In our 20+ years experience as sales and marketing executives, we have learned the hard way that a poor quality lead, even if it came free, will cost a lot of money and time to follow through, only to end up with no deal closed.
Let’s illustrate this lesson with an example:
Assume that your average deal size is $15,000 and your sales rep costs you an average of $7,000 per month fully burdened (this could vary significantly up or down based on location of hire).
Let’s say that you acquired 10 leads, each at 100 dollars for a total of $1000, and provided these to your sales rep. Let’s say two closed after taking 6 months to close. Therefore, it cost you $43,000 plus commissions to earn $30,000 in revenues.
Let’s say you received 10 more leads each for $1,000 dollars or for a total of $10,000, from a different source. However, four of these leads closed within three months. This means that it cost you $31,000 ($10K for the leads and $21K for three months of salary to the rep) to close $60,000 of business. To make it easier to compare costs, during the same six months, with these higher quality leads, you are able to close $120,000 for a total cost of $62,000 plus commissions (i.e. 20K for 20 leads and $42K for six months of salary for the rep)
Therefore, although the first set of leads looked ten times cheaper at only $100 versus $1000, the quality of these leads was so poor that they ended up costing you nearly three times as much as a percentage of revenue generated—i.e. it cost you $1.43 for each $1 of revenue you produced to process these leadsleads. In the meantime the “expensive” leads cost you only 52cents for each dollar of revenue, since their quality was better–they closed at a higher rate and faster than the much cheaper deals(see chart).
It is very important that you factor in closing ratios and sales cycles when you calculate the cost of leads, not just what those leads cost you per unit when you acquired them.
Ultimately what you want is revenue and not leads. Since you have to process the leads until they are closed won or lost, you have more costs to factor in than just input cost of leads.