cost per lead

This previously-published article was updated on March 13, 2018.

Just as it sounds, “cost per lead” refers to the price you pay to generate a new business lead. On the surface, measuring cost per lead is quite simple: Add everything you spent on a marketing initiative and divide it by the number of leads generated.

You want to keep that cost figure low, right?

In theory, yes. However, those numbers can be deceiving, and I’ll give you two reasons why. Let’s start by comparing cost per lead across three different marketing channels: Trade shows, print advertisements and inbound marketing.

Trade show cost per lead

Say your company attends one trade show per quarter. Let’s start by adding up all the associated costs, including:

  • Airfare
  • Hotel rooms
  • Meals and other travel costs
  • Floor space
  • Booth design
  • Designed and printed materials
  • Shipping costs
  • Labor costs of employees

Let’s estimate that the total cost equals $20,000. We’ll also say you walked away with 50 new contacts from business cards you collected. So, your cost per lead was $20,000 / 50 leads, which equals $400 / lead.

Print advertising cost per lead

Say your company also runs print ads in the same three trade journals every month. Costs for this totals $4,000 / month ($12,000 total for the quarter). Because you’re smart, you put unique URLs at the bottom of each ad so you can attempt to track how many people saw that ad and proceeded to visit your website. Maybe you traced six leads during Q1 directly to those ads. Hence, your cost per lead (for the entire quarter) was ($4,000 / month x 3 months) / 6 leads = $2,000 / lead.

Inbound marketing cost per lead

Finally, you’ve started learning about inbound marketing and decide to invest in content creation, search engine optimization (SEO) and online lead generation this year by hiring an outside agency.

The agency fee is $5,000 / month ($15,000 for the quarter). During those first three months working together, let’s say you generated 21 leads. So, your cost per lead for the quarter was ($5,000 / month for 3 months) / 21 leads = $714 / lead.

The table below illustrates the visual summary. Note that all the numbers I’ll be presenting, although hypothetical, represent actual patterns we see for inbound marketing with our actual industrial clients.

cost per lead side by side

Glancing quickly through these numbers, you can see that inbound marketing ($714 / lead) was almost twice as expensive as trade shows ($400 / lead) for generating new leads. Print ads ($2,000 / lead) look like they were a waste of money.

Well, it’s not that simple. Let’s take a closer look.

Why cost per lead is deceiving

There are two fundamental problems with using cost per lead as a marketing success metric:

  1. Cost per lead doesn’t account for lead quality.
  2. Cost per lead encourages quick wins over sustainable lead generation results.

For the remainder of this article, we’ll examine these two points in depth. I’ll also present a solution for measuring results in a more meaningful way.

Problem #1: Cost per lead doesn’t account for lead quality

All leads aren’t created equal. In our previous example, you may have collected 50 business cards at your trade show booth. Nice. That’s 50 new leads, right?

But how qualified are those leads? Isn’t it possible that 20 of those individuals were just vendors trying to sell you something? Isn’t it also possible that a business card exchange is no more than an act of courtesy — an exchange those individuals will have with the next 10 or 100 people they meet? Sure, you might have come home with 50 “leads” but how many are truly sales-qualified leads?

Alternatively, let’s consider your inbound marketing campaign and the quality of the leads it generated. You began your inbound marketing campaign by identifying the problems your ideal customers face as well as the common questions and concerns you’re consistently addressing during sales calls. You fed those insights to your marketing agency and they helped you produce targeted content addressing those issues. They also helped you carefully choose and incorporate strategic keywords into your content so search engines like Google, Bing and Yahoo recognized it.

Before long, targeted visitors started discovering that content in their related Google searches and new website traffic trickled in. Because that content addressed issues your customers cared about, they were immediately engaged. You earned a little trust and, depending on where they were in their respective buying processes, they either downloaded a white paper that dove deeper into the topic or (even better) were ready for a sales conversation and filled out your Request for Quote form. In short, they provided their names, email addresses and phone numbers in exchange for your expertise, thus becoming tangible leads.

Which of these channels just produced a more qualified set of leads? While my objective here isn’t to discount the value of attending a great trade show (or to say that inbound marketing is the only solution for everyone), my point is that not all leads are created equal. Because of this, we can’t discount lead quality at the expense of volume. We have to dig deeper.

Let’s go back to the table we examined earlier and add two extra rows: “Sales-qualified leads” and “Cost per sales-qualified lead.” These are the leads you can look at and say, “Yep, we want to attract that type of company. And yes, that’s exactly the person from the company whose attention and trust we need to earn.”

cost per lead by channel

You’ve probably noticed that the print ad spend isn’t getting the job done. Compared side by side, trade shows are still more effective than inbound marketing, just not as much as we originally thought. Considering who is actually a sales-qualified lead can give you a more accurate picture of the success of your marketing initiatives.

Regardless, all of these marketing investments are really expensive when we consider their outputs of leads that are actually sales-qualified. Maybe we shouldn’t be marketing at all and should just get back to boots on the ground, knocking on doors and cold calling!

But before we jump to that conclusion, let’s look at the second reason cost per lead can be deceiving.

Problem #2: Cost per lead encourages quick wins over sustainable lead generation results

As an owner of a business that has been incrementally growing for over 11 years, I understand there’s little room for waste. When something isn’t working, you have to consider going in another direction.

But as a marketer, I know that some marketing initiatives are designed from day one to achieve quick results at the expense of a sustainable infrastructure. If you gauge success based on the results produced over a short period (like three or even six months), you’ll never get an apples-to-apples comparison of each marketing channel’s true impact on your business growth.

