Calculating ROI, part one: The Value of a Lead

We recently surveyed our clients to find out what kind of challenges they are dealing with. One of the clearest messages to come through was the difficulty and the importance of calculating ROI. We'll lay out a simple framework for performing this calculation in a series of three blog posts, of which this is the first.

Image source: Charles M. Russell Museum, cmrussell.org

Image source: Charles M. Russell Museum

What is the value of a lead?

Leads don't pay the bills. A lead is simply the opportunity to make a sale - a point illustrated by the painting to the right, titled "Meat's not Meat Till it's in the Pan". Nevertheless, it's important for marketing professionals to be able to quantify the value of the leads that they generate for the sales organization. It's a simple calculation, but one that few marketers are likely to have made. The value of a lead depends primarily on two variables: average sale value and average close rate. The equation looks like this:

 

Average lead value = (Average sale value)*(Average close rate)

To illustrate, a company with an average sales value of $10,000, and an average close rate of 25% has an approximate lead value of $2,500. Of course, this is a gross over-simplification. Leads vary tremendously in their potential value and their likelihood of turning into sales. It's an important metric to know, however, because it gives a rough idea of how many leads a marketing organization needs to generate in order to meet the company's sales goal:

Leads needed = Annual sales goal / Average lead value

The point of this article has been to encourage marketing professionals to know how much a lead is worth and to use that knowledge to set realistic targets for their lead-generation activities. In our next post, we'll go into greater depth about a trickier topic - the incremental value of more leads.

If you would like to leave a comment sign in with your Facebook, Twitter, Google or Disqus account and submit your comment below: