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.
What is the value of a lead?
Leads don’t pay the bills. A lead is simply the opportunity to make a sale. 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.