How Much Should a Qualified Lead Cost?

It’s a Puzzlement!

Virtually every aspect of our lives is counted or measured. Everything from the calories we consume (too many), to the weight of all of the termites in the world (all termites outweigh all humans by eight times) is measured and reported - often showing up in USA Today in a box that says something like “We’re Eating More Garbanzo Beans.”

Businesses are no exception to this rule. Supply chain statistics, number of days’ inventory in stock, A/R aging, cost per lead, and hundreds of other statistics are sliced and diced by businesses every day.

On the top line, sales people have quotas, marketing people have budgets and executives are frantically driven by quarterly results. The most essential element of the cost per sale, however, is largely unknown. Few executives can tell you what their actual cost per lead is, much less what it should be.

A Bit of Background
They may be putting a pleasant face on it in your company, but sales people seem not to like marketing people very much, and vice versa. Sales people constantly complain about the quality and quantity of leads produced as well as the cost per lead. Marketing complains that they never get feedback on leads and that the field fails to follow-up on any “qualified lead” that marketing creates. Unfortunately, both sides are right.

The fact is, fewer than 7% of the “leads” passed to sales should be. That means it is normally left to sales to contact one hundred companies to find seven (or fewer) real leads. A problem? Well, great “hunters” are generally not great “beaters,” and vice versa. So, when marketing sends one hundred leads out to a “hunter,” there is a better chance that none of the leads will be followed up than leads to a “beater” and opportunity might be found, but will not be effectively sold. And that drives up the cost per lead.

Even when sales takes the time to plow through a stack of leads, and finds a qualified lead or two, they are not very likely to pass credit along to marketing. So from marketing’s perspective, any qualified lead seems to end up in a dark hole.

As a result of all this, most companies default to “buying leads” for the lowest possible price, and measure marketing by quantity, not quality - an apparent vicious cycle where it appears cost per lead has gone down, but qualified leads have not increased.

What can you do?

Know the Numbers
1. You probably know, or can find, the cost of each campaign, and the number of responses each yielded. For example, a $50,000 budget might result in mailing 20,000 direct mail pieces, or inviting 25,000 individuals to a webinar, or calling to qualify 2,000 companies. Trust that my cost assumptions are consistently conservative.

2. Being generous, we’ll assume a 1% response so that the direct mail and webinar invitations yield approximately 200 and 250 responses respectively.

3. A good rule of thumb is to assume that 5% of your addressable target audience is interested “short-term” in your offer, while 15% have long-term interest. Since sales people are driven to produce short-term revenue, we apply the 5% short-term percentage to the total universe and yield 10, 12.5 and 100 short-term leads respectively.

4. Hence, the following costs per short-term qualified lead: direct mail ($5,000), webinar ($4,000) and outbound calling ($500).

Don’t believe me? Calculate the real cost per qualified lead for your business.

Overcoming Objections
The two most common objections I hear when discussing the concept of cost per lead are:

1. The calculations ignore the residual branding value of using direct mail to find a qualified lead.

2. Our cost per lead is a lot better than the numbers you have used.

Well, first, it is pretty clear in today’s economy that brand or image advertising is reserved for the Coca Cola®s and Microsoft®s of the world – not the average technology company.

Regarding the second objection, as much as 85% of direct mail to businesses is either not delivered or never read by the intended “decision-maker,” who would serve as a qualified lead. Even companies that avoid common mistakes (such as using standard mail instead of 1st Class) find that mail delivery and recall rarely exceeds 15%. Email is even worse. Too, otherwise rational people feel they should enjoy a 2% response on mailings, as though it is an inalienable right. The reality is that the average business-to-business mailing will pull .25 - .5%. Increasing response with bribes increases cost, but usually does not decrease the cost per lead.

Recommendation
Calculate and agree on an acceptable cost per qualified lead. Do not accept cost per response as a substitute. In our example, the cost per response is $250 and $200 for direct mail and webinars respectively, but those numbers are meaningless. Only the cost per qualified lead (#4 above) will provide you with a clear picture of your return on each program. Basing decisions on cost per response rather than cost per qualified lead will result in cascading inefficiencies along the “sales supply chain.”

Finally, hold sales accountable for every lead. Add every lead to the forecast. And take NO lead off the forecast without sales management approval.

So, what is the ideal cost per lead?

It’s simple. The ideal cost per lead is more than you probably think, but probably a lot less than you are paying!

About the Author
Dan McDade is the founder and president of PointClear, the Business Prospect Outsourcing company. Before McDade founded PointClear, he served as Vice President of Marketing for the direct mail firm Jackson & Perkins and as President of UST: The Business Marketing Group. PointClear works to increase sales and lower cost per lead for clients by building databases, managing prospecting programs, performing list segmentation, analyzing ROI and developing target market intelligence.