In order to make smart marketing decisions, you need to know what your leads are worth. This calculation is a bit more challenging for B2B companies with the longer sales cycles that come with more complex, higher-price-tag products and services. But not knowing what your leads are worth can either cause you to shy away from spending what you need to in order to acquire good leads, or cause you to spend too much.
Here are the four steps to calculating what your leads are worth, so you’ll be confident in your marketing budget allocations.
1. Calculate Your Customer Lifetime Value
Your CLV is the total amount of profit you expect to make during the length of time a client stays with your company. This number will tell you the absolute maximum amount you can spend to attract a new client. To calculate this number, you can use this formula:
CLV = (Average Value of a Sale – Production Costs) x Number of Repeat Transactions x Average Retention Time for a Typical Customer
2. Calculate Maximum Allowable Investment per Client
Although you can spend up to the amount of your CLV, you obviously shouldn’t plan to spend that much on a regular basis or you won’t be making any profit. First, decide the minimum amount of profit that you want to make per client (either as a dollar amount or as a percentage). Then, run either of these formulas to arrive at your Maximum Allowable Investment:
MAIpC = CLV – Desired Profit Dollar Amount
MAIpC = CLV (100% – Desired Profit Percentage)
The formula for calculating MAIpC with a set dollar amount is straightforward, but let’s look at an example to explain the formula for calculating MAIpC using a percentage.
Let’s say you want to make at least a 30% profit on every client, and your CLV is $50,000. So, your formula would look like this after you subtract your Desired Profit Percentage from 100%.
MAIpC = $50,000 x 70%
After converting 70% to a decimal of .70, your MAIpC formula would equal $35,000.
3. Break Out Your Lead Stages and Average Conversion Rates
Knowing your CLV and MAIpC are the foundation for understanding what a lead is worth. But before you can determine the value of a lead, you need to estimate your conversion rates for each of your lead stages. For example, it might look like this:
Inquiries (Leads) that convert to Appointments — 20%
Appointments that convert to Next Step Appointments — 50%
Next Step Appointments that convert to Proposal Stage — 60%
Proposals that convert to Clients — 80%
4. Calculate Lead Value and Maximum Allowable Investment per Lead
To calculate your lead value, you’ll need to work backward through your lead stages. So (according to the example percentages we’ve used above), in order to convert one Client, you need 1.25 Proposals. To get 1.25 Proposals, you need 2.08 Next Step Appointments. To get 2.08 Next Step Appointments, you need 4.16 Initial Appointments. To get 4.16 initial Appointments, you need 20.08 Inquiries (Leads).
To calculate the value of your leads, simply divide your CLV by the number of leads needed to convert a customer. In our hypothetical example, a lead would be worth $50,000 / 20.08, or $2,490.04.
To calculate the maximum amount of money you can spend to acquire a lead, divide your MAIpC by the number of leads needed to convert a client. In our hypothetical example, the amount you can spend per lead would be $35,000 / 20.08, or $1,743.03.
Once you know the value of your leads and the maximum amount you can afford to spend to acquire a lead, you can plan your marketing budget with confidence. Determine the conversion rates for each element in your marketing mix (or if you are outsourcing your marketing or using an agency, ask what the expected conversion rate is), which will tell you how much you should spend.