Let’s illustrate this point by extrapolating the three-month cost per lead comparison tables we’ve been using over 12 months.

cost per lead example

When you glance at the bottom right corner of these three updated tables, notice what has happened. The cost per lead and cost per sales-qualified lead numbers for print ads have remained cringe-worthy. And the trade show figures have stayed pretty high too. But look at inbound marketing.

Let your eyes run from left to right across the cost per lead row and the cost per sales-qualified lead row under Inbound marketing. Notice how these costs have dropped every single month. In January, the cost per lead from inbound marketing was $1,000. And the cost per sales-qualified lead was a whopping $5,000. Travel though time all the way to December and those figures have been reduced to $56 / lead and $278 / sales-qualified lead, respectively. The same cannot be said comparing the first few months of trade shows and print advertising to their respective last few months.

So, what the heck’s going on here?

What you’re seeing is the snowball effect of inbound marketing. When you run print ads or attend trade shows, you learn how to improve for the next one. You make those adjustments and experience some improvements. However, each trade show is a one-and-done marketing initiative. You spend $20,000 and experience a temporary spike in leads around that time, but then all of that activity dies off until you spend $20,000 on the next trade show.

Similarly, you might spend a few thousand dollars to run print ads in January; the publications circulate, visibility for your ads spike accordingly, and hopefully the phones ring a bit more for a few weeks. But unless you spend $4,000 again next month, the incremental return on that month’s investment goes to zero as soon as the next issue is published.

Now, here’s where inbound marketing is different. When you invest in inbound, you’re building a sustainable inbound lead generation infrastructure that gains momentum as it builds.

Let’s illustrate this with an example.

One of our clients — Green Dot Bioplastics — is an incredibly innovative manufacturer of sustainable plastic materials. Green Dot helps customers and prospects solve challenging, real-life business problems through helpful content. Over the past three years, our team has helped Green Dot harness their knowledge of sustainable plastics and translate it into helpful, user-centered content.

This particular piece — Why sustainable plastics? — was designed to help their ideal customers take the next step in their product development process. For that same page, we created “content upgrades” or “lead magnets” on topics that compelled readers to trade contact information for expertise on bioplastics, which helped them become sales-qualified leads.

Over the first few months, this page generated no results. It didn’t rank well for Google searches related to “sustainable plastics” and as a result, didn’t drive much new traffic at all. But both us and our client weren’t surprised. In fact, we knew this would happen.

However, as we helped Green Dot publish increasingly helpful, customer-centric and problem-solving content on a consistent and ongoing basis, their site began to gain viewership and credibility in the sustainable plastics community. In particular, this Why sustainable plastics page caught the attention of top industry journals like Eco-Business, Waste Advantage Magazine and Bio-Based WorldNews, who all began linking to it from their sites.

As of this month (March 2018), this page has been ranking first for almost a year in Google searches for “sustainable plastics,” even ahead of content by plastics industry giants like DOW Chemical. And it continues to drive tangible new leads with names, phone numbers and email addresses for Green Dot every month.

This page about wood-plastic composites has had a similar effect. Over the last couple of years since the page was created, it has fluctuated between the second and fourth spot in search results related to “wood plastic composites” and has continued to produce qualified leads.

Although Green Dot may never spend another dime on the two pages we mentioned, those pages will continue generating leads well into the future. Talk about sustainable, right? Imagine three years from now when they have ten pages performing as well as those two.

The point is this: Not all marketing and advertising initiatives are designed to produce results immediately. Some channels require a heavy upfront work to lay a foundation for success.

In the case of inbound marketing, you need an infrastructure on your website to facilitate ongoing lead generation. That means optimizing your existing content for search engines. It means building a Learning Center to house your educational content. It means actually creating useful content month after month. It means fostering credibility for that content by building references to it (inbound links) from industry-leading sources that tell Google, “Hey, this content must be good. You should bump it up in your search rankings.”

And sometimes it means being patient, even with the pressure to produce immediate results.

So how SHOULD you measure marketing results?

My answer is simple: Measure the revenue generated by each marketing initiative.

Consider which leads were produced by your marketing investments in print ads, trade shows, inbound marketing or other channels. Did they become paying customers? If so, how much did they spend? And what is the expected lifetime value of these new customers?

With the right tracking mechanisms and a two-way data-sharing process between your Sales and Marketing teams, this kind of reporting and measurement is no longer out of reach.

If cost per lead remains an important metric for your organization, consider both the quality of those leads and the length of your data evaluation period. Shift your focus to cost per sales-qualified leads rather than the cost per (any) lead. Measure that figure over the course of a year before drawing conclusions about the success or failure of your campaigns.

Some useful resources

If you’d like to learn more about implementing success metrics and benchmarks before designing your marketing initiative, watch our video What marketing results manufacturers should be measuring. Although we recorded this video for manufacturing organizations (which is the audience we serve at Gorilla 76), it’s relevant to any business to business company.

We’ve also created a simple downloadable spreadsheet that lets you enter your revenue growth target, average customer value and close rate. It will then show you how many sales-qualified leads and how much website traffic you’ll need to hit your revenue goal through inbound marketing. Feel free to download our marketing performance targets worksheet.

Consider subscribing to our Industrial Marketing Newsletter for useful resources on inbound marketing. We’ll send content your way once or twice a month, depending on your preference.

Thanks for reading!