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Calculate Your Cost-Per-Lead
and Marketing ROI

When it comes to the economics of B2B marketing and lead generation, it's not the "cost-per-hour" that counts, or even your "cost-per-click," "cost-per-impression" or "cost-per-exposure" that matters. When measuring the performance of your B2B marketing program, what matters most is your cost-per-appointment for the initial sales appointment with the prospect, along with your eventual cost-per-sale, your revenue and your profitability. The sad reality is that if you choose a marketing strategy on the basis of its having the lowest cost-per-hour, or even the lowest cost-per-lead, you're begging for trouble. (We won't even contemplate not holding Marketing accountable for revenue.)

The Fundamental Problem: The Definition of a Qualified Sales Lead

The problem with calculating your Marketing ROI starts with the definition of a sales lead. This is because over the past few years the term "sales lead" has become so mis-applied and diluted that it has practically lost all its meaning. The traditional list vendors will try to tell you that a name on a mailing list, or an email address, is a sales lead. The search engines will tell you that a click is a lead. The content people will tell you that someone who agrees to receive a White Paper or attend a Webinar is a sales lead. And the consultants will tell you that someone with budget, authority, need and timing is a lead. As you'll see in a moment, though, while these are all interesting outputs of various promotional programs, they do not - by themselves - solve the problem of generating leads that actually result in more sales. In fact, most aren't even good interim steps in the process, no less are they true sales leads. And thus they are of questionable value in a marketing program.

But here are some of the different definitions of a sales lead that you may run into today, along with what you're actually getting:

Type of "Lead" Proponent What You Really Get
Contact Names List Vendors Suspects
Email Addresses Spammers Bounce-backs, blacklisting
Clicks Ad Aggregators Traffic
Business Cards Trade Shows Tire kickers
Exposures Media Companies Eyeballs
Webinar Attendees Content Consultants Students
Inbound Traffic SMM Companies Solicitations
BANT Consultants Disinterest
BRCs Mail Houses Catalog Collectors
Page Views SEO Companies Page Ranking

Promotion Program Outputs That Aren't Real Sales Leads

The problem, of course, is that none of these so-called "sales leads" are of any use whatsoever to your sales people if the prospect doesn't have a need for your product or service, and a real interest in talking with you about how you can help. That's the true definition of a sales lead. And so anytime you try to use one of these other definitions of a sales lead in the calculation of a performance metric (e.g. your marketing ROI), or - more importantly - try to pass one off as a qualified sales lead to your sales people, you're going to run into problems.

In short, marketing must result in the production of "qualified sales leads," whether it does so as a direct output of the process, or because it includes a separate lead qualification step. Otherwise, it can't be credited with producing a useful result, nor can a lead produced by one marketing program be compared in a valid manner to a lead produced by another.

Leads Must Be "Qualified" in Order to Be Worthwhile

For the purposes of calculating or comparing your cost-per-lead (CPL), anytime you're talking about a sales lead that's not an actual appointment with a decision maker who has need, ability and desire (i.e. a "qualified lead") you have to factor into your calculation the cost (as well as the time-to-convert and the conversion percentage,) of converting it to an appointment. That's the key to calculating your true cost-per-lead, and also to comparing the ROI of different marketing techniques on an "apples-to-apples" basis.

Unqualified Leads May Be Cheaper on a per-Lead Basis,
But They Are Always More Expensive on a Cost-of-Sales Basis

In general, it is less expensive to produce qualified leads in the first place, rather than to produce unqualified leads that must then be qualified. But one way or another a lead must be "qualified" in order to be worthwhile. And you can only compare the ROI of different marketing strategies if you use a fixed definition of a qualified sales lead.

Comparing Marketing Techniques

If you want to calculate or compare your cost-per-lead or ROI for different marketing strategies methodologies, therefore, you need to start with a standard definition of a sales lead. The one we recommend, based on over 30 years of experience, training and research, is:

A qualified lead is an appointment with a decision-maker (or strong decision influencer) who has a need for your company's products or services, and who wants with talk with you about how you can help.

That is, you must use a standard deliverable that can be applied to all techniques (SEO, SMM, telemarketing, direct mail, inbound, email marketing, advertising, PR, trade shows, etc.,) in order to make a valid comparison. And when you're comparing your cost-per-lead or ROI from different marketing tactics, if it requires additional work in order to convert what you have (e.g. a click, an attendee, a business card, a download, a response, etc.,) into an initial appointment, then you must also include in your analysis the cost of doing that conversion work. Otherwise you're misrepresenting the cost of the program.

To be sure, some people will argue that it is the salesperson's responsibility to convert these various so-called "leads" into appointments. But that doesn't change the basic calculation: Someone has to convert it. And that conversion, or qualification process, has a cost - which will necessarily vary by promotional method. Shifting that cost to the sales person doesn't eliminate it; it merely moves it onto someone else's budget line. You still have to compare marketing costs on an apples-to-apples basis to come up with an ROI; and the initial appointment is the best, if not the only, common denominator available for the B2B marketer.

