The Sales Cycle – Part 2 of 8

What does a lead cost you?

If your answer is whatever Google, Facebook or your marketing company says it costs, you’re probably missing a fairly big part of the number.

Let’s say you spend $2,000 in marketing to generate a legitimate opportunity for a $250,000 project. That’s an expensive lead, but potentially a very good investment.

The problem is that the $2,000 only got somebody to raise their hand. Now you have to turn that person into a customer, and that’s where the meter keeps running.

There are phone calls, site visits, measurements, estimating and proposal preparation. Maybe the customer wants a revision. Then another option. Then another meeting because the scope has changed again.

Before long, you could easily have another $1,500 of your team’s time invested in the opportunity.

Now your $2,000 lead has cost you $3,500 — and the customer still hasn’t hired you.

What happens when you lose?

This is the part that gets conveniently left out of a lot of marketing reports.

If you win the project, great. That $3,500 becomes part of what it cost you to acquire the customer, and you can decide whether the economics of the job justify it.

But what if you don’t?

You didn’t lose a $2,000 lead. You spent $3,500 chasing a job you never had.

And even that isn’t necessarily the whole number.

Think about who spent those hours. Was it an estimator, salesperson or project manager? Was it you?

Their time wasn’t free just because nobody wrote a cheque for it that day. While your best estimator was working through the third revision for a customer who eventually disappeared, they weren’t quoting another job. If you spent half a day on another site visit, that’s half a day you weren’t running the business, working with an existing customer or pursuing a better opportunity.

That’s opportunity cost. It’s harder to put on a marketing dashboard, but it’s still real.

Cheap leads can get expensive

This is one of the reasons I don’t get terribly excited about cost per lead by itself.

Imagine one marketing source generates 100 leads at $100 each. Another generates 30 leads at $250 each.

Which one would you rather have?

At first glance, the answer seems obvious. The first source gave you more than three times as many leads for less than half the cost per lead. Somebody is probably pretty happy with that marketing report.

Now let’s say only five of those 100 leads become customers, while 10 of the 30 more expensive leads buy.

You spent $10,000 to acquire five customers from the first source and $7,500 to acquire 10 from the second.

And we haven’t even accounted for the time your team spent answering, qualifying, visiting, estimating and following up with 100 leads instead of 30.

Suddenly those $250 leads don’t look very expensive.

A cheap lead that eats up hours of your team’s time and never buys anything isn’t cheap.

You aren’t actually trying to buy leads

Lead volume matters. Cost per lead matters. I’m not suggesting you stop tracking either one.

But neither tells you whether your marketing is actually producing profitable business.

What percentage of those leads were legitimate opportunities? How many did you quote? How many became customers? How much time did your team spend getting them there? And what did it actually cost to acquire each paying customer?

Eventually, I want to know something even more important: how much gross profit did those customers produce?

Because you aren’t really buying leads.

You’re trying to acquire profitable customers at a cost that makes sense for your business.

Those are two very different things.

Run the number yourself

Take your marketing spend from the last quarter and add the real cost of selling those opportunities: estimating, site visits, revisions, sales time and follow-up.

Then divide that by the number of customers you actually acquired.

Don’t worry about making the calculation perfect the first time. Even a reasonable estimate of the internal labour involved will get you closer to reality than looking at advertising spend alone.

Then ask yourself:

Are some of our cheapest leads actually our most expensive customers to acquire?

Which lead sources consume the most estimating and sales time?

Are we spending too much time pursuing people who were never particularly likely to buy?

And which sources consistently bring us customers who are profitable and worth having?

You might really like what you find.

You might hate it.

Either way, at least you’re managing the right number.

A lead isn’t valuable because somebody filled out a form or called your office. It’s valuable when you can turn it into profitable business without spending a fortune getting there.

Better Business. By Design.

About Ron Farrell

Ron Farrell works with business owners who want better profit, stronger systems and a company that doesn’t require the owner to carry everything on their back.

After building, systemizing and selling his own business, Ron now works with owners on the numbers, people and operating structures that turn a demanding job into a valuable business asset.