The Cost-per-Lead/Return-on-Investment model below enables you to compare the costs and benefits of different marketing strategies on a true, apples-to-apples basis.
Click here for a detailed background/introduction.
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-exposure" or "cost-per-demo" 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 a qualified 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 and you don't differentiate between a qualified lead and an unqualified lead, you're begging for trouble.
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-used and diluted that it has practically lost all its meaning. List vendors will try to tell you that a name on a mailing list, or an email address, is a sales lead. 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 from promotional programs, they do not by themselves identify opportunities 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|
|Business Cards||Trade Shows||Tire kickers|
|Webinar Attendees||Content Consultants||Students|
|Inbound Traffic||SMM Companies||Solicitations|
|BRCs||Mail Houses||Catalog Collectors|
|Page Views||SEO Companies||Page Ranking|
Promotional Program Outputs That Aren't Really 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 real definition of a sales lead: Someone who has a qualifeid need, and who wants to talk with you about it. 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, a KPI, etc.) or, more importantly, try to pass one off as a qualified sales lead to your sales people, you're going to run into problems.
To cut to the chase, marketing must result in the production of "qualified sales leads," whether it does so as a direct output of the promotional 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
In other words, 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 and a desire to talk, you have to factor into your calculation the cost (as well as the time-to-convert and the qualification rate) of converting it into an appointment. That's the key to calculating your true cost-per-lead. And it is also the key 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
As you would expect, it is generally less expensive to produce qualified sales 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 to Sales.
And you can only compare the ROI of different marketing strategies if you use a fixed definition of a qualified sales lead that works regardless of the technique used to generate it.
If you want to calculate or compare your cost-per-lead or ROI for different marketing tactics or methodologies, therefore, you need to start with a standardized 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 start by using a standard deliverable (i.e. an appointment) that can be a valid outcome of any of the techniques (SEO, SMM, telemarketing, direct mail, inbound, email marketing, advertising, PR, trade shows, etc.,) in order to make a valid comparison. 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. You can't compare them. And you can't calculate a meaningful ROI.
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:
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.
Customize the Model: If you would like to customize the input for the CPL/ROI model, please enter your email address below so we can send you an Unlock Code.
Step 1: Enter Your Marketing Program Objectives
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 your Gross Revenue Target, is. This way the model can forecast whether you're going to reach it or not.
You then 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 value. 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 that have 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. Either way, as long as you use the same value for each marketing program, the model will work.
You'll also need to know your Average Gross Margin. This helps calculate how much money is available for marketing and sales. And it will also enable you to measure how profitable the program will be. If you use VARs or distributors, use their mark-up plus yours. But for most 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 direct 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, and so you must account for it.) If you don't have a Field Sales force, but you use something like Inside Sales or Customer Support in order to close sales, use their expense (on an average per-sale basis) to estimate it.
With LeadGen.com, we don't just give you a name on a mailing list and call it a lead, or send you the same leads we've given to ten other clients. We don't consider people who are willing to accept a White Paper to be leads. Neither are clicks, impressions, traffic, booth stop-bys, or even "howdy calls." A lead is someone (or something) that's worth your salesperson's time. That means there's a need (i.e. a potential application) and a decision maker who wants to talk about how you can help.
Implicit in that is the assumption that they have the ability (e.g. budget and authority) to buy, since they wouldn't waste their time otherwise. But ultimately, we believe, that it is up the the salesperson to convert need and interest into an allocation of funds and a decision to buy.
When it comes to cost, professional B2B lead generation from JV/M can beat the alternatives hands down, and we can prove it, too. Compare your alternatives with our real-world data and you'll see. Use the worksheets below to calculate your cost-per-lead for advertising, trade shows, direct mail, direct mail with a telemarketing follow-up, in-house telemarketing, and asking your sales people to generate their own leads. Then compare the results to JV/M's current, actual cost per lead.