(This approach applies equally well in the B2C world, by the way. In the case of brick-and-mortar stores, the common denominator for qualifying as a lead is foot traffic. And in the online world it's hits to a dedicated e-commerce landing page.)

In any event, if you don't compare marketing techniques on the basis of a common deliverable, and use a standard definition of a sales lead, there are a number of significant, and potentially fatal problems (insofar as your program - and probably your career - is concerned) that can occur. For example:

  • If you (as the marketing professional) deliver unqualified leads to your sales force, they will feel that you've wasted their time. And at some point they will push back on you and your programs, rejecting both.

  • If you produce unqualified sales leads, the company will at some point incur additional costs for qualifying the leads, or for regenerating them.

  • And even if neither of these things occurs, then you may simply produce an asset that can't be monetized, wasting the original investment.

In short, anything less than a qualified lead (i.e. an appointment with a decision maker who has a need and who wants to talk to a sales person) will result in excessive costs, waste and failure.

The "Compare Your Cost-per-Lead" Model

If you want to compare the costs and benefits of different marketing strategies (and different methods for generating leads), the following model can enable you to compare approaches on a true, apples-to-apples basis - by comparing the cost-per-appointment for the initial appointment, which is where it actually counts.

Customize the Model: You can run the CPL model with the pre-provided inputs. But to use your own data in the model, you will need to provide your email address so we can send you an Unlock Code.
Email Address

The following model has pre-populated values in it. If you've entered an Unlock Code, you can use your own assumptions to run the model. (If you would like a spreadsheet version, drop us a note at Info @ jvminc.com.)

Step 1: Enter Your Marketing Program Objectives

To begin, you set up the model using a few basic assumptions. First, of course, is your revenue goal. This is because, if your ultimate goal is to generate sales, you need to know what your revenue objective, or Gross Revenue Target, is - at least so you can see if you're going to reach it.

You'll also need to know the value of an Average Sale. If you sell a capital good, or a one-time item, this should be pretty easy. Even if your offering comes in different configurations, you can just take an average. Or, you can run the model for a particular set of products, and estimate a weighted average sale. If you sell services, or a product that is purchased periodically, then the Average Sale should be the average revenue that will be credited to the marketing program when someone makes a sale. For most companies with recurring business, the marketing program will often be credited with the first year's revenue from the new customer, or the Net Present Value of all resultant sales from that customer. Either way, dividing your Average Sale into your Revenue Objective will tell you how many unit sales you need to book.

You'll also need to know your Average Gross Margin. This helps calculate how much money is available for marketing and sales - and how profitable the program will be. If you use VARs or distributors, use their mark-up plus yours. But for most industrial companies, AGM = (Price - COGS)/Price.

Finally, you need to put in the Average Cost of a Field Sales Call. This will tell you how much Field Sales expense, if any, is going to be "caused" by your marketing program. (This is a major, hidden cost in many ineffective marketing programs.) If you don't have a Field Sales force, but you use something like Inside Sales or Customer Support to close sales, use their expense (on a per-sale basis) to estimate the cost of going out on a call (or teleselling).

Lead Generation - Cost Comparison Worksheet
Enter Your Goals and Objectives
Objectives
Gross Revenue Target ($)(more)
$100,000.00
Financial Assumptions
Average Sale ($)(more)
$10,000.00
Average Gross Margin (%)(more)
35.00%
Average Cost/Field Sales Call ($)(more)
$200.00

Step 1: Enter Your Program Objectives

Enter your Revenue Target, your Average Sale, and your Average Cost for a Field Sales call as integers - i.e. with no dollar signs or commas (e.g. Enter "5000" for $5,000.00). Enter your Average Gross Margin as a decimal (i.e. enter "0.35" for 35%).

Step 2: Enter Your Program Costs

You can now put in your assumptions about your marketing initiative. To be sure, while marketing programs can seem to have very complex budgets and costs, most program cosgts can easily be simplified into three basic elements: Management costs, Set-Up (or program development) costs, and Volume-Dependent costs. (A more detailed discussion, with some examples, can be found here. And if you need help, contact us.)

Notice that you'll need to provide three inputs below for the Volume-Dependent costs (starting form the bottom):

  • A per-unit cost (e.g. cost-per-dial, cost-per-hour, cost-per-letter, cost-per-posting, etc.,)
  • Something to label the units with (e.g. dials, hours, letters, blog posts, etc.,) and
  • The number of units (dials, hours, letters, postings, etc.)

These will be multiplied in the program to get the variable cost component (e.g. 200 units at $25/unit, which will equal $5,000).

