As the saying goes, you need to spend money to make money. Of course, that doesn’t mean you have to break the bank to grow your business. Striking a balance between advertising costs and the revenue you derive from each customer is the key to a sustainable business. That’s why it’s important to know how much you’re spending on each lead and whether the profit justifies the cost.
This metric is, appropriately enough, called Cost Per Lead (CPL), and it’s a simple formula: the amount you spend on advertising divided by the number of leads you generate. Note that this doesn’t bring revenue into the equation. A lead is just that: someone interested in your business who hasn’t yet made a purchase. It is more expensive to acquire a lead than to get an existing customer to make a purchase. So, how can you reduce your CPL and boost your profit margin? And where are you most likely to convert those leads into paying customers for less money? Let’s take a look.
What is Cost Per Lead?
As we mentioned above, cost per lead is simply your advertising/marketing budget divided by the number of leads generated by that budget. Of course, once you start digging into this number, it gets complicated. How does your CPL change from channel to channel? Assuming that only 10-15 percent of your leads convert (based on cross-industry averages), are you able to generate enough leads with your current budget? Are any of your lead generation strategies not delivering results? Knowing the answers to these questions will decrease wasted ad spending and boost your profits.
Ideally, you create a detailed breakdown of each marketing channel. What are you spending to generate leads on each channel? This might include your ads and sponsored post budget on Facebook and Instagram, monthly cost for email campaigns, and all your PPC campaigns. Compare each channel’s spending to the number of leads you have generated. Then, evaluate the inherent costs of each channel compared to the quality of leads you obtain from each.
For example, you might be enjoying a low CPL for your email marketing because you’re only spending $20 per month on Mailchimp. But how many of those leads actually convert into customers, compared to a highly qualified lead who clicks on your expensive Facebook ad? In some cases, paying more per lead is a way to guarantee better ROI.
Creating Your Target Cost Per Lead
Your primary goal is to increase profits. If you’re like most business owners, you’re willing to forgo some unqualified leads if it means you can obtain more profitable sales. So, your ideal CPL is one that attracts qualified leads who are primed to buy, yet low enough that you maximize profitability. It may feel good to pay only $5 per lead, but if you’re only going to make $5 off each of them, then you’re merely breaking even. That’s why you should create your target CPL for each of your channels and adjust your strategy to maximize potential revenue.
As an example, let’s say that you’re currently offering a $20 discount on your flagship product. You know that on Facebook, you’ll spend about $20 per lead, but only 10 percent of your leads will make the purchase. This means that you need to generate at least 9 leads (and pay $200) for every one you want to convert. If your budget is only $2,000, you’re effectively creating only 10 customers. If your product is $100, you’ll get $80 revenue from each customer who gets the discount for a net loss of $1200. Obviously, that’s a huge waste of ad spending. Rather than getting more customers, it’s often easier to reduce the price you pay per lead.
That’s where lead quality comes in.
Improving Your Lead Quality
Advertising to people who aren’t your target audience is the most common cause of wasted ad spend. The problem is twofold: you may be advertising to people before they are ready to buy, or you may be advertising to the wrong people to begin with. Anything you can do to boost your audience’s engagement before you pitch a sale will help you reduce your CPL. That’s because folks who are interested in your brand will come to you, saving you the exponential costs of advertising.
This fact is the basis of inbound marketing, which focuses on building a community around your brand rather than relying upon ads to garner leads and therefore revenue. Inbound marketing involves everything from email to social media to blogs, as long as the strategy focuses on providing value to customers and boosting word-of-mouth.
Imagine if most of your leads came through referrals, or if all you had to do was execute a robust content marketing strategy and watch leads roll in. All you’d be spending was time (and the cost of your web hosting), and you could reduce your CPL to minimal levels. Now, it’s easier to get 10 people to buy your $100 product with a $20 discount — except you’re spending only a few cents per lead instead of $20. This happens when your leads are highly qualified, i.e. they have a sufficient understanding of your product and are excited to buy. It’s the difference between convincing them via interruptive marketing and enticing them via inbound marketing.
Buy or Generate?
