How Much Does a Sales ‘Lead’ Cost?

I have recently been evaluating lead generation campaigns and thought it might be helpful to refresh some practical ways to evaluate the real cost of a ‘lead.’ First of all, what is a lead? A lead is a contact that represents a real opportunity to (eventually) get a sale.  When a list supplier or other lead generation engine sells me ‘qualified leads’, what am I getting?  Usually this means the supplier will provide you with contacts that meet a basic set of criteria, such as geographical location, job title, industry, company size, etc. In actuality, many suppliers offer you very basic criteria, such as company size and geography; they don’t get very granular. So how do you know whether these are good leads or not? Here are some common methods:

• you ‘pre-qualify’ the contacts by virtue of your ‘offer’. Usually, you expose a message to give something away (e.g. white paper, webinar, product trial, etc.), providing the respondent gives you basic contact information.  The logic goes like this - if your offer appeals to someone, they will respond to your offer; once they do, you can conclude that this is a potential buyer. In practice, this is a very poor way to qualify a lead. Many people respond to an offer for a whole variety of reasons, even though they could or would never buy your product or service.

• You provide a set of qualifying questions – only those respondents who answer the qualifying questions correctly are deemed to be leads; the rest can be discounted.

• You provide the lead supplier with a stiffer set of criteria; such as ‘director or higher’ level IT personnel, companies over 1000 employees, the pharmaceutical industry, in North America. This sounds good, but the supplier will generally increase the lead cost for each criterion. In practice, this type of qualification pushes the lead price through the roof.

In practice, it is usually most cost-effective to simply pre-qualify the lead with by your offer and then follow up with the larger number of generated leads. However, when you do this, remember that the overhead of tracking and engaging the larger number of leads also has a cost in terms of time and money of your sales team. And, you need to make sure that the cost per real lead is low enough to make the campaign successful. Let’s look at an example:

Say you are trying to sell an add-on product to Salesforce.com; you want to target sales and marketing professionals in the health care market, that work in North American companies over 1000 employees. You create a white paper that describes the challenges of managing sales campaigns in the health care space and then you contract with a lead supplier to distribute this white paper via email newsletter sponsorships and industry portals.  As part of the campaign, you create a questionnaire of 4 questions that a downloader must complete to receive the whitepaper.  These questions will help qualify the leads.  Now, assume you contract for 500 leads at $40 each.  That’s $20,000.  For these $20,000 let’s see how much a lead really costs.

1. From the list of 500 leads, only a percentage of them will answer the questions ‘correctly.’ The others don’t meet the criteria for a sale; e.g. they don’t use Salesforce.com, their job does not involve buying or using your type of product, etc.  For argument’s sake, let’s say 60% (or 300) of the downloaders meet your criteria. 
2. Now, you try to contact the downloaders via email or telephone.  You run several campaigns and after a few months, you realize that you actively connected with 50% (or 150) of the leads.  These contacts represent the true leads.  How much did they cost you?
3. What you paid: (500 leads @ $40) = $20000
4. Number of ‘real’ leads: 500 x (60% qualified) x (50% actually contacted) = 150 leads
5. So, $20,000 ÷150 = $133 per lead

Is a lead worth $133? Maybe and maybe not.  It depends on a lot of factors; either way, you must be doing this kind of analysis. The only way you can build a strong sales program is to work backwards from the number of deals you need, figure out the conversion rates from leads to sales, and then calculate how many leads you must be generating. Only then can you figure out how much you can afford to spend on each lead.