Running trade ads is a popular and convenient way to generate leads, but advertising is expensive, and defeated by clutter. Worse, as many as 95% of the leads from ads are "for information only," bingo-card responses, researchers and other "tire-kickers." Fill in the worksheet below to calculate your cost per lead from your advertising program.
|Ad Development||$2,000||Creating an effective ad, either as part of a complex campaign or on a one-time basis, usually requires photography, copywriting, design and film. The initial costs will typically be around $8,000, which are spread over the useful life of the ad -- in this case, four uses. What is it for you?|
|Advertising Management||$2,500||If you advertise, a manager must take the time to decide what to advertise, and work with the agency to prepare the program. Even a modest campaign is going to take a few weeks of effort to get going. Enter your allocation.|
|Insertion Cost||$2,500||Trade magazine advertising is a great way to reach your target audience. A 1/4 page ad will run anywhere from $1,250 to $9,000 depending on circulation. Fill in your cost.|
|Gross Cost||$7,000||An investment of $7,000 is fairly typical for a quarter-page trade ad, when you include the development and management costs -- which is necessary if you're going to "compare apples to apples." Add up your incremental investments to get your gross cost.|
|Responses and inquiries||100||Trade advertising is usually effective in generating inquiries and responses, both from the journal and directly. Response rates can vary, but 100 is typical for our clients. What do you get from each run?|
|Subtract "The Tire Kickers"||5||Ninety five percent of all responses to trade ads are info-only researchers and "tire-kickers." Less than five percent are real leads. Estimate the percentage of response that are tire-kickers, (but don't think about the wasted cost of brochures you're sending to people who are never going to buy,) and subtract them from the responses.|
|Appointments||3||About 60% of the leads will grant you an appointment after talking to you on the phone (assuming that you follow-up,) and give you an opportunity to sell to them. Calculate the average number of appointments you get from ads.|
|Cost per Lead||$2,300||This may seem high, but it is really quite typical. If you calculate your cost per lead including ALL the costs, and counting only real leads, you may be quite surprised at how expensive advertising is -- and how risky: Because you really just spent $14,000 before you got your first lead! What's your real cost-per-lead?|
We work with many companies who exhibit at trade shows, and are amazed at how expensive they are on a fully-allocated, cost-per-lead basis (as are our clients.) Trade shows are notorious for the lack of decision-makers these days, and a recent industry study showed that 95% of trade show leads are NEVER followed up at all. What matters, though, is only how many appointments you get with decision-makers who have a real need, and a willingness to consider buying from you.
|Booth Development||$4,000||Five thousand dollars is the cost of an average 10x10 booth, double it for a 10x20. If you're fairly diligent, you'll exhibit at two shows per year, and your booth will easily last three years. Don't forget to add in the cost of materials, graphics, transportation and hotels, give-aways and entertainment. Altogether, the allocated cost per show is typically around $4,000 for the booth. Figure yours out this same way.|
|Management||$1,500||Now you have to staff the booth, plan the show, and do follow-ups. And the fewer shows you do, the more each one costs, because you're not efficient. (By the way, transportation is usually a big killer, here.) Enter your allocation.|
|Show Cost||$2,000||Trade shows are doing very poorly in the current economy, so they've lowered their prices. You may even be able to do better than this, so fill in what you think you're paying.|
|Follow-Up||$1,500||Most people don't follow-up their trade show leads, but if you don't at least send the good prospects a letter and call them on the phone, the show was a waste -- because they're not going to call you. We figure time at $20/hr and 1/4 hour each, materials at $3.00 per prospect, and phone costs at $4.00 per hour. What's your estimate? If you don't follow-up, reduce your appointment rate accordingly.|
|Gross Cost||$9,000||After they've bought the booth, most people only think of the cost of the floor-space (and that's what the booth manufacturer and the trade show people want you to think, too.) But the real cost is a lot higher. A cost of $7,500 is quite typical for one use of a 10x10 booth in a campaign that has even one out-of-town show per year. Add up your costs to get your gross cost per show.|
|"Leads"||250||We have to refer to trade show responses as "leads" here because that's what everyone calls them, but 98% of them are pure junk. Of all the cards in your fishbowl, 95% of them only want your giveaway. But you collect them, and you buy the attendee list (Oops! We forgot to count that cost, didn't we?) and pick up the cards from the other exhibitors so you have something to show for your effort. How many names do you come home with?|
|Real Leads||10||Real leads are decision-makers with a need. If you get 10 real leads out of the show, consider the show a fabulous success. If you were smart, you put some kind of mark on the card, or used a lead sheet, so that you could sort them out from the junk. What is your REAL take-home?|
|Appointments||5||You have to consider the reality that 95% of all trade show leads -- even the good ones -- are never followed up. We'll be generous, and say that your people are good, and will follow up half in a timely fashion. What's your estimate of the number qualified appointments you end up with?|
|Cost per Lead||$1,500||Trade shows can be quite a bargain, and if decision-makers would attend, they'd be a steal. Unfortunately, they usually don't. What's your real cost-per-appointment?|
Here at JV/M, we use direct mail -- not because it's better than our own telemarketing, but because we can't spare any telemarketers, so we do it as inexpensively as possible. The cost of direct mail varies quite widely, with the example below being fairly common, so fill in your own experience below to calculate your cost per lead.
