Total Lead Value vs. Cost Per Lead

Johann Edward


IT marketing is aligning ever more closely with sales in an effort to generate measurable results.

The criteria for measuring marketing success have changed significantly over the decades.  In the past, marketing was dominated by advertising, creative, and big discretionary budgets that were measured in cost per impression.   More recently, Direct Marketing began to dominate and cost per response, or cost per lead, became a de facto measurement criteria.

In the most recent decade, ROI has become the dominant measure.  This means that marketers need to focus more on cost per sale and cost per dollar of revenue in order to demonstrate ROI.  Today, marketers have to deal with complaints from sales that there are either too few goodleads, or too many poor quality leads, and complaints from the boss that leads are too costly.

As a concept, Cost Per Sale is not new; it is just more difficult to measure than Cost Per Lead.  Cost Per Sale requires marketing and sales to cooperate in order to be effective.  It also means more administrative duties, such as updating CRM systems and Lead Tracking tools.  For these reasons, when IT Marketers outsource their lead generation, they still mostly target cost per lead.  There are a number of issues with this approach:

  • Sales targets go up each year, and the cost of technology goes down.  As a consequence, the annual lead target suffers from  as much as 10-30% inflation every year.  This is unsustainable, and may even result in lead targets that exceed the number of  companies in a given market space (I have genuinely had clients ask for this).
  • As lead targets increase, each individual lead is worth less and less.  As a result decent leads are hidden amongst an avalanche of lightweight enquiries, and sales people ignore every lead, because they don’t have time to separate the wheat from the chaff.

Marketers are aware of this problem, yet they often don’t feel empowered to re-negotiate their targets accordingly.  The net result is poorly qualified leads that:

  • Annoy the prospect, because they’re not sufficiently interested to want a sales visit.
  • Annoy the sales person, because their sales productivity and morale plummets.
  • Annoy the business owner, because cheap leads that don’t work are still too costly.

And who gets the blame? Marketing.

The wrong target drives the wrong behaviours, and the industry is taking too long to change.

When marketing managers are required to demonstrate ROI on marketing spend, it is easy to see how Cost Per Lead would seem like a sensible way to evaluate effectiveness.   It is easy to measure, and provides a useful yardstick that can assist with budgeting and, when coupled with an understanding of average conversion rate, can help to calculate what volume of leads would be required to hit revenue targets.  However, better evaluation of which leads are more likely to convert and adding measures such as the total lead value (TLV) can have a much bigger impact on the expenditure to revenue (E:R) ratio than the volume of leads.

Marketing managers have concerns with this approach, such as:

  • it is difficult to identify and qualify high value or high quality leads at the point of lead generation, and
  • allowing sales teams or resellers to focus only on high value leads will lead to a ‘feast or famine’ sales pipeline.

However, these concerns do not justify the status quo, because the average lead qualityis often so low that even the high value leads are ignored, and as a result marketing spend is wasted.

Identifying high value opportunities is not easy and does require more investment in tools and training at the initial point of the enquiry process. For most mid- to high-end IT solutions the benefits of this approach far outweigh the up-front investment that may be required.  With proper training, skilled agents can predict with reasonable accuracy the value of a lead and how likely it is to close, which significantly enhances the marketer’s ability to prioritise leads and increases sales productivity.  Experienced lead generation agents are equipped to qualify opportunities to a much greater depth, enabling effective targeting and helping to deliver a much greater E:R ratio through improved conversion rates.  Without this up-front qualifying, re-evaluation of the opportunity will be needed at some point further down the line, wasting time and resources and resulting in a gap between sales and marketing targets and expectations.

When I have worked with clients to implement targets based on Total Lead Value, we have seen major increases in E:R ratios for a number of clients, without changing budgets or people, just behaviour.  One client went from an E:R of 1:2 to 1:20 without any increase in budget!  This is a classic Lean Thinking™ result, where productivity is driven by having the right process.  When it comes to developing your pipeline targets, think about your total lead value and how you can work with your sales team to focus on high value opportunities for optimum results.