B2B ABM: Seven Sales & Marketing Tips for 2017 - Tip #4: How Much Should Leads Cost?

Posted by Dan McDade

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on Dec 20, 2016 11:34:37 AM

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Sales & Marketing Tips for 2017 - Tip #4

How much should a lead cost?

My answer to this is, and has always been, probably more than you think, but definitely less than you are currently paying. If you want more information on understanding how much you should be paying for a lead, check out our How Much Should a Lead Cost whitepaper.

Here are a few examples that will help you understand your cost per lead:

Example #1
We once worked with the marketing director at a division of one of the world’s largest software companies. This individual was paying content aggregators $23.15 per lead. From one vendor alone they bought 6,000 leads. I was having breakfast the SVP of sales one day and he told me that they received no leads from marketing. I asked about the 6,000 leads and he said “why don’t you try calling a few of them and see what you think about them?”

So we did. And guess what? Only 1.8% of the so-called leads were even with qualified companies much less qualified leads. No sales rep is going to go through their share of 6,000 “leads” to find 108 qualified companies. So after spending close to $140,000, the leads went into a black hole in CRM. Despite our findings, marketing said that “this was an important source of leads, we just can’t afford to have you qualify them so we will continue to send them directly to sales.”

Example #2
A client provided 4,200 hospitals with 7,500 contacts and asked us to have a conversation with each contact on the list. If we had done exactly what we were asked to do, we would have talked to contacts at 3,815 unqualified hospitals and missed talking to 419 qualified hospitals that were not on their list. The actual cost per lead (doing it using Account-based Marketing processes) was about $1,200 vs. the $8,750 per lead it would have cost to do what we were told.

You might think that these are extreme examples, but they are not.  

While doing research for this blog I found one study that was quoted frequently stating that technology leads cost $51 – $100.  This is both meaningless and misleading. My friend Matt Heinz says: I think a lot of companies want a single, easy answer and it’s just rarely if ever out there.  Or they want to “growth hack” for cheaper leads but those rarely lead to quality deals. Matt also feels that the question “what should a lead cost” is the wrong question. He prefers and will soon blog about what he calls “the acceptable acquisition cost”.

Let’s look at an example of how you might come up with “the acceptable acquisition cost”:

  • Average Deal – $100,000
  • Gross Margin – 60%
  • Close Rate – 20%
  • Break Even Point Cost Per Lead - $100,000 x 60% = $60,000 / 5 = $12,000

Now let’s assume that you are looking for a 10x ROMI (return on marketing investment). Then, your acceptable acquisition cost per lead is $1,200.

There are lots of variables that make this an over-simplified example. The variables are that there are more SaaS solutions sold today than even just a few years ago and with SaaS you have to estimate the lifetime value of a contract and calculate net present values. Too, the simplistic example shows a higher margin for premise based solutions including services. Lastly, the simplistic example shown has all marketing and sales cost lumped into the break-even point.

Keeping in mind the disclaimers, a $1,200 lead cost for a $100,000 solution is a LOT more realistic than $50 - $100. If you are sending leads to the field that are costing $50 - $100, chances are most of the leads are ending up in a black hole. 

Watch for Tip #6 in this series. In that tip we'll talk about tripling the return on marketing and sales investments through effective nurturing.


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