What is a Lead Worth to You?

[mashshare]

Running a business without paying close attention to its metrics is a recipe for failure. Businesses fail all the time, and I don’t want yours to be one of them.

One of the most important metrics to know and constantly focus on improving is your average lead value. This article will discuss what average lead value is, how to identify it for your business, and what to do about it once you know what it is.

WHAT IS AVERAGE LEAD VALUE

Average lead value is simply the profit you expect to make, on average, for each new lead that you generate through your marketing efforts. Of course, some leads are literally worth nothing, and some leads turn in to your best customers and are very profitable.

But understanding your average lead value, taking all cases into consideration, is ACTIONABLE. Once you know your average lead value, you can do something about it, and focus specifically on improving it for greater profitability.

HOW TO IDENTIFY YOUR AVERAGE LEAD VALUE

A very simplistic way to calculate average lead value is:

[gross profit]
—————-
[# of leads]

It’s important to compare these metrics for the same time period. So, if you’re using 2014 gross profit, you need to divide that by the number of leads generated in 2014.

A more valuable way to look at average lead value is to consider the impact of retention. Hopefully people are renting from you more than once! And assuming that’s the case, it’s important to count the expectation for future sales in the average lead value. A three year value is a reasonable projection to use.

The calculation is two steps:

[3 Year Average New Customer Value] = ([average expected profit per sale] * [average # of sales per customer per year]) * (1 + [Retention Rate] + [Retention Rate] ^ 2)[3 Year Average Lead Value] = [3 Year Average Customer Value] * [Lead to Sale Conversion Rate]

Here’s a handy tool to make it really easy:

DOWNLOAD:Average Lead Value Tool

For those that support both B2C parties as well as B2B events, you will want to segment, because you don’t want your B2C leads mixing with B2B leads, because they’re fundamentally different. In this case you want to calculate your B2C average lead value and your B2B lead value seperately.

Taking it another step further, you could segment by marketing channel (AdWords, SEO, EasyLeads, etc), or geography, or lead demographic, but that requires you to be able to identify the required metrics for each channel. It’s possible, but not something we’ll cover here.

WHAT TO DO WITH YOUR AVERAGE LEAD VALUE

Once you know your average lead value, you can decide the acceptable acquisition cost for each new lead as well as make informed decisions to grow your business. Acquisition cost simply means how much you’re spending, on average, to generate each lead.

Let’s cover a few examples. In each example, let’s assume your B2C average lead value is $10. So your lead acquisition cost cannot exceed $10 in order to turn a profit.

Example #1: AdWords

It’s important to differentiate between cost per click and lead acquisition cost. A click is simply a *potential* lead. It only becomes a lead when you have the ability to nurture their buying decision, and no, having a website does not qualify. You need their contact info – a phone number and/or an email address.

So you know that you need your lead acquisition cost to be under $10 for your AdWords investment to be viable. If your lead acquisition cost is over $10, you might win business, but you’ll essentially be bleeding your cash flow into an unprofitable marketing strategy. In order for it to be viable, you either need to improve your average lead value, or reduce your lead acquisition cost.

So let’s say your cost per click is $0.50, and you convert 10 out of every 100 clicks into leads (capture email / phone). That’s a 10% lead conversion rate… not bad. In this case, your AdWords lead acquisition cost is $5. Every lead makes twice as much profit ($10) as it cost to generate ($5). Congratulations, you have an effective money making machine!

But let’s say your cost per click is more like $1.00, and you convert 5 out of every 100 clicks into leads (5% lead conversion rate). Now your AdWords lead acquisition cost is $20. Ouch. A lead is costing twice as much as it’s worth.

Use your own numbers, plug them in to the 2nd worksheet in the Average Lead Value Tool and compare with your average lead value.

Do NOT assume you know your lead conversion rate. You need to know your numbers, not guess. You might be surprised. If you don’t have a strong lead conversion process on your website, let us know… we can help.

So… if you’re investing in AdWords, is it viable? Let us know in the comments.

Example #2: Facebook

The key thing to understand with Facebook marketing is that the point is NOT to have more likes. This is difficult for some to grow out of, but the quicker you do, the sooner you can use Facebook in a way that can create dramatic positive returns for your business.

Basically it goes like this:

Website visitor < Like < Lead < Customer < Champion (customer who refers others)

A like only has value if you have a strategy in place to convert it to a lead.

What this means is that if you’re investing in Facebook ads, you need to divide your entire investment by the number of *leads* it generates. Based on our assumed average lead value of $10, if you spend $200 and generate fewer than 20 *leads*, it’s not yet a viable marketing channel… you have work to do.

If you don’t have a strong Facebook lead generation funnel, let us know… we can help.

Don’t pay for likes. Pay for leads. You need *leads* from your investment. Likes should come naturally, based on how you conduct business and connect with your customers and community.

QUICK TIP: Using a service like EasyLeads makes it super… easy… to convert likes into leads. Simply announce a raffle or giveaway on a Facebook post, along with instructions on texting your EasyLeads keyword to enter, and perhaps invest a couple bucks to promote the post for a couple days. Even just a couple conversions covers the cost of EasyLeads, and people are generating much more than that with even a single post.

Example #3: EasyLeads

EasyLeads is the simplest way we’ve found to generate leads in this industry.

And the beauty of it is that it’s available for one low price on a monthly basis, not on a per-lead basis (or per click or per like). It only takes a couple leads per month to break even. And imagine if you do what one customer did and generated 15 leads in your first week… what would that be worth to you?

Learn more about EasyLeads

WHAT DO YOU THINK?

Did this article help you? Do you have something to add? Share it in the comments below!

[ms-protect-content]

[/ms-protect-content]

5,025 Comments

Comment navigation

Comment navigation