Editor’s Note: Updated November 2018.
When I was 13 years old I took it upon myself to start a snow removal business in my neighborhood. For the incredibly low price of $10 I would clean my neighbors’ driveways and the sidewalks that led up to their front doors. My parents had one of those fancy snowblowers, but they wanted me to learn the valuable lessons of manual labor (ugh) and insisted that I do the work “with a shovel”.
My mom drove me to Home Depot and bought me a shovel, gloves and a bag of salt.
I’m guessing the supplies cost around $25, and of course being the great son I am, I wanted to pay her back. I needed to start making a return on investment (ROI) not only so I could pay my mom back, but so I could make money for myself and blow it on video games and pogs (remember pogs?).
Fast forward 19 years and, as a Director of Content Strategy at Brafton, I’m faced with very similar challenges.
Our clients have various goals, but a large percentage come to Brafton with the expectation that we are going to make their companies more money, plain and simple. KPIs like Cost-Per-Lead (CPL) and Cost-Per-Sale (CPS) are the most effective ways to show this type of ROI to our clients, and as digital marketers it’s our responsibility to cut through the noise and show them our work is paying off.
What is Cost Per Lead?
Cost Per Lead is the amount of money spent on campaigns in order to generate a qualified lead. Whether it’s a marketing-qualified lead (MQL) or sales-qualified lead (SQL), it’s the amount of money you had to spend to initiate a conversation with a prospect.
Measuring CPL takes the intangibles out of the equation. Instead of measuring “vanity metrics” like keyword rankings and organic search traffic, you are forced to measure dollars in versus dollars out. Based on that information, you can make informed decisions about your inbound marketing strategy and its effectiveness.
What is Cost Per Sale?
Cost-Per-Sale is the amount of money you spent that resulted in the business actually generating revenue. This type of KPI is more easily measured when working with e-commerce or paid search initiatives, but it’s often the most compelling type of metric you can offer when it comes to measuring ROI.
The line between an MQL or SQL and generating revenue is often dotted for various reasons (due to offline conversations between sales and the prospect, various other omnichannel activities, etc). However, when talking about CPS you can draw a direct line between a marketing initiative and the money that was generated by it.
How to calculate Cost Per Lead and Cost Per Sale
In order to calculate these metrics effectively, you need to ask the right questions, understand the percentage of web-based leads that close and what the average deal size of those closed online leads are.
From there, it’s basic arithmetic to figure out the value of your lead:
Average deal size X % of deals closed = lead value.
Once you have that information, you can plug it directly into your analytics tool of choice. By doing so, you can do some deep dives into the data to understand more of the nuance surrounding your lead generation programs (acquisition sources, specific landing pages driving revenue, etc.) and the channels through which you’re running them.
Say for instance you spent $5,000 creating an eBook asset to use for a lead-generation program and you want to figure out the CPL and CPS from this asset. Let’s revisit our friend Mr. Basic Arithmetic:
For CPL, you want to divide the cost of the asset by the number of leads generated by it:
$5,000 eBook generated 100 qualified leads = $50 CPL
For CPS, you want to divide the cost of the asset by the number of sales generated by it:
$5,000 eBook generated 10 sales = $500 CPS
Now comes the good part.
Since you were such a good marketer and asked the right questions, you know the average deal size that you’re working with, and now you can compare your CPS to see if the asset was actually worth the investment.
Average deal size = $1,500. Your CPS = $500 for the eBook asset — you’re $1,000 in the black on every deal closed on this program.
Your ultimate goal of course should be to get your CPL as low as possible while maintaining the actual quality of the leads themselves. Let me repeat that last part again: while maintaining the actual quality of the leads themselves. Without quality leads there are no sales, and with no sales, there is no ROI.
Putting your money where your mouth is
I’m often asked the question, “What are most of your clients looking to get out of their digital marketing initiatives?” The answer is usually quite simple but often hidden behind an obsession with what I like to call “vanity metrics.”
No matter how much additional traffic we are able to drive to a site or how well we improve a domain’s visibility in search, none of it matters if we can’t bring home the bacon.
Understanding CPL and CPS analysis allows a marketer to show true ROI to clients, and that’s what makes a true partnership succeed or fail.
He or she may have no idea what “search presence” or “engagement” means in a practical sense, but you can rest assured the equations we outlined above are as clear as night and day. We’ve used this example in the past, but what would you say if your CEO stopped you in the hallway and asked, “How are those Q4 figures looking?”
If your CEO stopped you in the hallway and asked, “How are those Q4 figures looking?,” what would you say?
You could a) gargle out something unintelligible because you don’t have a quick, neat answer, b) pontificate at length on the intricacies of your inbound marketing campaigns and their expected conversion rates as your CEO looks on, frustrated by your meandering response or c) answer with a single, concise number, like “$14k ahead of revenue goals with another month to go.”
Your sales and marketing strategies should exist in cohesion, with data insights passed between departments. That way, you have complete visibility into the sales funnel and sales reps can understand what types of marketing leads are coming down the pipeline.
What about Cost Per Lead advertising?
Organic marketing isn’t the only channel in which to measure Cost Per Lead, and we often recommend clients pair organic inbound efforts with paid advertising.
For one, they’re two sides of the marketing coin, and you should be focusing on capturing ALL intent-driven traffic, whether that means through Pay-Per-Click campaigns or through traditional content marketing channels.
The good thing about CPL advertising is that, by design, you already know how much you’re paying upfront and how much traffic will be coming in. This is accomplished through Google Ads, Bing Ads or any type of programmatic exchange you may use, in addition to social media ad platforms like Facebook Ads or LinkedIn Ads.
The aforementioned CPL and CPS equations still apply here, it’s just that, with PPC advertising, you don’t need to worry about quantifying seemingly unquantifiable metrics like shares or bounce rate. You bid on the impressions you want to receive.
Now, you still have to optimize your landing pages and ad creative to maximize those ad placements in order to turn each impression into a conversion and, eventually, a sale. But at least you have a dedicated, automated platform that tracks the movement of your spend in real time. That makes all the acronyms – CPL, CPS and ROI – so much easier to comprehend and report.
Transparency: A true mark of client-agency partnership
Understanding CPL and CPS analysis allows a marketer to show true ROI to clients, and that’s what makes a true partnership succeed or fail. We hear it every day of the week – yes, EVERY day: an SEO company reports surface-level metrics as if they are ROI and yet companies have nothing concrete to show for it. When they ask for ROI reports or even insight into why certain tactics were deployed, many SEO agencies clam up or can’t for the life of them give a straight answer.
Shouldn’t you apply the example above – the CEO stopping you in the hallway – to your marketing vendors as well? So, shoot us an email. Give us a call. Being transparent with true ROI is our thing.
Just in case you were wondering, I shoveled enough driveways that winter to pay my mom back and buy Ape Escape.