In many cases, you need to spend money and time to acquire leads. But how much does it cost your business to acquire a lead?
As a business, you need to know the cost-per-lead for your business. Of course, cost-per-lead differs by industries and yours must be similar to the average value in your industry.
Having this knowledge helps you to set sales goals and advertising budget.
Apart from these, you need to define what a lead is for your business. Is it an email subscriber or someone who calls to ask about a product? This helps to make your records of leads easier to track.
Why a Lead Generation Software?
The manual way of generating leads is at best, a waste of time, and at worst, loss of valuable leads. According to a study by Salesforce, B2B sales reps spend 21% of their time doing lead research. That is about 2.5 months in a working year.
A lead generation software will eliminate this time wastage as it can score and qualify leads to show you the most important leads to follow up.
In many cases, not all leads will fill your form or call your phone. Some just visit your page and leave. According to StatCounter, less than 2% of your website visitors are contacting you.
With a lead generation software, you don’t lose these leads as it helps you to track them.
Research shows that 73% of leads are not sales-ready and lead scoring efforts improve conversions by 79%. Without a lead generation software, all these unqualified leads are passed on to sales reps which could clog up the sales pipeline.
With lead scoring, your sales reps get to work on qualified leads and become more productive with their time.
Likewise, a good lead generation software will have integration to a CRM software which enables you to track your interactions with leads effectively.
If you want to generate more quality leads, a lead generation software will do that while saving time and cost.
That said, here are 6 ways to determine how much money to spend on lead generation software per month:
Determine Your Marketing Goal
Before you can determine how much you’ll spend on lead generation software, you have to define your marketing goals. [source]
Although there is no perfect correlation between the amount spent and the number of customers gained, there is still a correlation.
For example, the amount spent to gain 1,000 customers would usually be more than that spent for 100 customers in the same business. Your marketing goals would include important details like:
i). The number of customers: Here you have to set the number of customers you want for the year. This should be more than what you had the previous year.
ii). The number of leads: This is the estimated number of leads you need to gain the number of customers you want.
iii). Cost Per Lead: To run an effective business, you should always try to reduce your cost per lead.
iv). Channels: Here you have to estimate the number of leads and customers you want from each marketing channel.
You can draft your marketing goal based on your performance in important metrics the previous year. Your goal should be to improve on these metrics.
By automating lead generation with software and setting clear objectives, SmartBear, a software company, was able to increase their lead volume by 200%.
Set a Lead Generation Budget
To make a proper budget for lead generation, you’ll have to consider your marketing goal. This will usually depend on the number of customers you want to acquire. Bear in mind, though, that you’re focusing on ‘qualified leads’ only.
This should have been specified in your marketing goal. From the number of customers you want, you can estimate the number of leads that would give you the result.
Usually, businesses don’t have the same rate of success when it comes to the percentage of their leads that ends up becoming customers.
To know the number of leads you need, you can use your previous year records as the benchmark.
How many customers did you make the previous year and how many leads? Let’s say you made 200 customers last year from 1,000 leads, then you have a 20% success rate in converting your leads to customers.
So if you want to increase the number of customers acquired in the coming year to 300, it means you’ll have to make a target of 1,500 leads based on your previous success rate.
After specifying the number of leads that will get you the number of targeted customers, there are 2 major considerations to make in setting your lead generation budget:
Increasing your budget: If you want to gain more leads than the previous year, then you have to spend more than you did last year.
Reducing your cost per lead: Another way to gain more leads is to reduce your cost per lead. This is what you should be working towards as it means you can gain more customers even with the same budget.
Calculate Your Cost Per Lead (CPL)
How do you know the amount you spend to acquire a single lead? This depends on what you want to measure. For most companies, they compare their advertising cost to the number of leads they acquire.
In this case, their cost per lead = (advertising cost)/(number of leads)
However, these may not cover all the costs you incur to get leads. This is because advertising is not the only activity that brings leads to your business.
There is probably inbound traffic to your website from other sources apart from advertising. You can also gain leads through this means.
Therefore, you need to account for the cost of this channel. What marketing activities are generating inbound traffic to your website? Is it through blogging? Then you need to account for the amount you spend on content marketing.
Is the blogging done by your staff? Then you have to estimate the percentage of their work time they spend on it and get an estimate based on their salary.
For instance, if you have an employee who makes $8,000 monthly and spends 25% of their time on blogging and other website efforts, then $2,000 should be part of your marketing costs.
Another thing to consider is if you employ an agency that helps manage your website. This agency could take care of your content marketing and even search engine optimization (SEO) to help you get more inbound traffic that will convert to leads.
There are many other considerations to make and you just have to look at every cost that goes into how you acquire leads.
So let’s say you spent $5,000 on advertising, $4,000 on an agency and $1,000 for employee costs and get 250 leads for the month.
Your cost per lead would be: cost per lead = $5000 + $4000 + $1000/250
That would be equal to $40 spent to acquire a lead.
Calculate Your Customer Lifetime Value (CLV)
One of the most important calculations you need to make for your business is the average lifetime value of your customers. This is vital to your decision on how much to spend acquiring a lead.
With a healthy customer lifetime value, you know that even if you lose on your first transaction, you’ll make your gain over time as they perform more transactions with you.
A research by Bain & Company found that increasing customer retention rates by 5% increases profits by 25-95%.
But first of all, you have to acquire the customers. There are many ways you can calculate customer lifetime value and it can be as detailed as you want. One way to calculate the customer lifetime value is shown below:
You can also add more details like customer retention rate and discount if you want to make your result more accurate.
There are two major types of customer lifetime values you can calculate:
Historic CLV: This takes account of all the transactions you have done with a customer.
Predictive CLV: This uses historic CLV and other important industry information to predict the customer lifetime value of a customer in the future.
To determine the amount you spend to acquire a lead, predictive CLV is probably the best choice to use.
Know Your Churn Rate
The churn rate is the rate at which customers stop doing business with you. The average churn rate for your business helps you to make a decision on how much to spend acquiring leads that may turn out to be customers. [source]
To calculate the churn rate for your business, you can use this formula:
Customer Churn rate = (number of customers at the beginning of the year (or month) - the number of customers at the end of the year (or month))/number of customers at the beginning of the year (or month)
To make your business sustainable, you want to keep your customer churn rate below 5%. Going above 10% may lead to the downfall of your business.
Can You Sync the Software with Your Sales Tool?
One factor you need to consider in a lead generation software is whether it can integrate with other sales tools like CRM software packages or not.
This is because your customer acquisition process doesn't end with capturing leads. After acquiring leads, you want to be able to follow up with them and track your interactions with your leads.
A lead generation software that doesn't synchronize with other sales tools means you'll have to input your leads manually into these sales tools. This will cause another issue you want to avoid.
By implementing effective lead scoring and nurturing through integration between lead generation software and sales CRM, Managed Maintenance was able to get a 75% increase in lead generation in a year.
Spending on lead generation software is vital as it helps to eliminate some obstacles that your sales reps might face in turning your leads to customers. But you have to spend money on this software without posing a risk to your profits.
Follow these tips to help you determine how much your business can afford to spend on lead generation software.