How Much Should I Pay for a Lead?

Have you ever wondered if your marketing campaigns were productive towards your company goals? Do you know how your print advertisement is stacking up to your digital ads for growing your customer base? Are you curious as to how much you should be paying to acquire new customers in the first place? Cost-per-lead (CPL) is the metric that you need to know. If you have desires to grow your company and increase profitability, this metric is essential. CPL gives you a foundation for judging the profitability of marketing efforts, if measured accurately and tracked successfully. Without it, you’re in the dark as to how your efforts to bring in leads are affecting your bottom line. Below, we break it down for you with everything you need to know to start calculating your own business’ CPL so you can start reaping the rewards of being a data-conscious business owner.

Know Your Numbers

Many factors go into determining the answer to how much you should pay for a lead, and they are tailored to your specific business model. Before we begin, you must know the following metrics about your business:

The price of selling a product or completing a service

The average price that your clients/consumers pay for a single product or service

The gross profit for each product and service sold

The amount you receive for a single product sold or service completed minus the cost of goods sold

The percentage of leads you convert into sales

The amount of qualified phone calls or web forms completed that turn into revenue for your business

Calculate

What’s the most you can pay for a lead?

Before you can calculate the most you can pay for a lead, you need to calculate the most you would pay for a sale.  The most you can spend on a new sale while remaining profitable is the gross profit you make off a single sale of a product or service.  As an example, let’s say that your business averages a revenue of $500 for a service, with a gross margin of 40%.  This indicates you receive $200 in gross profit from this service. The most you can pay for a lead is $200.

Example: Service ($500) x Gross Margin (40%) = Gross Profit ($200)

You should be willing to spend 100% gross profit to get a new sale because of the importance of investing back into the company. These new customers can turn into lifelong customers once they’re in the door and they can refer other new customers, ultimately growing your business much farther than the initial acquisition of the first sale. If you acquire a new customer, your expenses will likely remain the same, so breaking even on your gross profit for that customer will not affect your net income. And as mentioned, the residual value will net you more income over the lifetime of that customer.

Now that you’ve calculated amount that you’d pay for a sale, you need to then calculate what you’d pay for a lead.  To find this, multiply that amount you’d pay for a sale by your lead-to-sale conversion rate. For this example, we’ll say your lead-to-sale conversion rate is 30%.

Example:  (Amount You’d Pay For a Sale) x (Lead-To-Sale Conversion Rate) = Cost-Per-Lead

$200 x 30% = $60

In this example, our cost per lead is $60. This metric is important for every business owner to know to ensure that lead-generating campaigns are profitable for your specific product or service.

What Is a Good Cost-Per-Lead?

There is no one-size-fits-all amount for cost-per-lead. A luxury home remodeler will have a drastically higher CPL than a residential plumbing service.  A CPL metric differs greatly between industries due to competition, seasonality and other factors.  A good CPL is one that is in line with your specific company’s growth and profitability goals.

Want to learn more? Our experts can help you calculate your company’s CPL and help you measure the efficacy of your marketing campaigns.  Request a free analysis to get started!