If you’re building a business, knowing your cost per lead is important.
I dare say, one of the most important metrics to track other than revenue.
Instead of comparing your cost per lead to your competition or to a random website that tells you what it should be, it’s better to figure out the unique cost per lead number for your business.
So, let’s help clear the air on why cost per lead is important and how to figure out your own target cost per lead in just a few minutes.
What Is Cost Per Lead?
Cost Per Lead or CPL is how much it costs to acquire a new lead for your business. This number can vary depending on your business, industry, advertising, and many other factors.
When someone fills out a form or contacts you, they become a lead. If there was any cost to make that happen, then that is your cost per lead.
Why Is Cost Per Lead Important?
So we know what cost per lead is, but why bother?
Knowing your cost per lead helps your business scale.
Even if you’re business is used to getting referrals or “free” leads through outbound campaigns, cold calls, emails, or SEO, knowing your cost per lead is crucial.
These free leads aren’t really free and have a cost of effort or time so you should know your lead cost number anyways.
You need to know your cost per lead, especially when buying leads or advertising. Cost per lead is a number that will help you better decide whether your marketing campaigns are working or not.
Let’s figure out what a good cost per lead is for you.
What’s A Good Cost Per Lead?
The truth is, this depends on your business.
Let’s say you’re planning to launch a Google Adwords campaign. You have a starting budget of $1,000 per month.
So you launch your campaign and in a few days start getting some leads. Awesome!
But wait, the cost per lead is coming in at $100. Is that good or bad? Hmmm. It depends.
Depending on your business, a cost per lead of $100 could either make or break your budget.
If you’re a law firm, a cost per lead of $100 could be a steal. But if you’re a small moving company, that could be more than you’re willing to pay to acquire a new lead.
So how do you know the best cost per lead for you? If you don’t already know (which is probably why you’re here reading this), let’s find out!
Calculate Your Current Cost Per Lead (CPL)
The best place to start is by calculating your current cost per lead to compare against future costs. If you’re already advertising your business, calculating your cost per lead is a good start and easy to do. Let’s do some simple math (I know math is boring but stick with me).
Here is the simple formula to calculate cost per lead:
Total Marketing Costs / Total Leads = Cost Per Lead
See I told you it was simple math! Still with me? Let’s use a real example…
If you spent $1000 on a TV ad and got 10 leads, your cost per lead is $100.
$1000 marketing cost / 10 leads = $100 cost per lead (CPL)
Unfortunately, that doesn’t tell us if our cost per lead is good or bad. So, how do you determine your target lead cost before you ever start advertising or the best cost per lead for your business?
Here’s a better way to do it…
A Better Way To Calculate YOUR Target Cost Per Lead (CPL)
Those paying the least for leads don’t always win, those who can pay the most for a lead win. – Confucius
Ok, he really didn’t say that, I made that quote up, but it’s still important.
Rather than fight for the cheapest leads, think about how you can outbid all of your competition. To do this you need to know the max you can pay for new leads and customers.
If you ever wondered how some companies (maybe your competition) can pay more than you for leads, this is how.
By using Customer Lifetime Value or LTV. Follow the steps below to calculate your target cost per lead in a better way.
1. Calculate Your Customer Lifetime Value
If you don’t know your lifetime value, you can use a tool like BareMetrics to find your LTV from your sales automatically or use the calculation below (it also helps you track your cost per lead):
LTV = ARPC (average revenue per customer) × Customer Lifetime
Here’s an LTV Example:
$200 ARPC x 5 months = $1000 LTV
If you don’t have monthly customers and only one-time sales, your customer lifetime would be 1.
2. Decide On Your Profit Margin
Now that you have your LTV, let’s find out how much you want to earn in profit so you know how much you can spend to acquire a customer.
Your profit margin is up to you and depends on your business expenses.
For this example, we’ll use 50%.
3. Calculate Your Max Customer Acquisition Cost (CAC)
This formula is:
LTV x target profit margin = Max CAC
$1,000 LTV x 50% target profit margin = $500 max CAC
If a customer is worth $1000 to you over a lifetime, then you could technically pay up to $1,000 to acquire this customer. The problem is, there is no profit and we’re all not in business just to breakeven right? So we want to subtract your profit from this number.
So we know you could pay up to $500 to get a new customer and still have 50% profit.
But what about your cost per lead?
To determine your cost per lead using LTV, we need to know one more number.
4. Calculate Your Sales Conversion Rate
This one is simple, if 1 out of 4 leads becomes a customer, that’s a 25% sales conversion rate.
sales / leads = sales conversion rate
1 sale / 4 leads = 0.25 (25%) sales conversion rate
5. Calculate Your Final Cost Per Lead
LTV – CAC x Sales Conversion Rate = Target cost per lead
$1,000 LTV – $500 CAC x 25% Conversion = $125 target cost per lead.
So now, we have a more accurate cost per lead target for our business with profit built-in. If we know we can pay up to $125 per lead, we can go buy leads or advertise anywhere with a simple number to decide if it’s working or not.
Let’s use a real-life example to wrap this up and put it all together.
For a moment, pretend you have a moving company and you’re competing against another company in your city. Looking at the chart below, who will win?
|Company A||Company B|
|Lifetime Value (LTV)||$500||$1000|
|Max Cost Per Lead||$62.50||$125|
As you can see from the example above, Company B can pay double for a lead to achieve the same profit margin simply because they have a higher lifetime value.
You could also improve your conversion rate without having to adjust your profit margin. This gives you two simple leverage points of Lifetime Value (LTV) and Conversion Rate to grow your business at scale.
So, when determining your target cost per lead, instead of just winging it or going with your industry standard, create your own numbers! While your competition fights to get free leads, improve your LTV and sales so you can outbid them everywhere.
If you take away anything from this article, focus on increasing your LTV and conversion rates. By increasing these two points alone, you can pay more to acquire customers, leads, and not fight for cost per lead. You can even pay more for better quality leads and keep your sales teams happier.
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