Originally published 1-27-16. Updated for accuracy.
As a business owner, you already understand that leads are valuable. They have a direct impact on your ROI, and they need to be nurtured by the sales team to be converted into new business. You don't need to have the difference between a lead and a sale explained. What you may not be sure about is how to calculate what a lead is worth or how lead value affects marketing ROI in a meaningful way. In today's post, we're going to discuss how calculating lead value will help you better determine your marketing budget and improve your ROI.
Calculating Lead Value
It's surprisingly easy to underestimate the value of your leads. In a key example, one marketing agency asked its client what they thought the lifetime value of their leads were worth. The answer the client gave was $50,000, but when the math was said and done, the answer was actually more than six times that amount — more than $340,000. Each lead was worth $132,000, which drastically changed how the client needed to consider their marketing.
Depending on the way your business works, there are two ways to determine lead value:
You may have hated algebra classes in high school, but right now, you're probably very glad you took them. To make things more complicated — and infinitely more useful — we actually recommend that you take the referrals those leads bring to your business into account as well. Mathematically speaking, you'll take the strict lead value and multiply it by the total number of leads, i.e., one plus the number of additional leads. So, let's break this down a little.
By the first formula, if a sale is valued at $2,000, but you only make one sale for every five leads, then the strict value of each lead is $400. However, if that lead brings in three referrals, the total number of leads is four and that lead is actually worth $1,600.
Similarly, by the second formula, if a sale is valued at $2,500, but your conversion rate is 20%, then the strict value of each lead is $500. If that lead again brings in three referrals, the lead is actually worth $2,000.
Once you know what your business' lead value is, you can make better decisions about sales goals and marketing much more definitively. It helps you understand how many leads you need each month to sustain your company, and how much advertising you should be paying for in order to achieve those leads. It also ensures you don't pay more for your advertising than what your leads are actually worth. It's also extremely useful to calculate lead value by source. You can determine how much of your marketing budget is best spent on particular channels, ensuring you get the right bang for your buck.
It's important to note that you don't want to start tracking leads using some variation of "How did you hear about us?" It's easy to fall into the "mention the ad" trap, especially since customers may be unclear, mention the wrong thing, or even give credit to a channel you're not even using to advertise your business. Marketing can be tough to track, in some ways, but there are plenty of tools to help, including:
Phone tracking services
Campaign specific landing pages
Site metrics such as referral source
The trick here is to ensure that each channel's expression of the campaign should be unique, but the message your brand is putting out to the world should be the same. You must balance brand consistency for your customers with clarity for your internal business processes.
Of course, tracking also needs to be coordinated with looking at your results. This isn't just because some users won't follow the instructions in your call-to-action. There are also a number of other technical reasons that may interfere with accurate tracking — browsers that don't report the source location based on the person's user settings. Tracking should always be compared to the conversions you're seeing in the same time period as your campaign.
Now that you have a better understanding of how to calculate what a lead is worth, it's time to take a closer look at your advertising budget. By utilizing lead value, you can ensure your budget goes to reaching more qualified leads for your team to nurture through to fruition.