B2B Marketing Blog

Uncovering The Truth Behind Cost-per-Lead And How To Optimize Your Marketing Budget

By Jordan Con
Jan 20, 2016

The best marketers today are excellent at identifying areas where they are unnecessarily wasting marketing spend. With so much data seemingly available, all of us marketers should be pretty good at this, right? But for many, this is still a big challenge.

We recently took a look at whether paid media managers are wasting money due to an over-simplistic bid strategy. Should we be willing to pay less for leads (e.g. bid less) on certain days of the week? Essentially, we looked at lead quality by day of the week.

Today, we’re going to look at our data to see if B2B marketers are wasting marketing spend because of the all too common use of a single Cost-per-Lead (CPL) figure.

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If lead quality depends on the marketing channel, shouldn’t your cost per lead target also depend on the marketing channel?

When the management team does the marketing forecasting for the next period, they often use a right-to-left, bottom-to-top method. This forecast starts with a revenue target and builds up to a target lead number that the organization thinks it will take to hit the revenue target.

Then, when the marketing budget is planned, they use these target figures to calculate a CPL ceiling -- what the marketing team is willing to pay per lead -- that will allow the business to profitably hit the target lead number.

But as we know, not all leads are created equal. Leads from some sources convert at a higher rate than leads for other sources. Therefore, the cost per lead ceiling for higher quality leads should actually be higher. The question is then, how do you figure that out?

In this post, we are going to analyze lead quality from different sources, primarily comparing the quality of online leads versus offline leads.

To do this analysis, we created three reports using our marketing attribution data: a lead report, an opportunity report, and a revenue report -- all split out by marketing channel. These are three key stages that will help us understand how well leads convert down the funnel, and ultimately, their contribution to revenue, by channel.

Here are some key charts derived from our data (indexed so that Online equals 100).

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Online leads have a much greater lead-to-opp conversion rate

Leads from online sources convert to opportunities at double the rate of leads from offline sources. With such a great disparity, we decided to dig a little bit deeper into the data. Online versus offline is a pretty broad way to pivot the data, after all.

When we analyzed specific offline marketing channels to figure out why they weren’t converting as well as online leads, we found that event leads and partner marketing leads (we consider these offline) have particularly low lead-to-opp conversion rates -- 7% and 5%, respectively.

Once leads are converted to opps, revenue per opp is comparable

But once leads are converted to opportunities, the differences between online and offline sources go out the window. Our data shows that the revenue per opportunity rate is only 0.27% greater when the lead source is an offline channel versus online -- for all intents and purposes, a negligible difference.

There are a couple of factors that come into play at this stage of the funnel. The first factor is the rate of which we convert opportunities into closed-won customers. The second factor is deal size. Offline leads could convert from opportunity to customer at a higher rate, but close with smaller deal sizes. Or they could convert at the same rate and have similar deal sizes. These are two paths to the same outcome. This analysis doesn’t shed light on that difference.

All we know is that revenue per opp is the same for offline leads and online leads, but that is all we need to figure out the correct CPL ceiling by marketing source.

What does this mean for our cost per lead ceiling?

When we combine these two rates -- lead-to-opp conversion and revenue-per-opp -- what we get is that online marketing sources have a higher revenue per lead rate, suggesting that they are of higher quality. They are more valuable to us.

Figuring out what this means for our cost per lead ceiling for online marketing channels versus offline marketing channels is really pretty simple.

Because we get twice as much revenue per lead from online marketing sources compared to offline sources, we should be willing to pay twice as much for online leads -- a 2x CPL ceiling. That would give us the same ROI.

Let’s use a hypothetical example to demonstrate the math behind this. We have the opportunity to run two marketing campaigns -- one is online and one is offline.

We can run an offline campaign that we predict that we will generate 200 leads for $5000. Based on our lead-to-opp rate for offline leads, only 25 will become opportunities,  and based on a opp-to-customer rate of 4%, one will go on to become a customer for $10,000 revenue. At a cost of $5,000, we will earn a 2x ROI.

We can also run an online campaign that we predict will also generate 200 leads. Based on our higher lead-to-opp rate for online leads of about 25%, 50 will become opportunities, and based on the same opp-to-customer rate (4%), two will become customers, totaling $20,000 in revenue. To match the 2x ROI of the offline campaign, we would be willing to spend up to $10,000 for this campaign. That’s a CPL of $50 -- twice as much as the CPL for offline leads.

If we were to use a single CPL ceiling as most marketers do -- maybe something that splits the difference -- we would lose out on both sides. If our CPL for online leads is too low, we aren’t going to generate as many high quality leads as possible, leaving potential revenue on the table. On the other hand, our CPL for offline leads would be too high, and we would end up wasting money chasing less valuable leads.

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Using our attribution data, we are able to be more sophisticated with how we determine the value of leads from different sources and adjust our marketing strategy appropriately. It makes sure we are investing in areas that have a lot of revenue potential and stops us from wasting marketing spend on more difficult leads.

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