Determining the Value of a Lead
If your website serves a lead generation purpose, you should have a rough idea of what an average lead is worth to you. This information can help you and your marketing agencies ensure they’re not overspending to generate online leads. There are two pieces of information you need to know in order to figure out the average value of a lead. They are:
The average percentage of leads that close and become paying customers, and
The average value of a customer. Note that this latter figure can be looked at two ways:
- The average amount purchased by a customer (for businesses selling one-time products or services), or
- The Lifetime Value (LTV) of a customer (particularly one who subscribes to an ongoing service or comes back to purchase often)
The latter figure – LTV – is most accurate, although it can be more difficult to come up with that figure than the former.
Simply multiply these two figures to come up with the value of a lead like so:
(AVERAGE VALUE OF A LEAD) = (PERCENTAGE OF LEADS THAT BECOME CUSTOMERS) x (AVERAGE VALUE OF A CUSTOMER)
Here’s an example. If 10% of your leads become customers, and the average customer spends $1000, then a lead is worth $100. If you get 10 leads (each worth $100), then you should get one sale worth $1000.
Note that just because a lead is “worth” $100 to you, that doesn’t mean you can afford to spend $100 to generate that lead. That’s because you’ve got to figure in the cost of goods sold and other expenses. In this case, you’d want to use the average contribution margin that a customer contributes to the business instead of the average “gross” or “retail” value of a customer. This is closer to a profitability figure, so it takes out the costs and tells you what you can afford to spend to gain that valuable new lead.