Sale lead costs and the “wrong end” math formula that stops you overpaying
Many businesses sell sales leads. So if you search Google for, say, insurance sales leads, you’ll see a list of websites and ads about sales lead suppliers. But how much should you pay? What do sales leads cost? The wrong end sales lead formula will tell you.
The fact is that most businesses don’t have a clear idea how much they should pay and rely on a bit of guesswork. This is clearly dangerous for two reasons. If you overpay you will erode profitability because too much of your gross margin will disappear on lead costs. If you underpay, you won’t get as many leads as you want because lead sellers know their markets well.
So how do you find the right price for your business? It actually straightforward but you have to start from the “wrong end”.
In my experience small businesses are particularly bad at knowing their key business indicators or KPIs. So as an example, if you ask a business owner what their lead to sale conversion rate is, they won’t be able to tell you. However, if you ask them how many sales they’ll get from 100 leads they usually can. There’s a step by step process to get from that position to knowing with precision what to pay. It’s called the “wrong end” formula because you start not at price of the lead but at the value of a certain sale.
The wrong end sales lead formula for valuing sales leads
Let’s use some simple math. There are a few key numbers we need to know.
- How much profit do you make from a sale? Call that A.
- How many leads do you need to get a sale? Call that B.
- How many website visitors do you need to get a lead? Call that C.
On this basis, a lead is worth A/B. For example, if you make $1,000 profit from a sale and it takes 20 leads to get a sale, then the profit per lead is $1,000/20 or $50. Let’s call this D.
If you pay $50 for a lead, you will only break even so you need to pay less than this.
In terms of website traffic, if it takes 20 visitors to generate a sales lead, ie C in the formula above is 20, then the profit per visitor is D/20. In our example, D is $50, so the value of a visitor to the site is $50/20 or $2.50. If you pay $2.50 per visitor you will, again, break even.
If you decide that you want to make a return of 100% on each lead, you need to pay half these numbers. In other words, $1.25 for a website visitor and $25 for a lead.
Clearly, whilst this formula applies to all businesses you need to take into account the fact that some of your products are probably more profitable than others and so you can afford to pay more for sales leads for those ones. Just as importantly, if not more so, you may know that in your business, customers come back and buy more than once. If this is the case, you can spread the cost of a sales lead across multiple sales. Many business owners know this and are comfortable with paying more for a first sale than the profit they will make from it. They know they will make profits in the future.
So that’s how you can calculate how much to pay for a sales lead with the wrong end sales lead formula. Simple!