How to Calculate Lead Value (and Build a Better Marketing Budget)
An important goal in most marketing is to generate leads of some kind. Depending on your business, your industry, and your product, leads could look different. A “lead” could be defined as someone who fills out a form on your website, someone that walks into a store during your semi-annual sale, or someone that shops on your website. In these cases the role of marketing is to generate the leads, and the role of the business is to convert those leads into customers.
But how do you put a value on leads and how can defining this value help you build a marketing budget for future campaigns?
Unfortunately, not all leads are created equal. If your latest campaign garnered 100 new leads, how do you know what that actually means? What if you knew that each lead was responsible for $100 in revenue, or $1,000? What if each was only worth $0.01?
Knowing the value of your leads is incredibly important for truly understanding the effectiveness of your marketing and the associated ROI. You’ll also be able to build a better marketing budget when you can calculate your lead value.
Calculating Lead Value
Lead value is an average that’s achieved by looking at a set period of time (for example: a month, quarter, or year) and comparing the amount of revenue generated and the total number of leads in that time period.
The equation looks like this:
Lead Value = Revenue Generated by Customers Converted from Leads / Number of Leads During Time Period in Question
Here are two similar, but contrasting examples:
- A company ran a 4-month radio campaign promoting a new service. During that time, they generated 350 new leads and converted 5 of those leads into customers at $10,000 in revenue each. The lead value for these 350 leads is roughly $143 each.
$50,000 Revenue from Customers Converted from 5 Leads / 350 Total Leads = $142.86 Lead Value
- A similar scenario of a company running a 4-month radio campaign promoting a new service. During that time, they generated 350 new leads and converted 50 of those leads into customers at $100 in revenue each. The lead value for these 350 leads is roughly $14 each.
$5,000 Revenue from Customers Converted from 50 Leads / 350 Total Leads = $14.26
It’s important to remember to only look at the revenue generated by customers who converted from leads. If you include other types of revenue, it will skew your numbers.
A More Advanced Look
That simple calculation is a general average for your business, but it’s much more useful to get detailed about the way it’s applied through segmentation.
For instance, you should be tracking a lead’s value over time. Is a lead you’ve been working with for three years as valuable as a lead generated less than a year ago? You should also be tracking your lead value by source, if possible (e.g., landing page with a form to receive information, contact information shared to enter a contest, someone who came into your store, etc.). Your general average value may be good, but with this nuanced level of tracking, you could see whether a high-value source was lifting a moderate-value source and a low-value source. You could also track lead value by what type of product or service was purchased, among other variables, and reviewing these variables together will provide useful insights into purchasing behavior and marketing ROI.
Influence on Your Marketing Budget
If leveraged correctly, your lead value calculations can help you build a better marketing budget by giving you helpful perspective on what’s working and what isn’t. This kind of exploration gives you data about which sources, and sometimes which channels, are providing real value. You can then focus your budget and other resources in the areas that provide the most valuable leads.
By looking at how a lead’s value changes over time, you can determine if your marketing is truly influencing long-time leads, or if your marketing is only effective with your newest leads. You should then evaluate why the marketing isn’t as successful—perhaps there are new pain points you could be addressing.
Most importantly, by viewing your tracked lead values in an integrated way, you can uncover numerous factors that can improve your marketing. For instance, if a high-value source results in service purchases but the moderate-value source results in product purchases, you can customize your marketing appropriately. This in turn should yield improved ROI.
A Few Final Tips:
- Keep your sales goals achievable. This isn’t just about maintaining the success and morale of your sales team—an unreasonable sales goal will inflate your marketing budget without providing appropriate returns.
- Regularly evaluate your lead sources and consider ranking them. Low-ranking sources should be looked at more critically to determine whether your resources should be devoted elsewhere. This is especially true if their value is degrading over time.
- Use lead value as a health check for your marketing strategy. By regularly benchmarking these values, you can begin to compare month-over-month and year-over-year, as well as unique campaigns. If the overall value or the value of the most recent leads is degrading, course correction might be required. If the value is growing, then your team is working hard and efficiently.
- Remember that marketing isn’t the only step to great lead value. Lead nurturing and your sales process are absolutely critical and must be kept in mind when determining why leads aren’t turning into customers.
- Remember, this is a tool, not a be-all-end-all approach. What we mean by that is that yes, calculating your lead value can be very beneficial, but it’s not always possible and it’s not always a perfect science either. If you aren’t able to get the tracking right, then your numbers won’t be helpful, so start by determining if you can even gather accurate information to start.
Continuing to understand the value of your customers and leads is critical to gaining an important, even granular view of your marketing ROI. If you want to build a better marketing budget, the tips and equations we’ve included above are a great first step.