Do You Know the Value of Your Leads?

Gerard Tollefsen - July 31, 2009

It is important to know the value of a lead when managing a Pay-Per-Click (PPC) campaign.  It is one of the first things we ask a new client during the discovery process and I am surprised that more often than not, they do not know the answer.  They have a good idea of the value, usually based on the average order value and their average conversion rate.  But too few companies actually run the hard data and crunch the numbers to determine what they should be willing to pay for a lead.

When I first got into the business field I had a manager who was very big on tracking the value of everything you did.  If you have a main goal and know the value of that goal, everything you do during the process to achieve that goal can be given a value.  For example, if you are in sales and you average $100,000 in revenue per month, you can literally place a value on every call you make during the month (even the calls that do not go well).  For the sake of keeping the math simple, let’s say you average 50 sales calls a day (given a normal 5 day work week and 4 week month) and you generate $100,000 in sales from 100 orders, which gives you an average order value of $1000.  During the month you make 1000 sales calls, some calls go really well and you make a sale while others are terrible and you get hung up on within 15 seconds.  But you are in sales and positivity breeds positivity and the value of every call you made that month is $100.  That was how my first manager wanted us to track our productivity, don’t get too high from the good calls or too low from the bad ones.  At the end of the month, every call you make is worth $100 if you work hard and work smart.  Of course over time, you want to grow your sales and increase your close ratio but, those are topics for another time.

This same line of thinking should be applied to tracking success online for both e-commerce and lead generation sites.  Track and analyze the process of how you get potential customers in your sales funnel.  Keep track of how many leads you need to attain a customer.  Additionally, keep track of how much your average customer is worth in terms of increased revenue.  Once you know how many leads you need to get to convert a new customer and you know how much that new customer is worth to your business, you can identify how much each lead is worth (both the good ones that turn into a customer and the bad ones that fall out of the sales cycle).  It is just like my example earlier, but on a business level versus a personal level. Plug in the appropriate numbers and you can calculate the value of a lead to your business.  Now this is a simplified example, but it is the foundation of determining the value of a lead.  Once you identify that value, you should be managing (and more importantly) optimizing your PPC campaign to achieve a lower cost per conversion than the determined lead value.  The greater “the spread” between your cost per conversion and your lead value, the better your return on investment (ROI).