How Much Are You Willing to Pay for a Lead?

This is a very important question that is often overlooked when accessing a potential new advertising source.

Whenever you are presented with a new advertising opportunity you should do a simple ROI analysis.  However, more importantly you should have an idea of how much you are willing to spend for a new lead as a percentage of the revenue generated by a job.

In the example below, fictitious numbers are used, but it is more important to pay attention the percentages.  The percentages paint a clearer picture of what is really happening.  The example is for a remodeling company with an average job size of $2,500.

The breakdown of costs and profit for a job would be as follows:

Materials

$375

15%

Labor

$875

35%

Lead Cost

$175

7%

Sales Commission

$175

7%

PROFIT

$900

36%

According to the example, you have about $175 to spend for a new lead for each job.  However that number is a little deceiving.  It is assuming that every lead you get will turn into a job.  In reality, your closing rate from a lead to a sale should be about 50%.  So, you actually have about $88 to spend per lead, because it probably took two leads to get this one job.  Also in the above example, this is assuming you have a sales team and are paying them only on commission, but it does give you an idea of where your money is going.  If you are doing the selling too, you can add that dollar amount to your profit.

So with a budget of $88 per lead you can now look at any new advertising opportunity in a new light.  Suppose it costs you $500 to run a quarter page ad in a magazine.  That would mean you would need to have about six leads from that ad (assuming a 50% closing rate).  The real question now is to ask yourself if you think that is possible.  If you think it is, test it.  Run the ad.  Did you actually get six quality leads, which turned into three jobs?  If not, is there something you can change?  Or is time to not use that source anymore?

If you need assistance determining how much you are willing to pay for a lead, contact TOTAL Business Coach at 720-295-6055 or online at http://www.TOTALBusinessCoach.com.

Comments

  1. Great insight on how to determine ROI for advertising investments. The formula is very helpful. Thanks for posting it!

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