9 Key Considerations for Determining Your Cost per Lead

Published August 31, 2021How much should your company spend on advertising to generate a new lead? Though a central factor to a company’s rate of growth and profit, the target cost per lead is rarely given adequate consideration. Directors, executives, and managers are happy that their lead generation goals are being met within budget, but the perceived success is measured against a dubious target.

A dubious approach to such a critical metric reveals an inadequate understanding of your customers and your business. Yes, you got the names, but you have no idea what you’re even measuring everything against. All the while, everyone’s happiness mysteriously continues even when you overshoot your target cost per lead.

The unexamined lead target is not worth hitting.

In this article, examine the nine core considerations you should take into account before arriving at your target cost per lead.

1. Variation in Lead Quality

Before you close a sale, all you have are indicators of the customer value of your leads (depending on how disciplined your approach is to lead quality).

Whatever your data points are, you must manage the cost of gathering additional data points yourself. Adding additional fields to your signup form can potentially lower your opt-in conversion rate, but you can also use APIs to pull shopper information automatically. Track and plot out all possible indicators, then input your revenue from each lead. Now you can see a correlation between your lead indicators and revenue.

A flimsy cost per lead figure should be abandoned in favor of tracking your cost per qualified lead.

Now begin your segmentation analysis. It is almost always wrong to set your ROI goal based on average lead quality. The best way to take variation in lead quality into account is to divide how many leads match your critical quality indicators by your costs for each source-based segment.

2. Lead Volume Still Matters

Don’t fall in love only having “quality” leads. High-volume channels of lead generation often make up for what they lack in “quality” in volume. Often, the volume of “good enough” leads through more expensive channels bring more gross profit to a business once the leads convert.

There tends to be an inverse relationship between the traffic volume potential and the expected cost per lead. Competition will increase with the size of the opportunity, which tends to increase costs. You often won’t discover new pockets of revenue potential without regularly testing new channels. The best strategy involves unlocking all the revenue potential in your market.

3. Your Competition & Your Brand

Every lead you convert to a customer represents an opportunity lost by a competitor. As your market share increases, the increased name recognition provides a nice bonus in branded searches and sales. If it helps motivate you, you can also think of the inverse: Every customer won by a competitor is a customer you have lost. Your reluctance to invest in additional marketing has cost your company the lifetime value of this customer.

4. Cross-Channel Influence & Attribution

No acquisition channel operates in a silo. There are multiple channels on the path between lead and sale. This holds true for paid advertising, organic search, media buy partners, in-person and online events, call centers, and more… even after someone is already a lead!

Don’t fixate on making a big adjustment to ad spend without at the same moment closely monitoring the performance of other channels.

5. Marketing Overhead

Ecommerce lead generation requires considerable marketing resources to craft unique offers and promotions. For high-consideration and high-value products or services in particular, creating top-of-funnel offers to generate leads is often critical.

Since your “product” is often content that needs to be written, edited, designed, and updated, additional work and resources always seem to be required. This resource-intensive approach often relies heavily on thought leadership.

To account for this overhead, divide the amount you spend creating marketing content by the number of leads you’re generating, then add this cost to each lead.

6. Lead Follow-Up

It’s easy to spit out charts on cost per lead, segmented by source, with monthly or yearly comparisons and insight into how the leads have been converting. However, in these considerations, the following important questions are rarely addressed adequately:

  • How are you handling your leads?
  • What are your sales cycle times by lead source?
  • What is the conversion rate at each stage of your sales funnel?

You must optimize your follow-up campaigns with an equal amount of gusto as your commitment to optimizing your lead volume at your target cost per lead. Email, direct mail, and social media work wonders as part of an effective lead remarketing strategy.

7. Customer Referrals

Almost any business will benefit from customers referring other customers, and you only paid for the initial lead. Any additional leads or customers brought to you through such word-of-mouth referrals were actually “paid” for by your marketing investment for the initial lead.

If referrals are a predictable part of your business, your advertising goals should take this into account as part of your complete customer value. Likewise, if you can validate that a certain percentage of your leads are referring other leads that turn into customers, the value ascribed to your leads should account for this– regardless of whether the initial lead becomes a customer.

8. Customer Lifetime Value

It can be hard to bring yourself (or your company’s executives) to spend good money today on leads that won’t yield their full value for months or even years. Many managers clamor for immediate satisfaction even though all of life reveals the wisdom of patience.

If your marketing budget doesn’t take customer lifetime value into account, then it’s safe to say that your business isn’t optimizing for this key metric.

Replace the question, “Did the lead turn into a customer?” with, “How much money was made (or do I expect to be made) from this customer?”

Getting a predicted lifetime value at the time of the initial lead capture allows you to have a predicted ROI target across your source campaigns and optimize those campaigns to drive leads with a higher lifetime value. This can be done by multiplying the conversion rate by the expected lifetime value of leads with similar quality.

9. The Master Lever: Conversion Rate Optimization

Conversion rate optimization begins with understanding the goals of your site visitors and then proposing website changes. You must remove bottlenecks and increase persuasiveness in the path to becoming a lead and then implement the proposed changes as a test. When the test wins, you win more leads, which becomes more revenue. The results of these wins continue day after day. Then you test again. Iterative testing compounds your wins even further.

Work done to increase the conversion rate of your landing pages will increase the ROI of all your acquisition channels in one fell swoop because it’s so foundational. This eventually affects your top-line revenue, often by double-digit percentages.

Lead Generation & Determining Cost per Lead for Growing Brands

After taking into account all the above considerations, take a step back to let your eyes adjust to the newfound light source placed upon your business. You want to make sound business decisions to maximize your revenue as a whole – not just your lead count. You may now have much more wiggle room to test.

If lead initiatives are important for your company right now, our team of proven digital experts is prepared to help. Send us a message and one of our team members will reach out to share answers, insights, and opportunities to put your brand on the path to profitable growth with your lead strategy.