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The Cost of Lead Generation

How much should you be spending to justify the cost of lead generation? How can you make sure you’re spending an appropriate amount as a small business?

Digital ad spending surpassed that of its TV counterpart in 2018. In fact, the total amount spent on digital ads was over 77 billion dollars. Yes. Billion. With that said, how can you make sure you’re spending an appropriate amount on your marketing as a small business? You don’t have the budget large corporations do. However, you still need to spend enough to generate new leads. How much should you be spending to justify the cost of lead generation?

But First, What is a Lead?

A lead is simply a potential customer that has found you through one of your marketing channels. These “suspects” are the people who have shown interest in your business and have given you a way to contact them. This is most often via a phone number or email address; however, this will depend on how the contact got to you.

Where Do Leads Come From?

Lead generation can come from numerous different marketing channels on the internet. You can obtain an email address through a Google AdWords campaign or newsletter sign up. You can get phone numbers when setting up free consultations or before downloading an ebook. And stepping away from the digital space, you can also generate leads in real life. This can be done through networking events, trade shows, lunch and learns, and other spontaneous meetings.

Do They Need to be Qualified?

If you’ve ever been in a marketing group, you’ll know the importance of qualified vs regular leads. A qualified lead valuable because they are more likely to purchase from you than a generic lead. Not only have they provided you with contact information, but they have also been vetted to make sure you two would be a good fit for one another. A qualified lead will have a need for your services, the right budget, and a desire to solve their problem (the problem you’ll be solving). Qualified leads have a much higher likelihood of converting, hence the reason qualified leads are that much more coveted.

Why Leads are Important

For most businesses, new customers keep cashflow stable. Attracting a continual, steady flow of leads is critical to any business’ growth. Leads are also important because they aren’t always the easiest to get. In a recent survey, Lead Generation Poses Biggest Challenge for B2Bs, by BtoB Magazine, “generating more leads” was cited by B2B marketers as their number one challenge. And while there are a number of blog posts with tips and tricks to generate more of them, there’s still one big piece of the puzzle missing. And that’s the cost of the leads you generate.

Lead cost varies widely between industries. And not all sources quote the same cost in each varied industry. Healthcare and fitness, for example, range anywhere from $53-$286 per lead on average. Information and tech services range between $41-$370 per lead on average. Financial services are close to Tech at $47-$272 per lead on average. And trades businesses spend anywhere between $26-$107 per lead on average.

How to Calculate Your Cost per Lead

To calculate your cost per lead, all you have to do is follow a formula. Divide what you spend on a campaign or channel by the number of leads that came in from that channel.

For example: Say you spent $3,000 on a pay-per-click (PPC) campaign. That campaign converted 50 users into leads. $3,000/$50 = $60 per lead.

As we just noted, the cost per lead will differ upon industry channel and the quality of a lead. If you want quality, a higher cost per lead might mean a higher quality lead with a lower overall customer acquisition cost. On the other hand, if you want quantity, you might want to lower the cost per lead. Even if that means the leads aren’t as qualified.

Conversion

As we’ve said, the cost of generating leads is determined by a number of variables. Other areas such as targeting, marketing channel, content, and creativity can play a major role as well. Many marketers will want to test different creatives across different platforms. This is known as A/B testing and helps gauge effectiveness and helps optimize a campaign. These conversion rates also vary by industry. Retail/commerce have an average conversion rate of 2%. Health and fitness have an average conversion rate of 8%. Technology has an average conversion rate of 5%. And Financial services have an average conversion rate of 10%. *

*  Marketing Insights, MarketingSherpa

So, What About You?

Facebook often recommends that you spend at least $100 on a campaign if you are a small business. Let’s say you are very lucky and a lead costs you $50 and you have a conversion rate of 10%. (Remember these are not qualified leads – they are generic leads or “suspects”).  Your $100 will at best, get you two suspects. And that gives you a 20% chance of closing business. The odds are 5 to 1 against you getting business from your $100 investment. Let’s up that spend to $500.  If odds are correct $500 will get you one converted customer.

What is that customer worth? If your customer is spending $3000 with you and you have a 25% gross profit, you have made $250 on your ad investment. (This assuming that you have the capacity to serve that customer with no additional cost.) A tech customer with a lead cost of $300 and a conversion rate of 8% (12 times 300 or $3600 per sale) show that they have to have a profit of $3600 from a sale to break even. And investing less than $3600 at a time is unlikely to produce results.

Want to Generate Leads the Conscious Way?

We know this can all feel overwhelming and you may feel discouraged. But there are numerous opportunities for small local businesses to lead generation in a cost-effective (but justified) way. If you have the ability to invest a chunk of change on a regular basis to lead generation costs, then, by all means, use that strategy to your advantage. But if you’d rather spend that money somewhere else in your business, there are other conscious strategies you can utilize.

The world of marketing is rapidly expanding. What’s trending and helping you gain new customers today won’t necessarily be the best way to grow your business tomorrow. With so many moving parts in both the digital and physical marketing space, it’s no wonder small business owners are unsure where they should even start. That’s where the Pittsburgh marketing agency onCOREventures Strategic Marketing comes in. We created onCOREventures for honest business owners wanting to operate in harmony with their core values. If you’re trying to create positive change in the world while also attracting customers who share your values, our “strategy first” methodology may be exactly what you’ve been looking for!

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About Kelly Gallagher

Hey there! I'm Kelly. I love to dream, create, dance, and hug all of the dogs. With a background in design and visual communication, I'm beyond excited to immerse myself into the marketing world.

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