The Myth of Average Cost Per Lead
As you begin or continue the process of marketing your business digitally, you will come across the question, “what is the average cost per lead (CPL) in my industry?” There are many articles only too willing to give you the answer: x is the average CPL for a boutique gym whereas y is the average CPL in the tech world. However, those articles are incredibly misleading because there is no straight answer. It is dangerous economically to base your business’s marketing plans by someone else’s guestimate of what your cost per lead should be.
We’re going to discuss why an average CPL is incredibly subjective and how you can establish a more precise idea of what it should be. Additionally, we will also weigh in on whether or not CPL is what we should actually be focused on.
What Goes into Calculating Cost Per Lead
There are so many details, large and small, that go into a business plan. What is at the heart of a business plan? Revenue. Revenue that comes from leads that convert into paying customers. At the end of the day, customers are the center of your business and acquiring leads is your most important task. I’m sorry to say the process of calculating your average cost per lead is not as simple as a website search. In fact, there’s a lot that goes into the calculation. One factor is how you’ll be running your marketing campaigns.
Advertising Tactics Depend on Business Models
Who are you targeting? Where are you advertising? There’s email marketing, Facebook advertising, billboards, pamphlets, and many more forms of advertising. Every tactic you choose will provide you with more leads or fewer leads depending on how effective they are for your business model. Will everyone use the same platforms and tactics? Absolutely not. There is no way that a boutique gym will have the same plan as a massive fitness franchise. Their entire business model will be completely different and so will their target audience.
For example, a boutique gym’s entire focus will be acquiring leads that will be more likely to come to the gym loyally. They may not have a lot of room for many customers but the customers they do acquire will need to be loyal and provide a strong customer lifetime value cost (LVC). The gym’s revenue comes from a heftier price that is paid consistently by happy customers that start out as well targeted leads.
A large fitness franchise gym, however, will more than likely be less focused on finding the perfect customer. Their prices are lower because they want more people rather than fewer who pay better. They’ll throw a ton of money into New Year’s Resolution promotions for monthly memberships that cost as low as $5 to $10 dollars. They receive a ton of response from those promotions by demographics of all kinds.
Will most of those leads become customers who go to the gym every day or even month? No. Why does this business model work? Because a massive amount of people will subscribe to these memberships that are affordable and too fantastically cheap to give up. They’ll forget to go, maybe even forget they have those memberships at all, but the gym is still receiving that money.
As you can see, depending on what your business does, your industry “average” cannot be applicable. Advertising, especially with Facebook Ads, will differ hugely and so will targeting methods.
In order to find CPL, you divide your number of leads into the money spent on acquiring them. However, what all goes into that “acquiring” leads number. Do you just add marketing tactics, or do you add the prices of components used to convert those clients, like free t-shirts given out to new members?
At the end of the day, acquiring leads is only one part of the overall very important process of client acquisition and client retention. Are leads great? Yes! Do you need more than leads for your business to survive? Yes. You need to not only bring in leads but have them convert into paying customers. Not only that, but you want them to be happy enough to stay. Finding leads is really a minimal cost in the overall process.
For example, if you own a larger franchise, you may need to hire more employees because of a surge in new clients. Maybe repairs need to be done for your customers to feel their membership fees are going toward a quality facility. Add those prices to your marketing campaigns and now we’ve moved into a different area than the price of cost per leads. Now, what we’re really talking about is customer acquisition cost.
Calculating Not just your Cost Per Lead but Also Your Customer Acquisition cost.
Customer acquisition is the entire focal point of most businesses. Leads are simply a means to an end. You need paying customers and you need those customers to stick. Should we really be focused so entirely on CPL, marketing and advertising tactics that provide us with an idea of how many people we might turn into customers? Or should we start looking at the bigger picture? I feel that cost per lead’s ego needs to be knocked down a peg and thought of more as a piece of a puzzle that falls under the customer acquisition cost umbrella.
Cost Per Lead
While it’s not as easy as a web search, it can be a moderately simple process to find out your cost per lead value. In general, you’ll want to look at your internal data, not that of any other business in your industry. As mentioned before, every business has their own marketing tactics that will make that data completely subjective. Take the prices of your marketing, advertising, and all other lead acquisition ventures and divide that by the number of leads you gained through them. That is your approximate cost per lead. You take that cost per lead and then you figure out a more important number….
Customer Acquisition Cost
This number will require a bit more research, but it is a number that is very helpful to know. To come up with our number, we add in the costs of those extra people you hired on in order to make sure that all of your gym members are being trained well, the cost of your marketing tactics that brought in leads and brought back old clients, and maybe even add in the cost of a redone entryway to protect customers from tripping. Essentially, add all your customer acquisition costs together. That can mean a range of things and, again, is very subjective depending on the business model. Essentially, what money are you spending to not only bring in brand new leads but to also make them loyal customers?
Add those numbers together and then divide that number by customers you gained during the time that money was spent.
Why is Customer Acquisition Cost Important?
For your business to flourish, you need to make sure that you are receiving a solid return on investment (ROI). In order to understand whether you will have a good return on investment with your business model, you need to know how much you’re spending on customer acquisition in comparison to what those customers are worth to you. If your customer acquisition cost is higher than your customer lifetime value (LTV,) then you will end up losing money.
The numbers for your cost per lead is important but it really isn’t as important as your customer acquisition cost. Make sure to study these numbers so that you have a better idea of how much money you are spending to get customers versus to how much you are earning in revenue. If you’re struggling to figure out how to keep your cost per lead and customer acquisition cost as low as possible, the answers may lie in outsourcing. It can be a very confusing process and finding agencies like Method Metrix who know what they’re doing and how to run campaigns cost-effectively may be worth looking into.
Good luck in your calculations and remember, you may need to tweak a few things if you find your lifetime values are not as high as your customer acquisition costs.