March 5

Why cost-per-lead budgets fail and fewer leads are better

Lead Generation

14  comments

A reader asked me to explain why fewer leads are better and why “cost-per-lead” budgets fail. These are two great questions that have the same fundamental answer: quality first then quantity.

Why cost-per-lead budgets are irrelevant to sales

The truth is that salespeople care very little about the cost of the leads we generate. What they really care about is how many of those leads will actually become viable sales opportunities.

For this reason, I think cost-per-lead measurements are irrelevant unless we can answer another fundamental question first, “What is our rate of lead acceptance (a.k.a. sales pursuit) into the sales pipeline” and then “What is the cost per opportunity?”

When sales leads got lost

Sadly, I find that a lot of marketers tend to focus on cost-per-lead because they really don’t know what happens to their leads after they hand them off to their sales team. This is why closed loop feedback and lead management are so important.

The ultimate metric is the cost per opportunity

B2B Marketers must start measuring cost-per-opportunity now! Why? It’s the one metric that can help you understand how well your sales team accepts and pursues leads.  Ultimately, it shows if your leads are actually helping our sales team sell and if we’re positively contributing to their pipeline.

Track sales accepted leads

Lead acceptance into the pipeline is primarily a function of lead quality.  There are other influences such as sales training and refining the lead routing process, but lead quality stands out as the single largest factor driving the real ROI of our lead generation programs.

In a cost-per-lead model there is a tendency to drive down the cost of each lead by generating more leads, which is good if the quality does not suffer.  However, this is rarely the case since there are a finite number of high-quality sales-ready leads in your target market at any given time.

Is your marketing helping your sales team sell?

The real question is, “Are these leads helping our sales team sell more and will these leads become profitable customers?”

In most cases in order to get more leads to sales (as they demand more leads now!), marketing is forced to send early stage leads, often at the inquiry stage in order to meet quota or cost per lead requirements. Of course, the need for more leads does not come with a commensurate budget increase!

More leads won’t help unless you do this

Simply sending more leads over the fence to sales will only result in more early-stage leads being lost, ignored or discarded.  And if your early stage leads are not being cultivated with lead nurturing and given the attention they need, they will go to waste. Unfortunately, in a cost-per-lead scenario, this waste will not be measured, rather only your lead production costs.

There is no doubt that a cost-focused mindset is a lot different than a value-driven mindset.  The cost focused mindset often drives decisions that are arbitrary to the objectives of a lead generation program. The most valuable leads are those that your sales team can convert to viable sales opportunities, not just leads that drive more activity.

More activity does not mean more results

Pushing more leads and creating more activity can give marketers a false sense of security in the short term, but in the long term the cycle of failed campaigns will continue as past failures are dismissed, overlooked or as fingers are pointed.  To break the cycle, we must close the loop with sales and start measuring opportunities.

The following are real-world metrics that every marketer should track in their lead generation program:

  • The number of inquiries? (people who raised their hands)
  • Number of leads? (qualified as “sales-ready”)
  • The number of opportunities? (leads that move to pipeline)
  • Nnumber of closed sales? (generated from marketing leads)

Measure these KPIs

If you know those metrics you can start to track the following key performance indicators:

  • Inquiry to MQL ratio (cost-per-lead)
  • MQL to SQL ratio
  • MQL to opportunity ratio (cost-per-opportunity)
  • Sales Accpeted Lead to pipeline revenue ratio (cost-per-pipeline revenue)
  • MQL to revenue (win) ratio (cost-per-closed sale)

Summary

A value driven mindset requires leaders and marketers to plan and budget for the long term and to take a more holistic view that goes beyond cost-per-lead budgets.

Cost-per-lead budgets are irrelevant unless you can first measure cost-per-opportunity or cost-per-lead-pursued and lead quality is a key driver in insuring that those leads are pursued.

What do you think about cost-per-lead budgets or sending fewer high quality leads to salespeople?

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About the author 

Brian Carroll

Brian Carroll is the CEO and founder of markempa, helping companies to convert more customers with empathy-based marketing. He is the author of the bestseller, Lead Generation for the Complex Sale and founded B2B Lead Roundtable LinkedIn Group with 20,301+ members.

  1. Excellent point of view!

    The other side of this coin is that the sales staff’s time is wasted with increased volumes of leads at the expense of quality.

    Of course, few organizations have the “closed loop” in place to be able to measure this accurately and therefore much money and time is wasted.

  2. The lead to customer conversion process is a chain of activities, and it is only as strong as its weakest link. Just as poor quality leads can dramatically reduce the conversion rate to customers, so can underperforming sales organizations. And, in these latter cases, they can make marketing look weak and inept. Ideally, it would be great if there was an independent definition of a quality lead. This would provide marketing with a goal of what to aim for in leads, and equally, it would provide an objective input into sales, thereby allowing analysis of sales’ ability to convert quality leads into customers. The key issue with the definition of a quality lead is that it varies from organizaiton to organization, and even in the same organization sales and marketing can’t seem to agree on how to define it.

  3. I agree that sales could care less about a large volume of unqualified leads. A good indication of lead quality is if your leads are being embraced by sales. I call it a ‘lead addiction’ where they can’t wait to see if a lead has been loaded into the CRM.

