Raise your hand if you know how much you’re willing to pay for a lead through pay per click advertising, or any other marketing channel for that matter.
(If you raised your hand, take that same hand and give yourself a hearty pat on the back. You, my friend, are awesome!)
For those of you who didn’t raise your hand, listen up!
Online lead generation is one of the fastest growing trends in online marketing. Organizations of every size whose final sales process & closing happen both on and offline are turning to the web as a great source of highly qualified leads. The possibilities are great, as are the pitfalls for those who are less than well equipped.
Managing a paid search campaign without a definite understanding of the value of a lead is like wearing a welder’s mask while walking through the woods at night.
Before we go much farther, it’s worth defining this thing called a lead, and how it differs from a sales transaction. A lead, is generated when a prospect, or potential customer provides information to an organization in hopes of learning more about a product or service, but no sales transaction is made – yet.
Determining how much you’re willing to pay for a lead is relatively easy. Except that some thought needs to be given to the amount of site traffic needed to ultimately produce a sale.
Let’s do a story problem…
Company A’s ppc campaign produced 200 leads over the last three months. From those leads, 6 sales averaging $800.00 were closed. How much is one lead worth to Company A?
(sales / leads) x average sale = value of a lead
( 6 / 200 ) x $800.00 = $24.00
Armed with that knowledge, Company A can not spend more than $24 to profitably acquire a lead.
Now, if you didn’t raise your hand earlier, chances are you’re wondering the following:
“Hmmm, that’s nice, but what does that have to do with the price of tea in China, or more importantly, my ppc campaign strategy?”
By determining that Company A shouldn’t spend more than $24 to acquire a lead, they can greatly refine their more granular performance metrics by examining the campaign data for that three month period of time:
:: Impressions: 18,000
:: Clicks: 2,600
:: Average cost per click: $0.45
So, if 2,600 clicks at $0.45 each translated into 150 leads, we know that Company A is currently paying $7.80 per lead. They deserve a pat on the back too! With such a comfortable gap between their current cost per lead, and the newly established ceiling of $24, Company A is free to expand their campaign in a more aggressive fashion in hopes of generating more leads and thus, more sales.
It’s well worth mentioning that while establishing these values, it’s VERY important to use campaign & sales figures that span a substantial period of time. Generally speaking, three months of data should suffice. Seasonality, social trends, marketplace competition etc. will greatly affect this as well, so be sure to consider those external factors in these calculations.
Now, go sharpen your pencil and dust off your adding machine; it’s time to do some math.