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How to manage Cost per Lead?
When looking at your Marketing Dashboard, you know the various lead sources are not easy to compare like apples to apples. For each lead channel you’ll have to account for:
- Lead speed - Inbound “hand-raisers” expect a faster service vs. Outbound prospects.
- Effective content - Someone who converted to a lead while watching a video about various solutions like yours, is at a different stage of education, and thus warrants a specific follow up, vs. someone who just clicked on an ad after a Google search.
- Expected engagement type - A lead that originated from LinkedIn will have a different expectation as to the type of follow up, vs. a lead that originated from an in-person referral or an inbound phone call.
The biggest difference though is how you think about the cost of the various lead channels. What’s the direct cost (advertising, staffing your online chat, the price of the booth at a trade show) or indirect cost (your all up team payroll, the overhead of your company's benefits, the investment in branding and brand awareness that’s not unique for a specific lead channel). To allow you to benchmark and optimize your various lead sources based on ROI, here’s what I recommend you do to calculate Cost-per-lead:
- Split your “Customer Acquisition Cost” (CAC) into all-up CAC and discretionary CAC, as follows:
- All-up CAC - Include all your marketing costs, including long term investments like brand awareness, people, your website and marketing automation infrastructure, and tools you use to run your marketing function. This CAC figure is most useful for presentations to investors or Board Members, and your executive team, to fine-tune long term marketing effectiveness, and cost of your growth. This CAC number is less useful in weekly/monthly/quarterly optimization of the ROI of your marketing team.Split your “Customer Acquisition Cost” (CAC) into all-up CAC and discretionary CAC, as follows:
- Discretionary CAC - This number has the be tied as specific as possible to your demand generation efforts by channel. It will be the basis for your cost-per-lead analysis. Here are some examples of what to include:
- Advertising cost (Banners, Cost per click, Cost per impression, Cost per engagement or form fill, depending on the advertising model)
- Event cost (Tradeshows, Regional Events, Sponsorships)
- Campaign Cost (Execution support, content production, renting materials, etc. to support specific demand generation campaigns)
- Contractors and Vendors that support your execution of a specific channel (PPC Management, ABM Agency, etc.)
- Database Marketing cost (lists, data cleansing, outreach campaigns, in-mails, paid messages)
- Define your “Marketing Qualified Lead” (MQL) as one single output for ALL your marketing lead sources. Create one version of all MQL that have equal value, so that your cost-per-lead calculation across channels will be “clean”.
- MQLs are easiest defined as any lead that Marketing dreams worthy (“Qualified”) to send to a Sales Development Representative (SDR) for initial qualification and the planning of a meeting with a Sales Executive.
- Most teams will have multiple types of MQLs. For a useful “cost per lead” calculation, you can choose to combine these types of MQL or track them separately. As long as you do this consistently and don’t change your approach, you’ll get useful insights that allow you to do Marketing Channel ROI optimization.
- “Hot” MQLs - “Hand raisers” who have filled out a form, or initiated a phone call or online chat and have expressed interest in your product by asking for follow up (a demo, a call or pricing/product information). Speed is of the essence in following up on these leads.
- “Activity” MQLs - These leads have been “qualified” based on the activity that is tracked by your Marketing Automation System (like Hubspot). Based on visits to your website or social channels, downloads, opens of emails or other digital signals (within a certain time) your lead scoring rules have determined that these leads are worth following up.
- Pick a time period of direct cost (discretionary) to be tied to your MQLs per lead channel. I think weekly and quarterly (13 weeks) are good windows. My preference is weekly unless you have initiatives where the cost that is tied to a specific channel spans a longer time frame (a trade show for example, that includes preparation and execution). Monthly does not work as the various months will have different lengths.
- For these two periods, add up all the discretionary costs that support a specific channel and use that as input to your “cost per lead” calculation. Don’t change this time period for at least a year, and see how it works for you.
- Now that you’ve “locked” the definitions of “cost per time unit” and “lead”, you can calculate cost-per-lead at the ongoing time windows based on the time unite you picked.
Review weekly, and learn from the cost of your different lead sources. If your Leadership team requires you to report monthly (vs. weekly or quarterly) you can just use an average of your weeks passed to calculate your ROI per channel. While the comparison of a 4 week month vs. a 5 week month will not be 100% accurate, it still allows you to do meaningful comparisons and show trends.