Knowing your numbers: How much can you afford pay for a lead?

Recently, I was asked to comment on the high costs and questionable value of education trade show, Bett for an article by journalist Merlin John, following a number of notable high-profile names performing their own little Bettxit this year (that’s an awful pun, but you get the idea).

If a marketing activity costs £50,000 but makes £80,000, it is a no-brainer that should be scaled. I will beg, borrow and steal (well, not really steal) to get my hands on £100,000 so that I can double the £80,000 return. However, cost and value are two very different sides of the same coin. Something can be high cost, but if the value is even higher, then all is gravy. The problem arises when cost outweighs value, and with value so damn hard to measure at events like Bett and made even more arduous by protracted sales cycles in schools, it is really difficult to fairly measure the return on investment.

If a marketing activity costs £50,000 but makes £80,000, it is a no-brainer.

So, what’s one to do? Frankly It comes down to knowing your numbers. If you have your numbers all sewed up, you can make a much fairer judgement about the marketing activities you are undertaking, and help make decisions about what is really adding value.. So here goes, the key acronyms and numbers you NEED to know to boost your marketing and bottom line.

CR (Conversion Rate)

This simply means at what rate do your leads convert into a sale, OR how many website/stand visitors do you need to make a lead.

For instance, if for every 20 calls you can make a sale, your sale conversion rate is 5% (1 sale/20 calls) = 0.05 (x 100)

If for every 35 stand visitors you get 1 really good lead, your lead conversion rate is 2.85% (1 lead/35 visitors) = 0.0285 (x 100)

ACV (Average Customer Value)

Quite simply, what is the average initial purchase value of a customer.

For instance, if you have a recurring subscription model at £1500 for 1 year or £3000 for 3 years but the average customer takes out a 1 year subscription (with no add-ons), your ACV is £1500.

ALV (Average Lead Value)

This is the theoretical amount of money every lead makes you. Clearly not every lead is going to convert into a sale, but this theoretical figure informs us how much we can afford to spend in order to acquire a lead.

Here’s the maths:

ACV x Lead to Sale Conversion Rate.

Eg. £1500 x 0.05 = £75.

AVV (Average Visitor Value)

This is the theoretical amount of money every visitor makes you. Clearly not every visitor will convert into a lead, just as every lead will not convert into a sale. But this theoretical figure informs us how much we can afford to spend in order to acquire a visitor. Here’s the maths:

ALV x Visitor to Lead Conversion Rate.

Eg. £75 x 0.20 = £15.

CLV (Customer Lifetime Value)

How much money does a customer pay you over their lifespan as a customer. For instance, if the ACV is £1500 but the customer then upgrades to a new 3 year licence and will typically drop off after that point, the CLV is £5000 (£1500+£3500).

The maths

Once you understand the above figures and how they relate to your business, you can get a much better understanding of whether a marketing activity proves worthwhile or needs refining.

Using the examples above, in the example we’ve used we could justifiably pay up to £75 for leads in order to break even*:

£75 per lead

£75 x 100 (100 leads)

5% lead to sale = 5 sales at £1500 = £7500

However, we can’t always just pay for leads, we might have to pay for clicks to website (or visits to our stand), after all, not every visit is a lead. So we need to factor in visit to lead conversion rates:

20% visitor to lead conversion rate

£7500 = 100 leads

500 visits = 100 leads

£7500 = 500 visits

£15 per visit.

OR

£15 x 500 visits = £7500

500 visits = 100 leads (20% conversion rate)

100 leads = 5 sales (5% conversion rate)

5 sales x £1500 = £7500

At 2% visit to lead rate…

£7500 = 100 leads

5000 visits = 100 leads

£7500 = 5000 visits

£1.50 per visitor

OR

£1.50 x 5000 visits = £7500

5000 visits = 100 leads (2% conversion rate)

100 leads = 5 sales (5% conversion rate)

5 sales x £1500 = £7500

Now we can afford to pay £1.50 per website / stand visitor as we know the maths will add up (5000 visits to get 100 leads to get 5 sales to break even at £7500) … providing the traffic is there! If we can’t get the prerequisite 5,000 visitors, we’ve got a problem and need to work on boosting conversion rates.

Know your numbers

It is so important to know these numbers as they allow you to make much fairer judgements on all kinds of marketing – whether real world or digital. It is for this reason that people saying ‘LinkedIn advertising/Bett/Magazine advertisements are expensive’ is only half of the story. Cost is fine providing the numbers add up, but when they don’t, companies leave in their droves.

Typically you would factor yearly costs (salaries, technology, electricity, servers etc) into these figures in order to show true value. However, you would also typically use the CLV (Customer Lifetime Value) as a metric rather than the ACV. We play to the worst case scenario as, in cases of maths, I think it’s always best to play safe. ACV will give you a more conservative value, meaning you can only be pleasantly surprised by results!

Ready to use these metrics to double your sales?

Learn the Starbucks Secret to retention and the McDonalds Secret to 6x a sale value. Book a free 'double your sales' strategy call today!

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