What is the optimal cost per lead for your business?
The obvious answer would be that the lower you can acquire a lead the better, which is not necessarily wrong however this way of thinking can pose certain problems.
It is interesting to note that many companies do not have a solid understanding of how much a lead is really worth to them and what the optimal cost per lead is. Instead they are more focused on driving costs down rather than really optimising them.
When it comes to working out the optimal lead cost, the answer will vary depending on your business, budget and other factors. There is definitely not a one-cost-fits-all solution here as every business will have to weigh up their relationship between volume and cost.
Understanding the Relationship Between Volume and Cost
The relationship between lead cost and lead volume is not usually linear. For example, say you have 50 leads per month and they cost you $50 each. This means in one month you have spent $2,500 on lead generation.
The usual line of thinking with this is that if you were to spend $5,000 a month you would get 100 leads, however often there are many variables that may skew this result.
It is common for leads to increase as variables increase however, it is not always the case. This means that the relationship between volume and cost is more about working out what your customers really want rather than blindly increasing the budget.
When you keep your budget smaller you can also work at really optimising your PPC campaign and milking it for all it is worth. This not only will benefit you in the long run, but it will also show your company the true potential it has to generate leads.
As blogger, Patricia Hursh states-
“With a very small budget you can milk all possible efficiencies out of a PPC campaign. As spend grows, budgets and bids are increased and a wider keyword net is cast. All of this will likely generate more leads but at a higher overall, average cost/lead.”
Testing Your Volume/Cost Relationship With the Marketing Efficiency Curve
All marketers must test their campaign efficiency curve in order to understand the volume-cost relationship for their particular industry. These results may also change or deviate as marketing campaigns are optimised and data is gathered over time.
To understand the efficiency curve in terms of the volume-cost relationship, think of it like this-
Say you have 100 leads per month at an average cost of 50 dollars per lead one month and 150 leads for 80 dollars another month.
Looking at these facts blindly, it may be obvious to state that 50 dollars for 100 leads is better value and therefore a better month however, that may not be the case.
Certain factors like lead-to-scale ratio, the average profit margin associated with each sale and the lifetime spend per customer will all skew which month had the most pleasing results.
It may actually be that the $80 month was able to generate more revenue and a better ROI even though the leads were more expensive.
This means that as a marketer, you really need to analyse the data before and after the sale to know where the break-even point is.
So, with all of this in mind how do you really go about finding the optimal lead cost for your company?
Finding the Optimal Lead Cost
1. Test the market
Every audience and demographic will respond differently and will have different needs. Testing your specific market to find the optimal balance is definitely important and in the long run will save you time and money.
2. Balance Lead Volume and Lead Cost
Balance is really key here and this balance will of course, all depend on your ROI. Even once you have found the balance between your leads and the cost, this number needs to keep being tested and tweaked according to campaign performance and other trends. Remember to also consider other factors that may skew this balance such as:
- The average profit margin associated with each sale
- The average life time spend of each customer
- Your lead to sale ratio
3. Don’t Just Focus on Driving Costs Down
Instead of finding every way possible to lower your lead costs, instead focus on maximising your lead volume at a price that feels comfortable to you and your company.
When you continually strive to reduce the cost per lead, you reduce the scalability of your business and you may also lose out on maintaining and increasing volume.
When it comes to determining the optimal cost per lead for your company don’t fall into the trap of thinking that lower costs are better.
Instead think broader, do your research and really look at the statistics in a holistic manner. Sometimes spending more to gain just a few more leads can be far more rewarding in the long run and can deliver a stronger return of investment.