The cost of a lead. How do you calculate it and reduce it?

Business owners and marketers are constantly solving one difficult problem: how to earn more while investing the least money. The cost of a lead is one of the most important figures for any business. Margin and overall profitability both depend on it. 

Being able to calculate and reduce the cost of a single lead is the defining trait of a genuinely good marketer. In this article you will learn how to solve the main problem of all modern marketing. 

The information is especially valuable now, when quarantine, COVID-19 and the crisis have sharpened competition in every niche. 

Let us start with the basic figures and see how to work with them.  

What is a lead? 

For every marketer, one of the main tasks is to interest a buyer in a product or a service

A lead is a basic concept in marketing. It is what we call a visitor to a site, a landing page or a business page on social media who has shown clear, active interest in a product or service. That interest can take different forms. Most often it is: 

• filling in a contact form;
• a call to the contact number;
• a message in a chat;
• an e-mail;
• a request for a commercial offer and so on. 

The cost of a lead can be determined by dividing the total cost of an advertising campaign by the number of leads it brought in. But that is only the general principle. Different situations bring a great many nuances. For example, the need to calculate the cost of a lead before the campaign has even started. 

The average order value and the figures connected with it 

The average order value is one of the key figures of any marketing campaign. It shows the ratio of total revenue to the number of sales. The average order value is always calculated over a particular period.   

How do you calculate the average order value? To do it, the total revenue has to be divided by the number of sales. 

The average order value depends on a well-considered pricing policy, on the range of goods, on service, on the sales funnel and on the lead generation tools used. 

This figure is an expression of how satisfied customers are with your service, goods or services. The size of the average order shows: 

• the price category of the company or the online shop;
• the level of customers' purchasing power;
• customer loyalty;
• the effectiveness of the marketing and of the loyalty programmes used;
• the prospects for cross-selling.  

CPL (cost per lead) 

This abbreviation is precisely the cost of a lead. Suppose you have already divided the budget spent by the number of leads and got a figure. But how do you judge it? To understand whether your cost per lead is acceptable, you have to take the nature of the product and your competitors' pricing into account. 

For example, when selling luxury cars a CPL of 10, 20 or even 30 USD would be a great success. When selling clothes, figures like that are a marketer's failure. 

To optimise CPL you have to take several factors into account.

How does a user decide to buy? 

The purchasing decision cycle can vary. Depending on the nature of the product, minutes, hours or even months pass between the decision and the purchase. 

There is a direct relationship: the higher the price of the product, the more time the decision takes. Once you understand the decision cycle in your business, you will be able to set analytics up properly and draw the right conclusions. 

For clarity, compare a coffee shop and an estate agency. In the first case you need an instant return in the form of sales. In the second it is important to track every lead carefully and get the highest possible conversion at each stage of the sales funnel.

Delayed conversion on a site 

A user often visits a site several times before buying. The channels of those visits can differ. The same user may come through an advertisement in Google, then through organic search results, and then through a saved link. Analytics will read that lead as direct traffic. But in fact it is a lead earned by paid search advertising — the first visit. 

It is important not only to connect the site to an analytics system but also to configure Google Analytics properly. Alongside that tool you can use Hotjar and other similar services. Together they will give a complete picture of user behaviour on the site. 

CPO — the price of a confirmed order 

Once on the site, a user starts moving down the sales funnel. Some of the visitors who become leads will become customers. CPO is one of the figures that describe the conversion process. 

CPO (cost per order) is the cost of one confirmed order. The figure can be overall or calculated for a single advertising channel. The formula for CPO is the same as the one for CPL. The only difference is that you divide not by the number of leads but by the number of orders. 

CLV — customer lifetime value 

This parameter describes the life cycle of a company's customer. It shows how much money you spent attracting a customer and how much profit that brought you. Knowing CLV, you will be able to judge how acceptable your CPL and CPO are. 

The figure is particularly important for businesses that depend on regular sales, online shops for instance. In such cases you need to track the purchase history of different customers over a particular period. For a deeper analysis, the customers should be split into several groups by meaningful characteristics. 

We recommend calculating CLV for each segment of the audience. It can differ between them, even though the average CPL will be the same. The higher the CLV, the better. Analysing it will help you target your advertising campaigns more precisely. 

From defining and analysing the key marketing figures, let us move on to how you can influence them with analytics, pricing and other tools. 

How do you reduce the cost of a lead? The main recommendations 

Reducing the cost of a lead is an important task in a crisis

There are several general recommendations that will help reduce the cost of a lead. Let us go through them in more detail. 

Be sure to set up end-to-end analytics and optimise your advertising 

You will be able to make well-founded decisions if you have complete and accurate information about visits and about what users do on your site. For that you need end-to-end analytics. The main data it will give you: 

• the price per enquiry (CPA);
• the average order value;
• total revenue;
• the return on investment (ROI). 

End-to-end analytics will show you every stage of the sales funnel and how each user moves along it. 

You will also see: 

• at which stages of the sale you have problems;
• which advertising channels, adverts and keywords bring more traffic and leads, and which simply spend your budget;
• which goods and services are the most profitable. 

Look for where your irrelevant enquiries and visitors come from

Attracting every visitor and every enquiry costs money. But far from all of them become leads. There can be a great deal of irrelevant traffic and irrelevant enquiries. That is a factor which seriously raises the cost of a lead and lowers the overall profitability of the business. 

So you have to find the irrelevant enquiries and eliminate the sources they come from. 

Once you have found the channels such enquiries arrive through, you will be able to redistribute the budget. 

Define the persona of your target audience in as much detail as possible 

To optimise the advertising and the content on a site, you have to understand clearly who is interested in your goods and services. A well-built persona of the target audience is a source of information for effective marketing decisions. What should such a persona contain? There can be a great many points, but there are several main parameters: 

• demographics (age, gender, place of residence);
• social characteristics (income level, employment, marital status and so on);
• the problems potential customers face (the lack of important everyday services, working tools and so on);
• values and priorities (caring for the family, personal effectiveness, the chance to save sensibly);
• search habits (which queries users type, which sources of information they use). 

Built the persona of your ideal customer? Now look at your site, your advertising posts and your landing pages through that person's eyes. Do they find answers to their questions and solutions to their problems here? Is the language clear to them? Are the arguments for buying from you convincing? Try to make the answer to all of those questions YES. 

Use tools for automation and optimisation 

Try to replace human work with automation as far as possible. That applies especially to routine actions. It is in those that most of the mistakes happen — the ones that cost you money. 

Test and adopt tools for analytics, automation and the optimisation of every process connected with marketing and sales. 

Conclusions. What will help reduce the cost of a lead? 

We have worked out what the cost of a lead (CPL) is and how it and other figures can be used to judge the effectiveness of marketing campaigns. What else can be done to optimise marketing KPIs? 

• Analyse your advertising channels. Track CPO and CPL for each of them: Google results, banner and paid search advertising, advertising on social media and so on. 
• Test different adverts for targeted advertising and in Google AdWords. Create several creative variants or ad groups. Aim them at the same audience. After a few days analyse the CTR (the ratio of impressions to clicks) and switch off the less effective adverts. Test new audiences and advertising platforms regularly as well. 
• Optimise the prices of your goods.

And keep reading our blog — we have many interesting and useful articles ahead!