Are Your Leads Costing You Too Much?
Knowing your cost per lead versus cost per sale is important because it helps set your goals and advertising budget. You should know how many leads come in, what the cost is for the lead and what the cost is for that lead to generate a sale. This is helpful information because you want to perfect the process of cutting out leads that would never turn into a sale. You are able to understand this process by seeing how much each lead costs and which of those leads turn into sales. You can hone in on the ones that do and increase ROI. Take the demographic profiling for the leads that generate sales and learn from the leads that don’t.
Now, you need to know the total cost of your advertising. Advertising is everything you do that puts your name in front of the public to increase Brand Awareness. From the signs wrapped around your car to brochure mailing and printing, all of these expenses count.
To get the cost per lead: Divide the total advertising dollars spent by the number of leads that came in.
Scenario #1: You made 50 sales in the month of April for a total of $400,000 in sales. You had 100 response calls come in. You spent $15,000 on postcard bulk mailers and Pay-Per Click for the month. Dividing $15,000 by 100 we get a cost of $150 per lead.
This information helps us identify a few different things:
- budget needed to increase sales and,
- which advertising tactics work best to reduce cost per lead.
Try this: Your goal is to increase sales to $500,000 for the next month. You know that you made 50 sales for a total of $400,000, resulting in an average job size of $8,000. If your average job size remains stable, to reach $500,000 next year you need to acquire 62.5 customers ($500,000/$8,000).
You already know you acquired 50 customers in April out of 100 leads, for a sales ratio of 1 in 2 (50/100=.5). So, to sell 62.5 the next month, you will need an increase of 12.5 sales which would result in 25 more leads. (12.5/.5)
125(100+25) x $150 per lead = the new marketing budget of $18,750.
What does that tell us? If you don’t know what a lead is costing, then you will never know how much you need to spend to hit your growing sales goals.
Cost per sale is also important for you to understand response versus acquisition. If 50 actual customers were acquired in the month of April, then we take the original marketing budget (100 leads x$150 cost per lead=$15,000) and divide that by actual customers acquired ($15,000/50) and you get $300 as the cost per sale.
Use the formulas to break down which marketing tactics are yielding the best results and what your advertising budget should be to fit your sales goals.
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