cost per lead doesn’t tell you the full story
Written by Reed Tan,
Featured on Strait Times in 2013, Reed is a battle-tested digital marketing consultant who has years of experiences in lead generation, search engine optimisation and digital advertising. He enjoys culinary and occasionally prepares meals for friends and family.
Generating good business leads is the lifeline of a healthy business. In fact, we don’t really need to explain to business owners on the importance of having a good lead generation campaign most of the time.
But the truth is, you need a decent advertising budget to generate good business leads.
Sadly, since many businesses are not equipped to track advertising roi, they are not comfortable spending a sizable budget on advertising as they can’t see the correlation between advertising budget and sales.
With a myopic understanding of their business, many business owners prefer a lower cost per lead so they can generate as many leads as possible based on their limited budget.
After all, more leads equal to more sales, right? Not necessary.
1. Cost Per Lead Doesn’t Tell You Anything About Lead Quality
The biggest fundamental flaw of using cost per lead as a performance metric is its inability to measure lead quality.
Many business owners have the tendency to overestimate the effectiveness of a campaign due to their over-emphasis on the number of leads on a given budget.
Nothing else matters if you can’t convert a lead into sales.
The truth is, more leads doesn’t necessary translate to more sales. In fact, focusing on the cost per lead or number of leads is too one-dimensional to measure the performance of your ad campaigns.
For instance, it is no secret that leads generated from Google ads costs much higher than that of social media ads. In a competitive industry such as coworking spaces, the top of page bid can go as high as $24 per click.
Despite so, that is a reason why many marketeers prefer Google Ads as their main advertising platform.
The biggest difference between Google Ads and social media ads is that Google Ads mainly targets demand driven audience while social media ads usually targets interest driven audience.
Naturally, leads generated from a demand driven audience has a higher closing rate than social media campaigns because they are looking for an immediate solution to their problem.
Though cost per lead from Google Ads is higher, unless you have an exceptionally visual social media ad campaign, the overall ad ROI for Google Ads is usually still higher compared to social media ad campaigns.
2. Doesn’t Work Well as a Benchmarking Tool
We realize there are significant number of business owners searching for average cost per lead across industries every month.
While benchmarking is a great way to measure performance, it is extremely misleading to benchmark cost per lead against other industries as there are many other factors that can influence cost per lead.
Let’s take second hand car industry for an example.
The weightage of a lead differs greatly depending on the pricing of the product/service. For instance, a cost per lead of $300 might be considered expensive if you are selling a second hand Honda Jazz for $30,000. However, the same amount of cost per lead is considered cheap if you are selling a second hand Porsche 911 for $600,000.
The definition of a lead can vary across industries as well. Some consider a complimentary trial sign up as a lead which could potentially be converted into sales while some consider a lead only when the prospect comes down for a tour. With inconsistency in its definition, it is difficult to benchmark average cost per lead across industries.
A better metric you should be focusing on is Return On Ad Spend (ROAS). In short, ROAS tells you how much revenue you earned for every dollar spent.
Return On Ad Spend (ROAS) = Revenue Due to Ad / Ad Spend
For instance, assuming you spend $5,000 monthly on Google Ads and generate $22,000 monthly, your ROAS would be 4.4 or 440%. This means for every $1 you spend on Google Ads, you earn $4.40 in profit. Depending on your overall expenses, a healthy ROAS should be between 400% to 800%.
3. Doesn’t Include Hidden Costs
Having a low cost per lead may mean you have more leads to work on, but if the quality of the lead is low, this means that particular lead is less likely to convert into a sale.
This also means your sales team have to spend more time to handle more leads, not to mention additional time on each lead such as multiple calls, meetings and followups in order to close these low quality leads.
Since these additional manpower costs are difficult to enumerate, many businesses fail to include them into their overall cost. This hidden cost can be a sting especially when you are operating your business in Singapore where manpower cost is high.
If you have high hidden costs, it would be more relevant for you to use Campaign ROI as a reference.
Return On Investment (ROI) = (Overall Revenue – Overall Expense) / Overall Expense
It is very possible to have good ROAS while having a negative ROI with overall high expenses.
Which Metric Should You be Focusing?
Having said that, cost per lead is not entirely useless.
However, it really depends on what you compare with. Comparing with average monthly cost per lead throughout the year can tell you which are the peak sales months. These are essential business intelligence if you are looking for lead generation services in Singapore.
You can also analyze anomalies by comparing cost per lead with relative months in the year. Taking the covid-19 pandemic for example, it is expected to have higher cost per lead in the office space industry as prospects may not be willing to make a purchasing decision at this time.
However, if you like to truly understand the performance of your campaign, we recommend using ROAS and ROI as your main metrics. What metrics are you using to measure your campaigns? We would love for you to share in the comment section below.