How to calculate the cost of acquiring a lead
The goal of your business, through marketing, is to acquire leads who you convert into customers. If you don’t have leads you wont have customers! If you don’t have customers, you don’t have a business. But there is a cost of acquiring a lead? But how much is that cost? Why do you need to know?
Why do you need to know the cost of acquiring a lead?
Ok – let’s ask a different question. Do you have limitless funds you can throw at finding and then converting leads? Probably not. You need to know that acquiring leads will be profitable in the long run. For that, you need to know the cost.
Knowing what a lead costs could mean being able to spend more to acquire more!
For example, if the cost is £15.56 and your product costs £37, you know you need roughly two customers to cover your cost. But is it that simple? Should I know more?
Let’s take a look at some recently published data from the United States.
Lead and Client Acquisition Data
The Best Beauty Company has an introductory product they sell for $7, they decide they are going to use Facebook ads to drive traffic. What do they need to know?
These are the figures you should always measure:
- Click-Through Rate (CTR) for lead
- Cost per Click (CPC) for a lead
- Conversion Rate (CVR) to a customer
- Cost of Acquiring a Customer (CAC)
Let’s look at these in more detail.
We need to know what is the percentage of people likely to click through, or, as it’s called in the marketing world, the Click Through Rate or CTR.
Click Through Rate (CTR)
There has been some research done recently on the average click through rate for different industries.
According to Wordstream, the average click through rates for Facebook are 0.9% for all industries. However, you can see from their figures below that there are some surprises.
For instance, the highest rate is for Legal Services at 1.61%! And employment and job training is the lowest at 0.47%.
Using our fictitious company, the Best Beauty Company would look to beat 1.16%. That means for every 10000 impressions, this business is going to have 116 clicks through from the ad to the landing page.
What are these clicks going to cost them – The Cost Per Click?
Cost Per Click (CPC)
Again, Wordstream have given us an average cost per industry as follows:
Using our example, the Beauty Industry averages $1.81 per click, so the total cost would be $209.96 for the campaign. i.e 1.81 x 0.0116 x 10000.
Now they have a potential of 116 leads that need to be converted into customers! The average cost is $1.8. At this stage, it’s not up to Facebook. It’s up to you to convince them what you offer is valuable to them, solves a problem and is what they want.
Conversion Rate (CR)
Now we come to the conversion rate. Again, Wordstream have data for the various industries and allows us, for this example, to complete the final step of working out the simple cost of acquiring a lead.
The average conversion rate for the beauty industry is 9.96%, so the number of customers that will buy is 116 x 0.0996 = 12 per 10000 impressions.
Cost of Acquiring a Customer (CAC)
Now we can work out the cost of that lead. The ads cost them $209.96, the number of clients is 12, therefore the cost is $17.49.
Thus, if the product costs $7, each lead acquired is making a loss for the business.
This is where the smart marketer earns their money. If they can sell these 12 customers another product, they know they can start to make money. This is when …….
The cost of acquiring a lead is negated in the back end of the funnel.
You offer what is called an up-sell of another product slightly higher in value, before you confirm the sale of the first product, perhaps for $17, and as a good marketer you convert at, say, 25%.
This would add another $51 to the bottom line. The value per client is up to $11.25 ( i.e. $84 + $51 = 135/12) and the cost of acquiring is still $17.49.
If they stuck at the front end funnel product, this business would have to work hard to increase their click through and their conversion rate. That is why we always suggest a business has a Sales Funnel that has a back end to it!
It is worth knowing what your cost of acquiring a lead is, so you can discover where in the funnel you start to make a profit.
Thus, always know what these three figures are, so you can find the sweet spot of your funnel and make adjustments:
- Click-Through Rate (CTR)
- Cost per Click (CPC)
- Conversion Rate (CVR)
- Cost of Acquiring a Client (CAC)
What does this all mean for your business? Knowing you can cover the cost of your ads in the back end means that the cost of a lead or a client should not stop you from driving traffic to your sales funnels through ads.
We have converted Wordstreams data into a online calculator – Take a look below to see what the average figures would be for your industry.