Lead value – what it is & how to calculate it
If you run a business, you’re constantly looking for more paying customers. Of course, the more leads, or potential buyers, that you convert into customers, the more revenue your business will generate.
Lead Value is learning the total value of your leads so you can make more educated decisions on how you can acquire more leads. This helps with forecasting sales and justify spending to acquire potential customers. Not just the value of the first purchase, but the potential lifetime value of the customer.
What is a quality lead?
There are a lot of misconceptions about quality leads. Quality leads first start with your lead generating funnel. A lead funnel is a strategy a business puts into place that focuses on attracting leads, nurturing them, and eventually converting them into sales. The best way to understand a lead funnel is to think about a real-life funnel. With a real funnel, you start with a large amount of water and pour it into the big opening at the top. As the water moves through the funnel, only a small amount comes out of the narrow bottom of the funnel. This is the same process for leads—you start with a bunch of prospects, but by the time they reach the end stage (the buying stage), there are far fewer prospects who made it all the way through.
Understanding your lead funnel will help you uncover your quality leads. Quality leads are those leads that moved quickly through the funnel and resulted in an easy, large sale—basically, they are the dream leads! With better quality leads, you will have better ROI for your lead generation program, thus saving you more time and making you more money.
Want more quality leads? Then it’s time to find out which of your leads are the highest value and lead to the highest conversions.
What is a conversion?
What constitutes a conversion depends on what your end goal is for your lead funnel. Most lead funnels are focused on driving sales, but others might be dedicated to a different goal, such as collecting email newsletter sign-ups. A conversion is when a lead successfully completes the final goal of your funnel—like the small bits of water at the end of the funnel in our analogy. If a sale was your goal, then a conversion is the moment you turn a lead into a paying customer. You have converted the lead into a customer.
For your business, a conversion can be any goal—it’s up to you to decide what you want to use lead generation for. Do you want to build your email list? Do you want to sell a specific product? Do you want to chat with customers about a new service you launched? Once you have a clear goal in mind, you can then add in the necessary steps to accomplish it as effectively and efficiently as possible.
Below are the steps to calculating lead value so you can learn either if your leads are high-quality and end up in conversions or if your strategy needs some work to make the leads better quality. It’s best to have last year’s marketing and sales information in front of you before you begin the calculation process, and it’s also worth mentioning that seasonal businesses would benefit from assessing their quarterly lead value. Ready to do a little math?
Step 1: How to calculate cost per lead
The cost per lead is a useful number because it will show you just how much you’re spending on marketing versus how much of that marketing is working. It is the base number you’ll need to project lead value and other growth forecasts.
Cost-per-lead formula: Total cost to acquire leads ÷ Total leads acquired = Actual cost per lead
In this formula, the total cost to acquire leads would be how much money you spent on marketing in the time period you are assessing. This number can also include any tools you use to save time managing your leads, like LeadCentral.
So, if you spent $1,000 on marketing and you received 10 leads, your equation would look like this: 1000 ÷ 10 = 100.
Per this example, your cost per lead would be $100.
Step 2: How to calculate lead value
Now that you know how much each lead costs you, it’s time to see how valuable those leads are to the success of your company. Learning the lead value will give you a snapshot at how much money you spend to receive a certain profit figure. If your lead value is lower than your cost per lead, then you have a problem.
Lead value formula: Total sales value ÷ Total leads = Total lead value
Let’s say, in the time period you are looking at, you brought in $15,000. Remember that your lead volume was 10. So, your equation becomes: 15000 ÷ 10 = 1500.
Now you know that even though each lead cost you $100, each lead also brought in $1,500 of business. Your lead value is $1,500.
Step 3: How to calculate lead-to-sale conversion rate
Next, you want to use the information you gained to configure your conversion rate. Remember, conversions are when a lead converts into a customer. Figuring out your conversion rate will show you how effective your sales funnel is because it will show you how likely it is that a lead will turn into a sale.
Lead-to-sale conversion rate formula: Converted Leads ÷ Total Lead Volume = Lead-to-sale conversion rate
Let’s stick with 10 for your Total Lead Volume. That means 10 people asked for an estimate. However, only 3 of those people actually followed through and agreed to do business with you. That gives you the number 3 for Converted Leads. So, here’s your equation: 3 ÷ 10 = .30
If you remember anything about math, you’ll realize that .30 converts to 30%. That means your conversion rate is 30%, which means 30% of your leads actually turn into sales.
Step 4: Projecting future leads and marketing budget to attain sales goals
If you have certain sales goals in mind (hint: you should), then you can now use your new information to determine how many leads you need in order to reach those goals.
Formula: Sales goal ÷ Lead value = Amount of leads you need to reach your sales goal at the current conversion rate
Alright, so let’s say your sales goal is to increase total sales to $20,000. Your lead value, as you calculated earlier, is $1,500. So, it should look like this: 20000 ÷ 1500 = 13.33 (repeating).
This equation says that in order to reach your sales goal with your current conversion rate, you would need to bump up your total leads from 10 to 13-14. To learn how much money that might cost you, there’s one more formula.
Anticipated marketing spend formula: Goal number of leads x Cost per lead = Marketing spend to achieve sales goal
With our goal number of leads at 13.33 and cost per lead at $100, 13.33 x 100 = $1,333. It would cost you $333 more in marketing dollars per lead to achieving your sales goals.
While these formulas are handy, we must also note that there are variables that can always affect your exact outcomes. Maybe your conversion rate mysteriously changes, unanticipated costs come up, the industry shifts or people leave your company—many factors can contribute to curveballs that may affect your calculations, but these formulas are great for creating a general lead funnel, sales, and marketing strategies.
Learning about your lead metrics and how they contribute to your overall profit is one big step to improving your business and fostering higher quality leads that convert. Chase those quality conversions and remember to use the data to help you—crunching numbers is necessary for building a profitable business.
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