of a Lead
A qualified lead is someone who has a need or interest that makes them likely to buy a certain product or service. Whether they meet certain demographic criteria or display buying behavior, qualified leads are suited for your offering and more likely to convert. Leads may be qualified and targeted using a number of criteria.
In the B2B space, you’ll know that your buyer usually meets the same demographic criteria. This information is what informs your ideal customer profiles and buyer personas. Demographics are a reliable way to target and qualify potential leads.
Common demographic metrics include:
- Company size
- Company revenue
- Company industry
- Position of employee
Someone may be the perfect fit for your solution, but if they don’t have the ability to actually purchase it, you have a problem. For example, targeting companies in India with English-only software probably isn’t a good bet. Alternatively, compliance software built for companies in Maine probably shouldn’t be marketed to companies in Florida. While this may be less important for global companies, setting some basic geographic requirements can help you qualify leads based on need and availability.
Common geographic metrics include:
- Company location
Intent can be a powerful tool to qualify your leads. In other words, have they watched any webinars, visited your blog, or filled out a form on your website? Behavioral data helps you understand how people have interacted with your service, website, or ads.
Common behavioral metrics include:
- Webinar clicks
- Form fills
- Social likes
Finally, let’s talk about desire. Does this person have the type of personality that craves your product or service? Out of all the qualifying buckets, this is the trickiest. A great example is Netflix. Every person has a unique dashboard. Netflix uses past watching history to suggest what you’ll like. This is based on your psychometrics. How customers engage with your product/service and consume your content is entirely unique to them. Actually leveraging this in lead generation is easier said than done. And most businesses use unique tools and algorithms to determine these hyper-complex data points.
Common psychometrics include:
Timing is everything when it comes to business. According to the Five Minute Rule, when B2B sales teams reached out to a lead who showed interest within 5 minutes, they were 100 times more likely to connect and 21 times more likely to convert the lead into an opportunity. The more timely the leads, the higher the quality.
At the same time, in order for prospect data to be valid, it needs to be up-to-date. Over time, a lead may change companies, get married, or get a promotion. In order to connect with the right people, having timely information is vital.
One of the most important distinctions between leads is whether they are cold or warm. A cold lead is someone who has had no contact with your business and isn’t familiar with your products. Cold leads generally require more patience, education, and nurturing than a warm lead. A warm lead is a prospect who has already indicated a level of interest; this may mean answering an ad, following you on social media, or opting into your email list
Warm leads are generally easier to convert than cold prospects, which is why they are so valuable. Depending on your partner, a lead generation provider can prepare leads at any end of the spectrum. For warmer leads, your lead generation provider might ensure that they meet certain criteria, as in matching your buyer persona, while also expressing interest by responding to an email or cold call.
Types of Lead Generation
Whether you choose to outsource lead generation or to manage it in house, you have a number of tactics to choose from. This will impact not only your cost per lead, but also your efficiency and conversion.
- Email marketing. Whether you utilize cold outreach or opt ins, email marketing can be an incredibly effective way to connect with your ideal prospects.
- Advertising. Placing ads on Google, Facebook, and other platforms can generate leads. This often works hand-in-hand with email marketing, as prospects respond to an offer that requires them to provide their email address.
- Cold calling. Cold calling is still an effective way to generate leads. Experienced cold callers understand that they need to talk to many people to find qualified leads.
- Social media. Posting on Facebook, Twitter, LinkedIn, and other social sites can help you build a following and acquire leads.
- Webinars. Sharing information with your audience with educational webinars is another effective way to generate leads while offering tangible value to prospects.
How to Calculate Cost Per Lead
Once you understand the distinctions between different types of leads and how valuable they are to your business, you can think about calculating your cost per lead or CPL. The cost per lead is a simple formula: the total expenses invested to generate leads divided by the number of leads you acquire.
CPL vs CPA
It’s important to understand the difference between the cost per lead and the cost per acquisition (CPA). CPL refers to the cost of generating a lead. CPA is the cost of acquiring a customer. In most cases, the CPA will be higher as you take various measures to warm up and convert your leads.
Typical CPL Costs
The costs involved in generating leads often include:
- Campaign software to manage webinars, send emails, etc.
- Purchasing prospect data
- Outsourced lead generation
- Salaries for employees or independent contractors to engage in lead generation tasks, including cold calling, managing social media campaigns, and creating content
- Incentives for prospects including free offers, free trials, etc.
How Much Should You Pay For Leads?
Lead generation costs vary widely based on your industry, the scale of your campaigns (e.g. whether you’re seeking customers locally, nationally, or globally), and the methods used to generate leads. You have to determine whether the price you’re paying for leads is profitable. This depends on several factors.
- Your budget. A large and established company will have a higher budget than a startup with little capital to invest.
- The cost of your products/services and your profit margin. If you’re selling something that costs over $1,000, you can afford to pay more for leads than if your average sale is $10. You also have to consider your profit margin by considering all costs that go into creating your products.
- Conversion rates. The average conversion rate varies by industry. For example, for retail and e-commerce, it’s 3%, while for financial services it’s 10%.
- Lifetime Value of Customer. Customer lifetime value is a complex but important metric that requires you to think long-term. A customer may only spend a certain amount initially, but if you can hold onto them for years, their value continues to increase.
The Value of Knowing Cost Per Lead
Knowing your CPL is an important metric for understanding the way your business is operating. In addition to knowing how much leads are costing you, it’s essential to know your conversion rates and ROI. Creating the perfect marketing formula for your business takes time and research. To compare the difference between outsourcing and generating leads in-house, download our guidebook to know the real cost difference.