    On the flip side, you know if things are not working when sales reps are indifferent to new leads (i.e. lack of follow up/excitement).

    Closed loop feedback provides for this dialogue versus waiting to find out at the water cooler.

  4. I agree 100% that its about quality not quantity. As well ROI should be based on sales revenue not website activity. We have found that behavior tracking and lead scoring help marketing determine when to pass a lead on to sales. We can see all interactions that lead/suspect has with the company. Where are they going on our website, what whitepapers did they download, what Google Adwords they clicked on and more. Based on the lead’s interaction with the company, a lead score can be automatically assigned. If the lead score is higher than a certain threshold, the lead can “move” to sales. If not, then marketing can nurture that lead further. Sales is more “accepting” of the leads coming from marketing. They not only see a lead score but see all the interactions that lead has had with the company. As well, marketing can continue to nurture leads to increase their score.

  5. I’ve always found lead metrics to be affective by the boundaries of campaigns. In other words, if the same lead/contact is obtained by two sources (for example, a trade show and an advertisement), to which source is the lead credited? Often times it is double counted.

    Expanding the boundary of the campaign to include both sources may solve the double-counting of the lead somewhat, but if the boundary gets to be too broad it dilutes the effectiveness of the information (e.g. was that trade show an effective use of marketing dollars?)

  6. Well, I agree with all of the comments. It is a no brainer that we need a closed loop system, we need to know Marketing ROI, ie a closed loop system that will effectively tell us the ROI of each marketing campaign..YET, I never found anyone who could effectively SHOW me how to do this. Yes, on paper, it’s great, you have a tracking code for each lead and when sales closes the lead as a win, here you go. Well, beautiful, but HOW? Especially in a complex sales environment, when you get leads at the low level of the food chain, and then SALES closes the deal with the CIO. How do you establish the relationship? How do you establish ROI? based on the first lead that closed? based on the potential opportunity over the next 5 years?
    some claim: use SF.com or use SIebel or use this,
    yet technology is only as good as your process and I haven’t found anyone who could reengineer our marketing, sales and accounting processes to close the loop. Any example would be greatly appreciated.

  7. Good points. I accept what you said. but, most of the marketers are using cost-per-lead concepts. However, In cost-per-opportunity concept also, success is solely depends upon how effective the sales team is.

  8. Good points. We have been tracking 3 of the indicators you mentioned; however, we struggle to find industry “standards” for the key performance indicators to measure against. Any thoughts?

  9. It’s not only about cost vs quality. It’s about profits and your yield points, of course. The first dynamic that we measure in Cost per Call or Cost Per Lead is the “contact rate” or the number of valid phone numbers. Easier to do offline with TV and radio leads because you’ve got caller-id. But online leads are a different matter. With so many lead generation offers out there, one simple measure of success is the willingness of folks to give a real phone number. (See Charles’ question above)

  10. B2B Marketers must start measuring cost-per-opportunity now! Why? It’s the one metric that can help you understand how well your sales team accepts and pursues leads. Ultimately, it shows if your leads are actually helping our sales team sell and if we’re positively contributing to their pipeline.

  11. How are you bonusing your Lead Nourishment (LN) folks then?

    Here’s what you’ve ruled out:
    If not by # of leads or # of phone calls (same argument could apply — quality vs. quantity).
    Also I would rule out %-age that is closed/won by Sales — because LN’s only job is to get it into the hands of the sales team — and you could just have a bad sales person.

    I was thinking %-age of leads as a total of the marketing team (so including what can be tracked back to other lead generation vehicles — like Tradeshows, SEO, Public Relations, website, cross selling (from other divisions), etc. The problem with this is that if you invest in say more tradeshows which turn out to get you more leads, then where do you end up? Punishing your LN folks.

    Yet another idea is to base it on your marketing team’s pipeline. Would you break it down by division (PR, SEO, LN, etc)?

    Brian, you should really do a blog on how to compensate your LN folks – I think it would help the community.

    br,
    Laszlo

  12. Hi Brian,

    I was wondering if you had particular blog posts related to the matter of cost-per-lead, leads vs. opportunities, and conversion as it relates to SaaS Applications where the goal is to generate a free trial of the software without a sales person’s intervention.

    Your help is appreciated!

    Fernando A. Labastida
    fernando (at) labastida (dot) com

  13. Great article. Lead Generation is the most talked about topic on any sales and marketing forum. And needless to say that it is the most hyped about too. There are lot of companies using different ways and techniques to generate leads. There is no “right” or “wrong” here. It all depends on what kind of leads are you looking for, what kind of business you are in, and furthermore, what kind of market size you and your customers belong to.

    Thanks,
    GT
    http://blog.ellipsissolutions.com/2011/03/10/top-three-hidden-costs-of-lead-generation/

  14. Good read. In my opinion, the cost per lead < revenue per lead. The quality of of each lead should always be put into account. Otherwise, a business can lose more than what they have accounted for. If the team of sales representatives can gather a bunch of quality leads in the duration of the marketing campaign then the cost per lead will seem to lessen as the business' revenue will be boosted significantly.

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