Before You Hire a Lead Generation Company…
Okay. Before you hire a lead generation company, it’s definitely important to have a target cost per lead in mind. And there are a few things that you need to have a deep understanding of to really come up with a, a good target cost per lead for your particular business. Um, the first thing we really need to understand is the average value of a single customer transaction within your business. So let’s say that is a thousand dollars, and if you’re a service based business, it may be a reoccurring thing where you get that every month. If you are a different type of business and you only get that one time, maybe your contractor or construction company or a remodeler, and it’s a large one-time item. Um, the next item will ask how many transactions over the life of your customer. So this could be 24 if you hold the customer for years, or it could be one if you just remodeled some of these kitchen and your one and done.
Um, and then, so that will output the average lifetime value of a customer. So in this case, we’re going to say a thousand dollars, 24 months. The next important question, and this is going to be really important when working with a lead generation company is understanding the conversion rate or the average conversion rate of your leads. Now that can vary by channel. Um, so when you’re working with a company, you really need to understand how well you convert the leads they produce. So tracking that very accurately is going to be critical to coming up with a right cost per lead. Um, let’s say in this case we convert 15%, we’re going to say 15% in this case. So that will kind of give us the overall value of a lead. If we convert 15% of them, which is really just your lifetime value times your conversion rate is going to be the value of a lead.
So what the target cost of a lead should be is kind of gonna depend on your marketing aggression or your appetite for marketing. Um, some businesses need to have aggressive marketing to, to grow. Um, and, and other industries are, um, very light in their marketing. Lots of industries, um, should become middle of the road, the anywhere between six and 8% of their gross revenue should be spent on marketing and some companies need to be much higher in the 10 to 12% range. Um, if we’re saying, Hey, we spent 8% of our gross revenue on marketing than in this scenario, our target cost per lead should be $288 per lead. Now if you have very poor lead quality, um, then your conversion rate is going to significantly change. If this conversion rate dropped down to 10%, then the cost per lead drops a significant amount down to 192.
If you have excellent lead quality and you’re converting 33% or higher, then the target cost per lead is going to, is going to go up. So again, you need a good amount of data to really sample and understand what your average conversion rate is going to be. And that can take quite a bit of data to see that. But really what you need to do before you hire a lead generation company is use a lead value calculator and determine what your cost or your target cost per lead should be. Um, and, uh, one of the most important metrics to understand there is how well you convert leads into customers. So thank you.
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