Here we will present a very simple way to think about the value of a new good lead. As marketers we often have to make decisions about marketing investment. When a CEO asks us whether the $10,000 we plan to spend on a trade show will pay for itself it helps to have a good idea of what each expected lead is ultimately worth to us.
Start by thinking about your universe of prospects as a funnel. At the top of the funnel is the total number of prospective clients for your product or service. Below that is the number of prospects you know about (i.e. the number that exists in your CRM system). Below that the total number you have converted to customers.
Dividing the number of number of prospects you have converted to customers (250) by the number of prospects you know about (1,000) gives you the probability (25%) that you will close any new prospect you find out about. After all, if you know about 1,000 prospects and have closed 250 of them then you are closing 1 out of 4 of your leads. At this point you may realize you haven’t really tried to close all the prospects in your CRM. In this case, make an estimated guess as to the number you have tried to close and then go and attempt to close the others. J You get the point.
The next metric to factor in is the average profit (not revenue) per prospect. Your financial person can give you an idea of that by providing basic margin and customer data. For example, if you closed 100 customers last year and made $100,000 profit then you made $1,000 profit per customer. Taking the 25% probability of closing a new lead and the $1,000 profitability per customer you can determine that your maximum spend per good lead should be $250. But, keep in mind that is the maximum spend which leaves you with no profit. Depending on how aggressively you want to either grow the top or bottom line, you can determine how close you should spend to the maximum. Companies that are focused on revenue (top line) may be comfortable spending up to 250 per qualified lead. Those that are focused on profitability will be much more conservative.
Now, if you’ve been paying attention you may have realized that we didn’t mention the total number of estimated prospects. This is the 25,000 number in our example. While this doesn’t play into the lead value calculation it does serve to give us an idea of the potential for our revenue. If our example company has only closed 250 of the 25,000 total prospects and our probability of close is 25% then we’re justified to do some serious marketing to identify and sell to those other 24,000 prospects.