Two of the most common metrics that sales and marketing teams use to evaluate how much it costs to acquire new business are cost per lead and cost per acquisition. What is cost per lead? That is defined as how much a company spends to acquire leads, divided by the number of qualified leads it generates.
What Is Cost Per Lead and Cost Per Acquisition?
What the industry means by "cost per lead" or CPL is the total amount of money it costs an organization to generate leads. CPL answers the question, how much did you spend to obtain a list of potential clients or customers who might want to buy your goods and/or services?
We'll use the industry-standard cost per lead formula, which applies to both B2B and B2C:
Cost per lead equals total marketing spend (S) divided by the number of new leads (n)
CPL = S/n
Some analysts might take the calculation a few steps further by comparing "marketing qualified leads" against "sales qualified leads," but for the purposes of this article, we'll define a lead as a person or company that could become a customer or client. A lead is someone who has not yet purchased from our business, but who meets the criteria to become a paying customer.
Examples of CPL
Here are two hypothetical examples we'll use throughout this article.
Company A sells tankless water heaters to residential and mixed-use property owners and property managers. They spent $10,000 on a digital campaign to create a landing page with an advertorial comparing hot water heater tanks to tankless technology. The article contains a fill form for readers to request more information about tankless water heaters. The $10,000 covers its digital marketing agency's fees and online advertising fees.
The ad runs for 30 days and generates about 5,000 clicks with 200 solid conversions, for a cost of $50 per lead and a conversion rate of 4%.
Company B is a property management firm that provides commercial cleaning, maintenance, HVAC services and other maintenance to large office buildings and medical facilities in 10 major cities across the U.S. They purchase lead lists, which they then dole out to sales teams to work. Using data from LinchpinSEO, the average CPL in financial services (which includes the real estate industry) is $160. So if Company B purchased a lead list of 200 names, they've spent about $32,000.
Now that we've reviewed how to calculate cost per lead, let's compare that with cost per acquisition.
Cost per lead vs cost per acquisition
CPL differs from cost per acquisition (or CPA), which is how much an organization spends to acquire a paying customer or client.
Cost per acquisition equals total marketing spend (S) divided by the number of new customers (c)
CPA = S/c
Continuing with our example above, Company A, the tankless water heater company, spends another $5,000 in salaries, commissions, and resources for the sales team to work the lead list. They send emails, make phone calls and send proposals to the property owners. Of the 2,000 leads, 150 leads convert to customers (this is our hypothetical example; we can dream a little). The CPA is $100 ($10,000 + $5,000 divided by 150).
For Company B, they convert only 5 of the 200 names, estimating their CPA to be $6,800 per lead ($32,000 + $2,000 divided by 5).
Whether the CPA is worth it depends on the value of the contracts, the length of the terms of the contract, and other factors that go into the cost and benefits, which is often analyzed using a metric called "customer lifetime value," or CLV. Financial analysts will look at these metrics to determine whether their marketing and sales strategies are worthwhile. You might think that $6,800 is a lot to acquire a customer, but if the CLV is over $1 million dollars over the next 5 years, you might have a different attitude.
These are the types of metrics that sales managers, business development teams and executives analyze to discover opportunities for improvement.
Is Buying Leads Worth It?
Unfortunately, there isn't a solid yes or no answer to say whether you should continue to purchase leads or spend marketing dollars to generate leads through online advertising. The answer depends on your location, your budget, the size of your company, the competitiveness in your market and a slew of other factors.
In the commercial real estate industry, many developers, service providers and agencies are finding that prospecting tools are more effective and efficient than purchasing lead lists. They're using a web-based platform that gives them access to very large datasets that contain tens of thousands of records.
Company A, for example, could search for CRE property owners and operators that specialize in multi-family and mixed-use properties within any geographical location. They're finding that their conversion process is much more streamlined, because the prospecting platform puts them in direct contact with decision-makers. They're still conducting their online advertising, but they've been able to reallocate some of their spend, resulting in a better conversion rate.
Company B, the property management firm with teams in 10 cities, no longer purchases outdated lead lists and exclusively uses the web-based platform, which is updated daily. They have reduced their spend by XX%.
To learn more about how the prospecting platform works, request a free trial.
"The Biscred platform has streamlined our process and reduced our prospecting timeline by more than 50%." - CMO, BASE4