Cost Per Lead (CPL) is an important metric marketers at manufacturing companies use to measure the cost effectiveness of their lead generation channels. But how exactly should this metric be used? How do marketing teams know how much their business should be paying per lead? This article will help you understand the importance of cost per lead and determine how much manufacturers should be paying per lead through different marketing channels.
To calculate cost per lead, marketers typically count the number of marketing qualified leads (MQLs), which are prospects who have provided their contact details and taken an action indicating interest in your products, such as requesting a quote or information, downloading brochures, signing up for a webinar, etc. Once you know the number of MQLs generated from any given campaign or channel, the formula is simple:
Cost per lead = Total marketing spend/The number of marketing qualified leads generated
For example, if you spend $1,000 on a display ad campaign that generates 10 leads, your cost per lead would be $100 ($1,000/10).
In order to determine whether or not the cost is too high or too low, you need to calculate the conversion rate for those leads to find out how much each lead is worth to your business. If 10% of the leads from your display ad campaign convert to customers and your net customer lifetime value (CLV minus production, staff & overhead costs) is $5,000, the value per lead would be $500 (10% x $5,000). In other words, a lead that cost you $100 is worth $500 to the business. That’s an outstanding return on investment (ROI) of 500%.
Let’s take another example. If your business spends $50,000 to exhibit at a trade show that produces 50 leads, your cost per lead is $1,000 ($50,000 / 50 leads). If 20% of those leads convert to customers, the value per lead is also $1,000 (20% x $5,000 Net CLV). In this example, each trade show lead is twice as valuable as each display ad lead from the previous example ($1,000 vs $500), but since the cost per lead at the trade show is much higher, you generated 0% ROI ($1,000 cost per lead vs $1,000 value per lead). In other words, your business merely broke even at the trade show, while the display ad campaign was profitable.
Now let’s imagine 30% of your trade show leads convert to clients instead of just 20%. Your value per lead is $1,500 instead of $1,000 (30% x $5,000 Net CLV). All of a sudden, you have positive ROI and paying $1,000 per lead at a trade show may not seem like such a bad deal.
The above examples illustrate why it is important to put cost per lead into context and compare it to your value per lead. They also illustrate the risks involved with marketing channels that have a high cost per lead. When a marketing channel’s cost per lead is high, that channel’s lead quality (best expressed by the lead-to-customer conversion rate) also needs to be much higher to justify the additional cost.
Determining your maximum cost per lead is easy once you have calculated your company’s average value per lead. Remember, value per lead is calculated by multiplying your net customer lifetime value by your lead-to-customer conversion rate. For example, if your net customer lifetime value is $2,000 and your average lead-to-customer conversion rate is 20%, your average value per lead is $400 ($2,000 x 20%). That means you should aim to pay less than $400 per lead in order to ensure your lead generation initiatives are profitable. Considering manufacturers currently pay an average of $136 per lead across all marketing channels, a $400 value per lead would put you in a good position to be profitable, but keep in mind the cost and value per lead will vary greatly depending on the marketing channel.
At the high end, trade show leads cost an average of $811, nearly six times the average price manufacturers pay for leads across all channels. That is not surprising when you consider the many costs associated with attending a trade show (booth, shipping & logistics, transportation, lodging, meals, etc.), but it means your face-to-face interactions at a trade show need to translate into much higher quality and much more valuable leads to make trade shows worth it. If your company’s average value per lead is $400, it means the value per trade show lead needs to be more than double that before trade shows start to make business sense.
At the low end, we find online channels such as search engine optimization and retargeting ads with an average cost per lead of $31, making these online channels attractive due to the lower risks involved and higher potential for rewards, as long as the lead quality and value remain reasonable. You would still make a huge profit generating leads with these online channels even if the leads are worth less than your company’s average value per lead of $400.
Paying attention to cost per lead benchmarks is important because they give you an idea of whether or not you are paying too much for leads. If you are paying significantly more than average for any given marketing channel, you should probably try to optimize your campaigns before giving up on that channel altogether. Cost per lead is also a good way to compare different lead sources within the same marketing channel to determine the potential for improving ROI by reducing the cost per lead. View this full list of cost per lead benchmarks per marketing channel.
On average, our XPRT Premium members, composed primarily of B2B manufacturers of environmental, energy, agriculture and medical technology, pay just $24 per lead, which is among the lowest costs per lead available to manufacturers, slightly less than search engine optimization and retargeting ads, and over five times less than the $136 it typically costs a B2B manufacturer to generate a lead across all marketing channels.
That means online lead generation through XPRT’s B2B marketplace is a low risk option that can be extremely profitable, especially considering that leads generated by manufacturers are typically worth hundreds of dollars or even more.