Anything you could imagine is for sale on the Internet — and that includes leads. Yes, you can always purchase leads for your business, but it’s not always a good idea. First of all, you’re buying email addresses (usually) that belong to people who have never heard of you. As we discussed above, lead quality is crucial to reducing your overall CPL, but purchased leads are unlikely to be qualified. They haven’t engaged with your business and don’t know why they’re hearing from you. That’s a fast track to the blocked listrather than the lucrative marketing campaign you hope for.
By spending money on purchased lists, you’re likely sending your CPL to astronomical levels. There’s such a low chance that someone on the list will convert to a customer that you might be buying thousands of email addresses to gain an opportunity for one purchase. It’s just not worth it.
Decreasing Your Cost Per Lead
“Okay,” you say, “I won’t buy leads. But how can I avoid high CPLs?” Even if certain platforms are more expensive than others, there are always ways to improve your profitability. The simple answer is that you have to generate as many qualified leads as possible. On platforms such as Facebook, you pay for every lead who engages with your ad, which can lead to exorbitant costs if your messaging isn’t aligned with your target audience.
That’s why it’s helpful to narrowly define your ad audience, then deliver highly targeted copy to them. This way, a $2000 ad budget can go much further by focusing on your ideal customers rather than a generic group of people who may be interested in your services.
Another key way to reduce your CPL is to engage in retargeting. Again, this all comes down to qualifying your leads. If people have already engaged with your website, they’re more likely to make a purchase once you serve them an ad via social media. Familiarity breeds loyalty — and loyalty leads to more purchases. In short, if you reach out to people you already know are interested, you’ll improve your likelihood of conversions, and that not only reduces your CPL but also boosts your customer’s lifetime value.
Finally, you need to ignore anyone who is not engaging with your content. One of the primary drains on an email marketing budget is paying for leads who receive the emails but never take action. Why pay for people who show no sign of converting? Especially if you’re paying for leads on a tiered basis, removing non-engaged subscribers can reduce your CPL. And of course, segmenting your audience and delivering highly targeted messages to each segment helps you get more revenue out of your spending.
Diagnosing Your Keyword Problems
When it comes to PPC advertising, CPL is the primary metric you need to track. Any missteps can be costly, so it’s important to fully refine your strategy and remove any underperforming keywords. Here are some signs that your PPC strategy needs work:
- You have a high conversion rate but also a high CPL: You’re targeting highly competitive keywords. Mix in some niche keywords to decrease your CPL.
- You have a low conversion rate and a high CPL: Your ads/targeting need to be re-done. It’s not working.
- You have a low conversion rate and a low CPL: You’re attracting traffic but your landing page needs work.
- You have a high conversion rate AND a low CPL: You’ve found the Holy Grail of PPC advertising! Carry on.
If you have any situation besides the last one, don’t be afraid to cut or even exclude keywords from your strategy. Any non-converting keyword could be pushing up your CPL or dragging down your results.
The final step in optimizing your advertising strategy is to encourage your leads to convert. While not technically part of your CPL, the tactics you use to improve the quality of your leads and generate more of them for less money will help you further convert them into customers. Keep in mind that today’s consumers are very savvy and discerning: they quickly reject opportunistic and inauthentic campaigns, and they’re primarily interested in brands that match their values.
That’s why the lead nurturing process must follow from your lead generation process. When you’re crafting your campaigns for optimal Cost Per Lead, don’t forget to map out a clear buyer journey. It’s your job to walk the lead from initial touch to final purchase, whether that’s through great content, subtle messaging, or outright sales pitching.
CPL plays into this by reducing your overall costs of obtaining a repeat customer: the more qualified and affordable a lead is, the more you can spend on nurturing them into a loyal follower of your brand. If you’re spending $100 per lead, your best bet is to hope for near-instant conversion into customer. But if you’re generating lots of leads at a lower price, you can devote more time and money to helping them feel comfortable making regular, larger purchases.
Optimizing your CPL helps your business be more profitable — hands down. To do so, you must fully understand the costs of promoting on each digital channel, as well as how you can reach your target audience quickly and efficiently. Ultimately, it comes down to improving the number of qualified leads. The more people who engage with your content primed to buy, the less you spend on converting them to customers. That means that, indeed, content is king, and strategy is your key to success.
This guide will be here when you need it to help you through your initial understanding of cost per acquisition. Take it slow, and you’ll be an expert in no time. Happy Advertising! ☺
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