Cost per lead: Definition, calculation and importance

Cost per lead plays a crucial role in any business's marketing campaign. Alternatively known as CPL, it's a marketing metric that reveals the cost and effectiveness of a marketing campaign designed to generate leads. 

While CPL may be used alongside similar metrics, such as cost per click and cost per action, its goal is different in a marketing campaign.   

What Is the meaning of cost per lead? 

Cost per lead, in simple terms, is the amount you pay to get a lead/ prospect. A lead is anyone who interacts with a brand with the prospect of turning into a paying customer. In other words, a lead is a potential customer who comes through a marketing campaign — for instance, a Google AdWords campaign. 

To explain further, cost per lead is an advertisement cost-tracking system where an advertiser pays for a prospect's interaction with a marketing campaign. Usually, a cost-per-lead marketing campaign aims to get prospects or consumers to interact, not to make a purchase.

For example, a CPL goal may be to get people to complete a sign-up for a newsletter or submit contact information. When a prospect or a potential customer completes the required action, the advertiser pays for that singular prospect — the amount paid is " cost per lead." 

How do you calculate cost per lead? 

The cost-per-lead formula is simple. To calculate CPL, divide your total ad spend by the number of leads within a period. For instance, from January to May, if you spent $5000 on lead generation and got 100 prospects/leads, divide 5000 by 100 to get the amount paid to acquire each lead. In this case, $5000/100 = $50. Hence, $50 is the cost per lead. 

• Cost per lead formula = Total amount spent on ad / Number of leads generated 

What is an example of cost per lead?

Cost per lead can be somewhat challenging to grasp. Given this, here's an example as a repetition for emphasis in addition to the cited one in the preceding paragraph. 

If your company intends to get more leads, it can decide to set up paid marketing campaigns for its target audience. The budget can be $10,000. Based on the industry, there is an existing estimated fee charged on each lead. This means a certain amount is expected to be paid when a prospect completes a desired action.

Now, for the sales team to know how much it costs to get each lead, the number of leads generated is calculated. In this case, let's say business X got 150 leads. Hence, if the business spends the entire $10,000 on ads, the amount is divided by the number of leads — 150. This means 10,000 divided by 150, which equals $66.67 which is the cost of each lead generated. 

What is a reasonable cost per lead?

A reasonable or good cost-per-lead marketing metric isn't difficult to deduce. First, it is essential to remember that the number of generated leads doesn't singly determine if a cost per lead is good or reasonable. Hence, a good or reasonable CPL costs less than the amount a lead will bring a business in terms of gross profit per sale. If a lead brings a business a $100 gross profit, then a CPL should cost less than this amount. 

With the above principle in mind, there is also an existing cost structure for CPL, which is based on each industry. The cost per lead by industry varies; For example, if a business is in the tourism industry, the CPL can range from $29 to $182, with the average being $182. The telecom industry ranges from $24 to $65, with the average being $45. 

These numbers are not fixed, yet they give an idea of what it may cost to help companies prepare a CPL budget. Regardless of the cost, the rule of thumb is that a good CPL must cost less than the profit a lead generates. 

 High or low cost per lead — which is better? 

Often than not, spending a high amount on generating leads doesn't mean it's a better approach compared to spending less. In the end, the quality of the lead matters as much as the campaign's goal. If an Ad campaign brings in qualified leads at a high cost but has a good ROI, it's worth it. Conversely, if you can acquire a qualified lead for a low CPL, that, too is a sign that your campaign is doing well.

Smart box 

The goal of every business is to lower the cost spent on lead generation. So it's often common to see sales teams working hard to track marketing effectiveness and performance so as to see where to cut costs. 

So instead of spending more on multiple advertising channels, sales teams can direct their marketing efforts wisely to determine when to spend more or spend less. Hence, a sales team can take some of the following approaches to achieve a more cost-effective cost per lead average while maintaining the quality of lead generation: 

Comparing & review ongoing or past campaigns 

Except it's the first or inaugural marketing campaign, a sales team can review the advertising campaign in use or already used to determine; what to stick to, what to spend more money on, or what to stop spending on. By evaluating these ads and advertising channels, ineffective ones can be stopped to prevent spending unnecessarily. At the same time, the effective ones should continue. It's also an opportunity to try out new campaigns that may bring new leads. 

An A/B testing approach

In a bid to lower lead costs, a marketing team can try a medley of ad campaigns. The goal is to use a variety of display advertising to generate qualified leads. Then the ad with the better lead generation and the average cost per lead ratio is selected. In this case, the ad campaign with a good cost is preferable even though it may not be the cost-effective campaign. So far, it brings more leads and has a higher conversion rate, making the money spent worthwhile. 

Keyword preference 

Keyword-based strategy in a digital marketing campaign has tweaks that allow a sales team to adjust ad spending appropriately. Sales teams in companies must understand that keyword choice dictates the cost and effectiveness of lead generation. For example, choosing long-tail keywords which have less competition costs less. But to enjoy this good cost, adequate research is necessary to study the target audience, develop a buyer persona, and develop fitting long-tail keywords. 

Additionally, it is imperative to check the performances of keywords in use and drop low-performing keywords that take up a marketing budget. 

Why is the cost per lead important?

Return on investment is essential in a digital marketing campaign, and cost per lead helps to determine if a marketing effort is profitable — that is — it has a profit that supersedes the cost of bringing in a lead. Beyond profit, cost per lead provides insight into how your digital marketing campaigns are working — such as " what channels bring in the most customers, or which gives more leads," how individual campaigns are performing, and helps to track and prepare ad budget. 

When used collectively with other metrics such as cost per mile, pay-per-click cost, and other relevant metrics, a marketing team can measure the conversion rate and cost ratio to annual revenue. 

Summary 

The cost per lead metric measures the effectiveness of your marketing campaign to get quality leads. Businesses or companies utilizing digital marketing or any form of digital marketing strategy need this metric alongside similar metrics to ensure their ad money is spent right and to track and improve their marketing efforts. 

‍