Before You Can Know ROI, You Have to Know This

ROI is important (understatement of the year) – after all, if you don’t have any concrete way to gauge your marketing costs and performance, how can you know whether you’re taking in more than you’re spending? But before you can know ROI, you have to know how much money a lead is worth. Analyzing performance on a per-lead basis is one of the best ways to determine whether your marketing strategies are effective or not. So how exactly do you do this? Well, for the sake of clarity, let’s start off by defining what a lead actually is.

What is a Lead?

Since there are a wide variety of businesses that offer all kinds of different products or services, let’s keep it simple: A lead is a potential sale. It’s someone who is potentially interested in purchasing what your business has to offer. In the world of digital marketing, the most common definition of a lead is a qualified website visitor, one who demonstrates (or will develop) the intention to buy. Since leads are essentially the lifeblood of your business, it only makes sense to utilize them as a unit of measurement to determine whether you’re effectively using your resources to achieve ROI.

Determining How Much a Lead is Worth

So how do you determine the value of a lead? In other words, what type of dollar amount can be assigned to each lead to give you a good basis for measuring ROI? Systems of lead valuation can sometimes get a little complicated, so for the sake of keeping things simple, let’s use an example of a company that sells a certain type of specialty camera online. Let’s also assume that the company attracts leads using a combination of pay-per-click (PPC) marketing and display advertising on related websites.

• 10,000 people visit the site per month by way of clicking on a PPC ad or display banner. Each one could be considered a potential lead.
• Out of these 10,000 people, 800 click through to make a purchase–that’s an 8% conversion rate.
• Each sale brings in an average of $200 in revenue.
• The average profit margin on a sale is 20 percent, which means that for every sale, the company clears $40 in profit.

This means that in a typical month, the company will generate roughly $160,000 (800 sales x $200 per sale).

Now that we’ve nailed down the dollar amount generated by these leads, the next step is to find out how much money was spent in advertising in order to acquire the leads. Let’s say that the company spends an average of $20,000 per month in PPC and display advertising to generate 10,000 visitors (roughly $2.00 per click).

Remember, only 800 of these 10,000 visitors actually made a purchase, so in effect, the company is spending $20,000 in advertising to garner 800 qualified leads. That would put the company’s cost per qualified lead at roughly $25 ($20,000 divided by 800).

So what does this tell us about ROI? Basically, at 10,000 visitors per month, the company must spend $25 in order to generate a $40 sales profit, which means that their per-lead ROI is roughly 38% ($40 minus $25 = $15, which is 37.5% of $40).

Knowing Your Spending Thresholds

While the above example is somewhat oversimplified, it demonstrates the importance of having a good grasp of how much money you should spend to acquire a lead, so that you can know whether your efforts will keep you in the black or put you in the red. There are several variables that you must keep a close eye on, so that if anything changes, you’ll know how to respond in order to stay profitable.

For example, if advertising costs increase (e.g., cost-per-click rises), you’ll essentially be receiving less traffic for the same amount of money. For this reason, any attempts to ramp up spending in order to make up the difference should be approached with caution. Profit margins on your product(s) are another factor to consider as well; if the cost to make or acquire your product begins to increase, your ROI per lead will decrease proportionally.

Know Thy ROI

As a digital marketer, the last thing you need is to have any vague or false impressions about how well your marketing strategy is performing, which can lead to a misallocation of resources or worse. Instead of setting aside a generic dollar amount for your marketing budget every month, take time to calculate how much return you’re getting from your advertising dollars on a per-lead basis, and then you’ll be better able to determine how to adjust each variable in order to achieve an optimal ROI.