Finding The Optimal Cost-Per-Lead

It’s amazing how few companies can tell you what an online lead is really worth. I’ve found that most marketers embrace the lower is better philosophy. But, is a low-cost lead generation strategy always the best choice?

I contend that there is an optimal lead cost for every company. Establishing the right cost-per-lead model involves testing the market relationship between volume and cost… and ultimately must be driven by ROI.

Continually reducing cost-per-lead

Many B2B search marketing programs are designed to drive prospects to online contact or registrations forms. A common way to manage these campaigns is to drive cost/registration lower and lower, over time. Of course, one must ask: what is happening to volume with this strategy? How many potential registrations are being left on the table?

The cost/volume relationship

Undoubtedly, there is a relationship between lead cost and lead volume, but typically it is not linear. Let’s use a B2B pay-per-click (PPC) campaign as an example.

If 50 leads per month cost $2,500 ($50/lead) twice as many leads will not necessarily cost $5,000 (still $50/lead). It is common for lead cost to increase as investment increases. Why? With a very small budget you can milk all possible efficiencies out of a PPC campaign. As spend grows, budgets and bids are increased and a wider keyword net is cast. All of this will likely generate more leads but at a higher overall, average cost/lead.

The marketing efficiency curve

Each marketer must test this “PPC efficiency curve”, understanding the volume/cost relationship for their particular market. As campaigns are being optimized, data is been gathered, and marketers must analyze their options.

For example, would you rather have 100 leads per month at an average cost of $50/lead, or 150 leads per month at an average cost of $80? True: $80 is more expensive than $50 — but, depending on factors such as lead-to-sale ratio and the average profit margin associated with a sale, an eighty dollar lead might be the best choice. In fact, a savvy marketer might be willing to spend much more per lead, based on ROI.

Finding the optimal lead cost

Marketers who expend the time, energy and effort required to estimate the value of an online lead have a big advantage over their competition when navigating the marketing efficiency curve. Instead of focusing solely on driving cost/lead down, these savvy marketers focus on maximizing lead volume at an acceptable (profitable) cost/lead.

Where is the sweet spot for your company? I urge B2B marketers to test the market and find the optimal balance between lead volume and lead cost, based on ROI.

Opinions expressed in the article are those of the guest author and not necessarily Search Engine Land.

Related Topics: B2B Search Marketing | Channel: Search

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http://www.nimaheydarian.com Nima

Any resource suggestions on how to find the actual optimal cost-per-lead?
SearchMeister

Given a limited budget, your most efficient method is still to strive for the lowest cost per lead possible, provided you can still spend the full budget. If you have no fixed budget, then you would continue purchasing leads until the marginal profit is zero, thus maximizing profit. Not many marketers work with an unlimited budget, however.
http://www.practicalcogitators.com tmadel

Interesting column. I agree completely that minimizing cost per lead can be a very misguided goal. Focusing on ROI is absolutely the right thing to do.

It is dangerous, though, to rely only on averages when doing this analysis.

For instance in your example above, you say that someone could get 100 leads for an avg. cost of $50 per lead. If they wanted more leads (to 150) the average cost per lead would rise to $80.

You argue they still may want to do this if the ROI worked out: the return per lead > $80.

This is not true, because while the average lead may now cost $80. The incremental leads cost $140.

If you get 150 leads for $80 each your total cost is $12,000. If the first 100 leads cost $50 each they total $5000. That means the additional 50 leads cost $7000 or $140 each.

If each lead led to $100 in revenue then it seems to make sense that paying an avg. of $80 per lead is smart, but not when the incremental leads are costing $140.

Be very careful with averages!!!!
http://www.marketingdrs.com elcer24

Having spent millions a month on PPC, it was possible to determine the optimal point for a PPC campaign.

As Patricia mentioned, you can either get some unknown volume at a fixed CPA OR fixed volume at some unknown cost.

The If you graph volume VS acquistion, you basically get a parabola. If you know the equation of that line, you can use Calculus take a derivative and get the values at points of inflection.

For the rough guestimate method, graph volume on an X-axis and CPA on the Y-axis. You can visually predict a range where you’ll get the most volume for the least cost (the farthest point of the curve), which will be close to the optimal point for business (or clients’).

In my practice, I generally start with a client’s desired cost per lead, assume a 2% – 5% conversion rate, and then set my CPCs, adjusting on the purchase cycle timelines (average time from first visit until conversion). CPA = CPC / Conv% OR CPC (max) = CPA (target) * Conv%

Guess I should write a white paper and include graphs?
-Eric Clark
http://www.echoquote.com daleu@echoquote.com

I think you hit the nail on the head (and your math was fine) but wonder why every marketer focuses on the cost of the lead versus its value to the organization, especially in B2B.