|Material Development||$6,000||The cost of materials can vary enormously. We know clients who print 20,000 postcards for $2,000, and others who've printed 2,500 four-color brochures with a CD insert for $38,000 (and then didn't send it out!) Don't forget the cost of design, copy, photography, printing, letters, BRCs, inserts, the mailing list, and waste. A typical commercial mailing of 1,000 pieces will cost $6,000, but you can enter your own estimate from your own experience.|
|Management||$1,500||Again, you have to manage the mailing, and probably have to clean up the data base. Enter your estimate of the human costs here.|
|Mailing Cost||$1,000||Fulfillment costs might be a dollar per piece, but a complex piece can be much more. Don't forget postage. Eenter what it costs you from the time you have your material in hand, 'til the time it's in your prospect's hand.|
|Gross Cost||$8,500||Calculate the total cost of your mailing, including the allocated costs from re-usable materials. By the way, we hope you didn't forget a direct response mechanism -- otherwise your mailing is likely to fail!|
|"Leads"||20||You can get several types of responses to direct mail: phone inquiries, BRCs, hits on you Web site, or even orders. A response rate of 0.5% is typical, although repetition will help. We'll be generous and say that your good mailings can get a 2% response rate. Add yours up to get the number of leads.|
|Real Leads||10||Again, you have to separate the "tire-kickers" from the real prospects. The typical ratio for direct mail is 50% are kibbitzers. How many real leads did you get from your last mailing of 1,000 pieces?|
|Appointments||5||Enter how many of those real leads turn into appointments. Typically, it's 25%, but we rounded up -- way up. What's your experience?|
|Cost per Lead||$1,700||Direct mail isn't much of a bargain if you don't get any business from it, is it? What's your real cost-per-appointment?|
The secret to making direct mail work is to follow it up with a phone call. It adds to the cost (in the form of your sales person's time -- plus some opportunity costs that can be ignored.) But some people think it's so worthwhile that they don't even bother sending a letter, they just call and say they're following up a letter. We don't believe in dishonesty, but telemarketing does make direct mail more effective. Compare your results to the norm to calculate your cost per lead when you add the phone call.
|Direct Mail With A Telemarketing Follow-Up|
|Material Development||$6,000||The cost of materials stays the same as before.|
|Management||$2,500||The management cost is going to increase because you're going to have a big fight getting your sales people to make the phone calls. Either that, or you're going to have to take the time to hire a telemarketer. We'll be generous with our estimate. Enter yours here.|
|Mailing Cost||$1,000||Fulfillment costs are the same as before. Write yours here.|
|Telemarketing Costs||$5,000||Let's assume that your sales people are going to make their own phone calls (i.e. you're not hiring a telemarketer.) An average salesperson has a $40K base. One thousand contacts (if you call everyone,) is going to take about 250 hours which, of course, you couldn't possibly do anyway. But if you did actually make the calls, it would cost you about $5,000. Again, ignore the impact of the accounts he loses because he's on the phones, the cost of the phone calls themselves, and the increased turnover you have because sales people don't want to work the phones, for the moment, and enter the additional cost of the telephone follow-up here.|
|Gross Cost||$14,500||Obviously, adding a telephone follow-up to your direct mail program is going to increase the costs, probably by a lot more than this. What's your estimate?|
|"Leads"||50||Telemarketing works, so your response rates are going to go up. Perhaps not as much as if we did it, but we certainly would concede that that will jump by a factor of ten, from 0.5% to at least 5%.|
|Real Leads||25||From the fifty suspects you got above, how many are real prospects? Again, 50% is a good estimate from our viewpoint. What's yours?|
|Appointments||12||And how many of those will turn into apointments? We figured half. What would you say?|
|Cost per Lead||$1,200||This is starting to look good. The response was better, and it looks like the cost-per-lead went down. What's your cost-per-lead when you add a telephone follow-up to your direct mail program?|
In-house telemarketing can be a great tool to initiate the sales process, find leads and book appointments. Since so many people try to compare us to in-house, we're going to show you how to do the "apples-to-apples" comparison, because it's not just our $30-45/hour rate versus your $10/hour wage. Also, you have to keep in mind how hard it is to find a truly effective executive appointment-setter, how long it takes them to become productive, and the extremely high failure-rate.