Program Assumptions
Program Name Inbound Marketing Program
Management Costs $5,000.00
Set-Up Costs $1,500.00
Volume Dependent Costs Number of Units (e.g. number of hours, emails, targets, postings, etc.) 200
Units (e.g. hours, emails, targets, postings, etc.) Blog Postings
"Per-Unit" Cost (e.g. $/hour, $/email, $/target, $/posting, etc.) $25.00

Step 2: Enter Your Program Costs

Enter any text you'd like for your program name. Use integers or decimals for your Management Costs, Set-Up Costs, Number of Units, and Per-Unit costs - with no dollar signs or commas. (Thus, the pre-populated example can be read as follows: Management expense for the Inbound Marketing Program is $5,000. The Set-Up Cost is $1,500. The Volume Dependent component is going to be 200 Blog Postings, at $25/Posting, which will calculate out to $5,000 in the model. The total cost will be, therefore, $11,500.)

Step 3: Enter Your Expected Results

In this section, you're going to enter what you think the results of your program are going to be. For most marketing programs, the output is going to be some number of "sales leads." Note that you can define this result however you want, as you're going to have the opportunity to calculate the cost of converting it, if necessary, to an initial appointment later. By this logic, if you define the output of your program as an initial appointment, obviously, then the cost of conversion will be zero. But since most marketing programs don't result in appointments, you'll need to account for the cost of conversion later.

Program Results
Leads Produced 10

Step 3: Enter Your Expected Results

In the pre-populated case, we're predicting that the program will produce 10 (unqualified) sales leads from the 200 blog postings.

Step 4: Converting Sales Leads to Initial Appointments

As discussed above, most marketing programs neglect to consider the cost of converting a "sales lead" (e.g. a click, a white paper request, a name on a mailing list, a Social Media contact, etc.,) into an actual appointment with a decision maker who has a need and who wants to talk with you about how you can help. With the next set of inputs, you're going to enter the factors that will enable you to calculate the cost, if any, of this conversion (or lead qualification) process. In most cases, this process will have to be done using some form of telemarketing (or possibly email) follow-up, either using in-house resources or an outside vendor.

Keep in mind that the amount of effort (e.g. the dial rate, the cost/hour, and the conversion rate) for converting unqualified sales leads into qualified sales leads will differ significantly depending on the quality of the lead, which you can reflect in the parameters you enter below. Better quality leads, for example, will have a higher conversion rate (i.e. the fraction that will convert to actual appointments,) while poorer quality leads will tend to have a lower conversion rate. They may also have different contact rates, costs/hour, or dial rates. But the inputs below will enable you to reflect the differences in lead quality (from different promotional methods) in your P&L.

Lead Qualification (e.g. Telemarketing Follow-Up) Assumptions
Program Set-Up Cost ($) $1,000.00
Hourly Cost ($) $40.00
Lead Qualification
(e.g. telemarketing)
Productivity
Expected dial rate
(dials/hour, e.g. 10)
10
Expected contact rate
(dials/contact, e.g. 5)
5
Expected Conversion Rate
(% of leads that become appts, e.g. 0.25)
25%
Expected call duration
(minutes/call, e.g. 10)
10
Expected Close Rate
(percentage of qualified leads that close, e.g. 25%)
25%

Step 4: Enter Your "Lead Qualification" Costs

In the example above, we're assuming that it costs $1,000 to set-up the Lead Qualification program, which will cost $40/hour to run. It is expected to have a dial-rate of 10 dials/hour, and that we'll talk to a decision maker on every fifth attempt (i.e. a dials/contact of 5:1, or a 20% contact rate.) It is expected that 25% of the contacts will convert to an actual, qualified sales lead (i.e. an initial appointment). And we're assuming that a good call with a decision maker (e.g. to set up the appointment) will take around 10 minutes.

In order to get to a revenue and ROI forecast, this model also includes an Expected Close Rate (i.e. the fraction of prospects with whom there is an initial appointment who will eventually buy) of 25%.

Step 5: Run the Model

If you've unlocked the model (by providing entering an Unlock code), then you will be able to enter your own parameters above. Otherwise, the model will run with the pre-populated assumptions.

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And if you need help, click LeadGen.com.

Show Detailed Discussion


JV/M's Current, Actual Cost-Per-Lead

JV/M generates appointments for all kinds of companies, from high-tech systems and professional services to commodity materials and commercial supplies, so the cost per lead can vary quite a bit. But using data drawn directly from our activity reporting system that we use to track results for our clients, at our regular billing rates, our current, average cost per lead is:

JV/M's current average cost-per-lead = $178.66

That's:

  • $2,121.34 less than the cost of a lead from your advertising campaign
  • 12 percent of the cost of a trade show lead
  • $1,521.34 less than the cost of a direct mail lead
  • 15 percent of the cost of a lead generated by direct mail with an in-house telemarketing follow-up
  • $74.34 less than the cost per lead of in-house telemarketing
  • $691.34 less than the cost per lead of having your sales reps do it themselves (and they don't quit on you! In fact, they'll thank you.)

Are you still sure outsourcing your Lead Generation is more expensive?

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