A successful marketing strategy has many components, but the overall efficacy always boils down to one question:
Are you acquiring new customers in a cost-efficient manner?
It’s the “cost-efficient” part of the question that is crucial. Anyone can throw a ton of money into a campaign and come away with leads. But that’s like using ten gallons of gasoline to start a campfire when a single match will do. One match is less wasteful and far cheaper.
By knowing your cost per lead, you can optimize your marketing campaigns so that you are using just the right amount of matches.
How Do You Figure Out Your Cost Per Lead?
In order to figure out the most economical use of your budget, you need a firm understanding of your cost per lead (CPL). So, what’s the best way to calculate it?
Cost per lead formula = total cost of the campaign divided by the number of leads generated
For example, let’s say you have $1,000 to spend on an AdWords campaign. If you gain 100 qualified leads from that campaign, then your CPL is $10 ($1,000/100). This figure helps determine where you will focus your marketing efforts, as the marketing channel you choose will have a large effect on your overall customer acquisition cost.
What is a Lead?
Before diving too deep, let’s first define the term “lead.” A lead is a potential customer that has arrived through one of your marketing channels. They have provided you with a way to contact them, such as a phone number, an email, or even just a name. The type of contact information collected will depend on how the contact got to you and what kind of business you operate.
Where Do Leads Come From?
Lead generation can come from digital marketing channels or from the good ol’ meatspace. For instance, you can get someone’s email through a Google AdWords campaign or you could get someone’s business card at a trade show. Both are examples of leads, and each has unique costs associated with it.
What is a “Qualified” Lead?
A qualified lead is like a regular lead, but better. Not only does a qualified lead provided you with contact information, but they have been vetted, through validation methods such as questionnaires and market research, to make sure that they are actually in your target audience.
A qualified lead is someone who has been identified as having a need for your services, the budget to buy, and a desire to find a solution to the problem you solve. A qualified lead should have a much higher than average likelihood of ultimately purchasing your product or service (converting), which is why many companies track qualified leads and regular leads separately.
Who Might Be Interested in Determining Cost Per Lead?
Anyone who wants to track their marketing effectiveness at a granular level should know how to determine their cost per lead. If you can lower your cost per lead while generating the same revenue from each lead, you’re doing it right.
CPL is an especially important metric for direct response marketing, which is marketing that includes a call to action. Examples of this type of marketing include digital display ads with CTAs such as “Click Here to Buy” or “Get the Guide” (example below from Intercom). In these instances, it’s straightforward to determine the cost per lead coming through the channel because the user action is easily tracked. You simply take the amount you spend on the channel and divide it by the number of leads generated.
CPL is also crucial in brand marketing, a type of marketing that promotes brand awareness but doesn’t necessarily include a call to action. An example of this type of marketing is a display ad at the top of a news site that simply includes a company slogan, such as a McDonald’s ad that simply says “I’m Lovin’ It”.
Tracking the cost per lead from such efforts is not as straightforward as with direct response marketing, but it’s still quite valuable. A holistic marketing strategy always aims to build up its funnel in multiple different ways — using a mixture of direct response and brand marketing techniques.
Cost Per Lead and Online Bidding
Online bidding, whereby companies bid on whether they get to serve an ad to a consumer who has taken a certain set of actions (such as performing a search), is the bread and butter of modern online marketing efforts. Online bidding campaigns are usually structured around one of three strategies:
CPM, also called cost per mille, is the price an advertiser pays for one thousand impressions of its ad on a web page. “Mille” is Latin for thousands, thus continuing the long and illustrious English language tradition of co-opting Latin words and using them ad nauseam.
The main benefit of CPM bidding is its simplicity. You pay a flat fee based on a fairly predictable amount of impressions, and you gain brand awareness along the way. The downside is that it’s harder to track how effective the ad is in driving qualified, quality leads to your site.
CPC, or cost per click bidding, means the advertiser only pays when someone clicks on their ad. The advantage of CPC bidding is that you don’t pay for “wasted” impressions that might come about in the CPM model. Rather, you are paying only when someone takes a valuable step toward conversion: clicking on your ad.
CPL bidding, as we’ve discussed, has the advantage of making sure that the advertiser is only paying for someone who takes the specific and highly beneficial step of clicking the ad and leaving contact information. It’s CPC bidding on steroids. CPL bidding is less risky for the advertiser, as they are paying (in theory) for exactly what they want. The downsides are that CPL campaigns take more time to set up and monitor, they are not used frequently, and advertisers can sometimes end up overpaying compared to other bidding mechanisms.
CPL vs CPA
CPA, or cost per acquisition, is a metric which tracks users who not only click on an ad but those who go as far as to make a purchase after clicking on the ad. Because generating acquisitions is the holy grail of marketing, it seems at first glance like CPA should mostly replace CPL spending.
But it’s not that simple. Both CPA and CPL bidding have their place. While CPA is good for those who want to generate sales right this second, CPL can be much more effective for marketers with a more long-term, holistic strategy. By collecting lead information, CPL campaigns give marketers the flexibility to reach their potential customers at multiple touchpoints. This is crucial if you want to build email lists, launch email retargeting campaigns, or start rewards programs. With CPA campaigns, you are taking an all or nothing approach — if the user doesn’t make a purchase, you might be left with no way of getting back in touch with them.
Here’s a great infographic for keeping everything organized in your mind:
So, What’s a Good Cost Per Lead for My Industry?
The average cost per lead by industry varies widely. For instance, financial services leads cost, on average, $271. On the other hand, leads in the and publishing sector only cost $191.
As the marketer’s goal is to maximize efficiency, it’s critical to know if the amount you are spending for a lead is in line with your industry’s average. If you are looking for leads in the media and publishing world and you are spending $250 per lead, something needs to change ASAP.
How to Reduce Your CPL for Online Campaigns
There are several good strategies for lowering your CPL, and any prudent marketer will diligently explore them all.
One strategy you can try is lowering your bids. If you consistently bid the same thing, you’ll reduce the time you spend tinkering with your campaign, but you also might be hurting your bottom line. Trial and error is the key to effective growth marketing, so you’re going to want to experiment. You might find a sweet spot where you are bidding a little less but getting equally good results for your campaign.
You can also try to find more efficient ways of generating leads organically. For example, SEO (search engine optimization) is one of the cheapest ways to generate leads. If you spend a bit of time developing a great company blog that ranks highly on search engines, it could turn into a solid money maker without requiring a huge spend. Similarly, the cost per lead on social media is still very cheap compared to the cost per lead on display advertising. Thus, a compelling and engaging company social media account might pay dividends for your business.
Finally, you should also be ruthless about analyzing your internal data. You might discover that when you check your performance by device, you are paying quite a lot for poor results on your mobile bids. That might cause you to reduce those CPLs while focusing more of your efforts on making money on desktop bidding.
There are few things more important to a digital marketer than acquiring, analyzing, and monetizing leads. If you can implement strategies that maximize revenue while minimizing costs, you’ll do wonders for your company’s bottom line. I hope that you can use the information and ideas in this post to become a marketing hero in your office.