October 7, 2020
3 Reasons Why Cost Per Lead is an Overrated Statistic for Businesses
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.
Cost per lead doesn’t tell you the full story
Generating good business leads is the lifeline of a healthy business.
In fact, we don’t really need to explain to business owners the importance of 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 ROAS (return on ad spent), they are less 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.
Isn’t it reasonable to expect more sales with more leads?
Here is why cost per lead may be over-rated depending how you view them.
Why Cost per Lead is Overrated
- Cost Per Lead Doesn’t Tell You Anything About Lead Quality
- Doesn’t Work Well as a Benchmarking Tool
- Doesn’t Include Hidden Costs
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.
The truth is, having more leads doesn’t necessarily 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.
While cost per lead from Google Ads is higher, unless you have visually impactful video content that generates viral engagement on social media, chances are you will be getting a better ROAS for Google Ads compared to social media ads.
2. Doesn’t Work Well as a Benchmarking Tool
While benchmarking is a great way to measure performance, it is extremely misleading to benchmark cost per lead against other industries.
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.
One might consider an email reply as a lead while others might only consider trial sign up as a lead. 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).
ROAS tells you how much revenue you earned for every dollar spent.
For instance, assuming you spend $5,000 monthly on Google Ads and generate $22,000 monthly, your ROAS would be 4.4X 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 3.5X to 5X.
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.
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.
It depends on what you compare with.
One great way of using cost per lead is to analyze anomalies throughout the year.
For instance, it was expected to have a higher cost per lead for office rental industry during covid-19 pandemic since businesses are not ready to make a heavy commitment and were looking to cut cost.
Another useful way of using cost per lead is to analyze purchasing trends for your business.
By analyzing the patterns of decision-making in consumers, you can manage your ad budget efficiently to maximize your ROAS.
These are essential business intelligence especially when you are looking to improve your lead generation campaigns especially in Singapore.
If you like to truly understand the performance of your campaign, you need to know what you are comparing with. If you are focusing on returns, 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.
Just drop us a message if you need help in marketing your business.