When it comes to purchasing leads, how do you know how much of your marketing budget to invest? With a few simple calculations, you can be sure you’re on the right track, knowing that your expenditure is more than just a leap of faith.
Marketing executives at business services firms feel frustrated when they don’t see an immediate return on investment from leads, especially if they are evaluating leads from a new source. Sales cycles for most business service companies’ average about three months. And even if the lead is qualified, will it take some time for revenue to be generated from the provider of your new leads.
Furthermore, the marketing metrics being used to measure leads are not necessarily the right ones. For example, if your average sale per customer results in $250 in profit in the first year, and you purchase 10 leads at $25 each, with a ten percent conversion rate to acquire that new customer, you might feel concerned that you essentially broke even on your initial marketing investment.
However, customer lifetime value (CLV) is increasingly being used as an appropriate measure of lead value. CLV reflects the present total value of a customer to the company over his or her lifetime. When we discuss CLV, we typically refer to the value of a single customer, using the average sales of such a customer. The model of CLV can be broken down as a function of these three elements:
- TP: Total Annual Profit (Total Sales – Cost)
- TC: Total Customers
- CL: Average Customer Life (in years)
Using the elements, customer lifetime value is calculated as CLV = TP X CL.
Although CLV could measure the customer’s value over his or her lifetime, most marketers use three years (based on considerations surrounding product life cycle, customer life cycle and profit calculations).
Now when you calculate the CLV of a single customer, you will see just what the true value is of your investment in leads. Plus if you factor in any repeat or additional purchases made by each customer, that $250 profit can turn into several thousands of dollars over the term of their relationship with you.
Companies such as Amazon, whose average customer purchase is about $20, typically spend much more than that in marketing dollars to acquire each customer. Why? Because they look beyond the initial buying cycle to realize that over a period of several years, that customer will likely spend thousands of dollars.
Generating qualified leads can be a complicated process, but a good lead generation company can specifically tailor the lead acquisition process to the needs of your business so you can be assured of receiving quality leads…leads who are actively seeking the services you provide…leads who will most likely convert to longtime, valuable customers.