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How much should you pay for a sales lead?

When planning a B2B 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, the 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.

Ruth Stevens

Ruth Stevens

Ruth P. Stevens is a senior advisor for Consultants Collective. She consults on customer acquisition and retention, for both consumer and business-to-business clients. Ruth serves on the boards of directors of the HIMMS Media Group, and the Business Information Industry Association. She is a trustee of Princeton-In-Asia, past chair of the Business-to-Business Council of the DMA, 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 serves as a mentor to fledgling companies at the ERA business accelerator in New York City. Ruth is a guest blogger at AdAge, HBR.org, and Target Marketing Magazine. Her newest book is B2B Data-Driven Marketing: Sources, Uses, Results. She is also the author of Maximizing Lead Generation: The Complete Guide for B2B Marketers, Trade Show and Event Marketing, and co-author of the white paper series “B-to-B Database Marketing.” Ruth is a sought-after speaker and trainer, and has presented to audiences and business schools in Asia, Australia, and Latin America. She has held senior marketing positions at Time Warner, Ziff-Davis, and IBM. She studied marketing management at Harvard Business School, and holds an MBA from Columbia University. Learn more at www.ruthstevens.com.

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Discussion

  1. Avatar Mariana

    Interesting article. It seems simple enough, but so few marketing actions today are driven by this degree of data. With the right calculations you can really focus on the tweaks necessary to improve ROI.

  2. Avatar Strategic Alliance

    This is the holy grail to client acquisition… It’s all about knowing how much you can spend to acquire leads, and how many leads you’ll need in order to convert to a paying client and still be profitable. Great article.

  3. Avatar Ajay Kedia

    Nice Article

  4. […] you’ll want to go a little further than this to figure out things such as the cost per inquiry, as well as the cost of qualifying an […]

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