How to Determine a Goal Cost Per Lead (CPL) for Your Lead Generation Campaigns

In the world of digital marketing, especially for local lead generation companies, understanding and setting a realistic Cost Per Lead (CPL) goal is crucial to the success of your advertising efforts. 

Unfortunately, many businesses fall into one of two traps: either they spend significant amounts of money on ads without proper performance tracking, or they set their budgets too low, expecting miracles with not enough funds to support their efforts. Both approaches can lead to frustration, wasted resources, and missed opportunities. 

It’s important to find the right balance, but do you know how?

At That Random Agency, we help businesses navigate the complexities of digital marketing by providing strategic advice on how to optimize ad spend, measure performance, and ultimately achieve a sustainable and profitable CPL. In this blog post, we’ll walk through the key considerations for determining a realistic CPL and how to use this metric to guide your marketing strategy.

It’s important to note that your CPL may vary by marketing channel. Looking at your overall marketing spend along with all leads generated (including organic and referral) is also an important KPI to consider and monitor.

What is Cost Per Lead (CPL)?

Cost Per Lead (CPL) is the amount of money you spend to acquire a lead through your marketing efforts. A lead is typically a potential customer who has expressed interest in your products or services by providing contact information, such as an email address or phone number.

CPL is a critical metric because it helps you understand the efficiency of your marketing campaigns. A well-calculated CPL ensures that you’re spending your advertising dollars wisely and generating leads that are likely to convert into paying customers.

Why Setting a Realistic CPL Matters

A realistic CPL is essential for two main reasons:

1. Budget Optimization: Without a clear CPL goal, you risk either overspending without adequate returns, or underspending and limiting your ability to generate quality leads.
2. Competitiveness: The digital advertising space is highly competitive. If your CPL is set too low, you may not be able to compete effectively against other businesses willing to invest more in acquiring leads.

How to Calculate a Goal CPL

Calculating a goal CPL involves understanding several key business metrics:

1. Average Order Value (AOV): This is the average revenue generated from a converted lead. For example, if your average contract is worth $20,000, this figure is your AOV.
2. Conversion Rates:
   • Lead-to-Opportunity: The percentage of leads that become qualified opportunities.
   • Opportunity-to-Sale: The percentage of opportunities that convert into actual sales.
3. Desired Profit Margin: This is the profit you want to make after accounting for the cost of acquiring the lead.

Example CPL Calculation

Let’s walk through an example. Suppose your average contract value (aka average order value aka AOV) is $20,000 and you have the following conversion rates:

• Lead-to-Opportunity: 20%
• Opportunity-to-Sale: 10%

This means that out of 100 leads, 20 become opportunities, and 2 result in sales.

If you want to maintain a 50% profit margin, you need to ensure that the CPL allows you to retain half of the revenue generated per lead.

1. Revenue Per Lead:
   • If 2 out of 100 leads convert into sales, that’s $40,000 in revenue.
   • Revenue per lead = $40,000 / 100 = $400
2. Target CPL:
   • To maintain a 50% profit margin, you need to keep 50% of the revenue per lead, which is $200.
   • Therefore, your target CPL should be $200 or less.

Why It’s Important to Track and Adjust Your CPL

It’s important to understand that CPL is not a static number. It’s based on assumptions around conversion rates and AOVs, both of which can change over time. If your conversion rate improves or your AOV increases, you might be able to justify a higher CPL. Conversely, if your conversion rates drop, you may need to lower your CPL to maintain profitability.

To effectively manage your CPL, it’s crucial to:

1. Track Metrics of Success: Continuously monitor key metrics such as conversion rates, AOV, and CPL. Tools like Google Analytics, CRM systems like Hubspot or PipeDrive, and marketing automation platforms like Mailchimp can provide valuable insights.
2. Reevaluate Periodically: Regularly reassess your CPL goals based on the latest data. This could be quarterly or after significant changes in your business operations or market conditions.
3. Adjust Your Strategy: If you find that your CPL is too high, consider optimizing your campaigns by improving ad targeting, refining your messaging, or experimenting with different channels. If your CPL is too low and you’re not generating enough leads, it may be time to increase your ad spend.

As a business owner, you have a lot of levers to pull. If your opportunity-to-sale metric declines, it may be due to a competitor launching a promotion, or a new sales team member who is not as experienced, etc. Before lowering your CPL, remember to also make your sales funnel process as efficient as possible to maximize those paid lead opportunities.

The Brutal Truth: Competitive Environments Require Competitive Budgets

In the pay-to-play world of digital advertising, being competitive means being willing to invest appropriately in lead generation. A $15 CPL might seem cost-effective, but if your competitors are willing to pay $70 or more per lead, your chances of capturing high-quality leads diminish significantly.

By understanding your business metrics, setting a realistic CPL, and continuously tracking and adjusting your strategy, you can ensure that your marketing efforts are both efficient and effective. 

At That Random Agency, we’re here to help you navigate these complexities and build a strategy that drives real results. If you’re interested in working together, contact us today.