If you aren’t sure how to calculate how much money you need to be spending on lead generation, don’t worry – it’s very easy to learn. All you need is some of your closing records and a basic calculator. Once you’ve got those files in front of you, take in the process below and get plugging to find your lead acquisition cost.
How to Calculate Your Target Lead Acquisition Cost
What is Your Goal for the Year?
The first step is to set a target for your business. How much new revenue are you looking to generate over the course of the next business year?
For the sake of this exercise, let’s just say you’re looking for $500,000 in new business revenue for the foreseeable future.
How Far Should You Cast Your Nets?
In a perfect world, every opportunity would end in a closing. Unfortunately, that’s not the case so you need to plan an upward buffer to make sure you hit your mark. Analyze your business history and find your closing rate (opportunities vs. closed deals) and multiply it by your revenue goal for the year. That means if you have a closing rate of 1:4 (1 deal made for every 4 opportunities), you’ll need to make enough opportunities to generate $2,000,000 in revenue optimally if your goal is $500k.
Formula: Target New Revenue x Closing Rate
How Much Do You Make Per Closing?
This one is easy. Just look at your earnings for last year and divide it by the number of clients involved. If you had $10,000,000 in sales last year and 200 clients, that would mean your run-of-the-mill client nets you $50,000 a year (big numbers are easier to deal with).
Formula: Previous Sales / Previous Clients
How Many New Opportunities Do You Really Need?
This will let you know how many more business opportunities you’ll need to make for yourself compared to your last sales year, and for that you’ll use information from steps two and three. By taking the amount of money you stand to pull in from your nets ($2,000,000) and dividing it by your average revenue per closing ($50,000) you will get the number of new clients you’ll need to generate that $500k by the end of the year. In this case, that number is 40.
Formula: Optimal New Revenue / Revenue per Closing
What’s Your Lead to Opportunity Conversion Rate?
Now that you know how many potential business opportunities you need, it’s time to figure out how many leads you’ll need to contact in order to get 40 of them to think about doing business with you. This is where your lead conversion rate comes in, and you get that by looking at how many contacts you’ve made historically and how many of them were thinking about doing business with you. Let’s say that ratio (which differs greatly per industry) was 1:2 for the sake of simplicity (though the actual ratio will normally never be that neat). Therefore, you’ll need two leads for every one opportunity, meaning that because you need 40 opportunities it will take about 80 leads to get there.
Formula: Lead to Opportunity Conversion Rate / Required Opportunities
Calculating the Total Cost
Now it’s time to figure out exactly how much money you should be spending per lead generation to make doing business worth your while. To calculate this, we will be looking at your Direct Sales Expense as well as your Operating Margin (both of which are numbers only you will know). Take note of how much it normally costs you to conduct business and how much and then convert it into a percentage.
Now that you’ve got everything you need, start by subtracting the percentages of your Direct Sales Expense (let’s say 60%) and your Operating Margin (let’s say 10%) from your total expected revenue ($500,000). That leaves you with $150,000, from which you then take away whatever you want to keep as profit from your total expected revenue (let’s say an optimistic 15%), which would leave you $75,000 to spend on lead generation. The final step is dividing $75,000 by the number of leads you’ll need (80) which leaves your hypothetical lead acquisition cost being $937.50 per lead.
Lead Acquisition Cost Formula: (Total Expected New Revenue – Operations Margin – Direct Sales Expense – Target Profit Margin) / # of Leads Needed
It’s important to keep track of how much you should be spending at most on lead generation by tracking your lead acquisition cost. Historic data usually helps you vet out an average, but always remember to leave a bit of a buffer zone in case your budget is tight. The last thing you want is to put in a year’s worth of work only to realize your revenue doesn’t cover the cost of your lead generation program.
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