|Recruiting Costs||$11,000||Finding a good telemarketer is going to take several months, and cost quite a bit of money. If you use a recruiter, you're going to pay 25% of the telemarketer's first year salary of $20K, or $5,000. (And that's a serious underpayment for a good bird-dog.) If you run ads in the paper, it's going to cost you $400 per week, and will take you a minimum of eight weeks, for a total of $3,200, to find enough good candidates to be able to pick a good one. (How much do you pay for skills testing, by the way?) If you are lucky and your cousin Louie's daughter likes to talk on the phone (which says nothing about sales skills,) and is home for the summer, you've saved some money for now, but you still have to deal with the average turnover of a telemarketer of 300% per year, which puts you right back into recruiting costs. And what's the most expensive part of any in-house sales position? It's the money you pay the person between the time you should have let her go (because she's not performing,) and the time you finally do let her go.|
|Management||$10,000||The biggest complaint we hear from clients who have tried this is the amount of time it takes to manage the telemarketing function. Managing one good telemarketer takes about 25% of your time, plus sales training. Four will need a full-time manager. Enter 1/4 of your manager's salary here.|
|Salary||$20,000||Let's be short-sighted and give her (or him,) $10.00 per hour. JV/M actually has to pay quite a bit more than that, but that's because we have to get people who have high-level B2B experience, and who truly know how to sell. Write your telemarketer's wages here.|
|Telephone and other Expenses||$10,750||We didn't count telephone expenses before (about $4/hour for 2,000 hours per year,) but now we have to, plus the cost of a contact management system (about $1,000,) data bases and mailing lists (about $0.35 per name for 5,000 names.)|
|Gross Cost||$51,750||You might be able to do it for less, but if you count all the costs, and want to compare equivalent effort, it's going to be a lot more than the $20,000 you thought you were paying. What did you come up with?|
|Appointments||150||Most people tell us that we produce about three times as many good appointments as in-house telemarketing, on average. Two appointments per week is typical with a good in-house telemarketer (and zero or one is common,) where we'll usually get you one per day for a tough project, more for an easy one. Put in what you're getting.|
|Cost per Lead||$345||According to industry statistics, the average cost per lead is $295 for commercial services, and about $250 for industrial products for in-house telemarketing -- actual appointments cost more. (We just talked to a company that was paying over $1,000 per lead, and over $5,000 per appointment, using in-house TM!) What did your cost-per-lead come out to be?|
This is an easy calculation, assuming you can actually get your sales people to do the prospecting.
|Make Your Own Appointments|
|Total Compensation||$20,000||To calculate the cost of your own sales people making their own appointments, simply divide their total expected compensation by the amount of time they spend prospecting (and add in the expenses below.) A decent base + commission rep is going to make about $80K, and spend 1/4 of his or her time prospecting.|
|Expenses||$12,000||Telephone, gasoline and the rubber chicken they serve at the Chamber luncheon come out to about $1K per month for the average sales person. Include the cost of the lists that the telemarketer would have used, and a couple of dollars for letters and golf.|
|Management||$5,000||Do you want to include management time? How much nagging do you have to do to get them to go out, or pick up the phone? How much does sales training cost? Pick a number.|
|Opportunity Cost||$50,000||This is the biggest factor, and the source of the most controversy. Many sales people will tell you that if they have to go out prospecting then they're going to lose business at their current accounts. Sometimes they're right, sometimes it's an excuse not to go cold-calling. We picked an average number, assuming they're right half the time, they have a $1M territory, and are vulnerable on 10% of their accounts. You can estimate whatever you want, and take comfort in the fact that no one knows who's right.|
|Gross Cost||$87,000||If you ignore opportunity cost, this number is $37K. You'll see in a moment that it isn't going to make that much of a difference. What did you get?|
|Initial Calls||250||In order to compare apples-to-apples, you can't count these suspects as prospects until there is a second call. That's because the first call is where the sales rep finds out if there's a need. How many first calls do your sales people make during a week? Five would be a lot.|
|Appointments||100||Do your sales people turn up two good new prospects per week? Whatever they get, multiply it by 50, and enter it here.|
|Cost per Lead||$870||Having your sales people do their own telemarketing is good because you've already invested in the resource. Understand, however, that it's still very expensive. If you ignored the opportunity cost, your cost per lead is $370 -- still a lot of money.|
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 = $172.55|
Are you still sure outsourcing your Lead Generation is more expensive?