The True Cost of Leads

Why quality of leads matter more than the cost of acquisition of leads

The True Cost of Leads

A wise CEO once said, “You buy revenue.” There is no escaping the fact that revenue costs money to generate. We will spend money at different stages of the pipe–in Marketing, lead qualifying, and in Sales. Save some here and pay more later. Or pay more here, and save money later. The question is how do we generate sales in an optimal way so our output (sales) is at least five times higher than our input cost to generate that sales?

Most companies want to know the true cost of leads. They want to know what they’re getting for the numerous different ways they spend money to get leads. What is working and what is not? Should they spend more money on what seems to work? How much more should they spend?

Some of these companies are tracking their marketing spending carefully all the way through closed sales. They can generate a pie chart that shows their spending by lead source and the “ROI” on each.

However, this only measures what we call the accounting cost of leads. It only measures what the company spent in marketing related activities to acquire these leads. However, as the goal is to generate revenues from these leads, then all costs that went into generating revenue from a lead must be accounted for.

The true cost of sales is hidden in the sales cycle of the lead—the longer a lead takes to close, the more it costs. In fact, when seen this way, a lead that doesn’t result in sales may cost less than a lead that takes a long time to become a win.

Let’s run some analysis to see what this means.

Let’s say Company ABC generates about ten leads per month for about $8,000 per month, or $800 on average per lead. Three of them closed, each for nearly identical amounts of $50,000 in sales. The accounting cost calculation would say, we spent 8,000 to earn $150,000 or our cost of leads was only 5.3%

However, how true is this? We think it is grossly inaccurate.

First of all, it does not take into account the remaining seven leads that didn’t close. We know that some sales rep worked these leads and finally closed them out as lost. How much time and effort went into those leads that didn’t close? Those cost are significant and should be added to the $800 per lead we started with.

But even the leads that closed cost the company since a sales rep had to work them hard to close them.

The Real Costs are Hidden

Continuing with the above example, lets say that the three leads took different time spans to close. One closed in two months, another in four, and another in six.

If they were all comparatively the same value, then the lead that closed in six months cost the company three times as much as the lead that closed in two, in terms of continued sales rep and sales manager focus to close that lead.

But in reality, the costs are even greater than this. If we accept that we rely on the Sales Organization to bring in revenue, then we have to accept that the entire payroll of the company depends on the ability of the sales team to close deals. Therefore, it is not just the salaries of the sales organization that should go into the calculation. It is, in fact, the payroll and overhead of the entire company that should really go into the calculation of the true cost of leads.

The true cost of leads is not what you paid for the leads. It is how long it took the few that close to convert into revenue, and even worse, how long it took your people to work on leads that never went anywhere. Conversion rates and speed matter very much.

We are not suggesting that companies get side-tracked into spending a lot of time and money tracking all these numbers. What we are suggesting is that companies remember all of these costs when they decide how they will generate leads. What you thought you paid to get those leads may be the least expensive part of the real cost of these leads.

Managing the True Cost of Leads

A company should not only worry about how much it costs to acquire a lead, but how much it costs to generate revenue from that lead. The two together make up the true cost of leads.

Controlling the cost of acquiring the lead is simpler and therefore that is where many companies focus. However, as we have stated, the true cost is hidden in how long it takes to generate revenue from those leads. And even more subtle and costly is allowing a lead that will never convert stay on the pipeline and continue to try to pursue it.

The solution is to get rid of the scarcity mentality that makes sales reps hold on to bad leads. Fill their pipeline and they will become very discriminatory. Which means they will not waste time–and money–chasing after deals that will never close.

Sales reps should be able to quickly determine if a lead has any chance of closing within the forecast range. If that doesn’t look to be realistic, sales reps should cut their losses and exit. They will only do that if they feel they have plenty of high-quality leads in their pipeline. Otherwise, they will hang on to bad leads for a long time, only increasing the true cost of leads.