Driving Growth: Analyzing Cost Per Lead (CPL) for Effective Marketing Strategies
Most companies look at their customer acquisition cost (CAC) because it tells them how much they spend to acquire new customers. However, the CAC doesn’t tell you how much you spend on each lead that you get, which creates a critical gap that leads to significant overspending in an omnichannel strategy.
To understand the true impact of all your marketing efforts, you need to know how much you’re spending on each campaign (and, more specifically, each lead).
What is Cost Per Lead (CPL)?
Cost per lead (CPL) is a metric used to measure the cost of acquiring a single lead. It’s typically calculated by dividing the total cost of a campaign by the total leads generated from it.
Analyzing CPL helps marketers better understand which campaigns are most effective at generating quality leads, and where they should be investing their resources. This allows them to make data-driven decisions on which campaigns they should invest in to maximize their chances of success.
Why Is It Important To Analyze Cost per Lead?
When businesses run marketing campaigns, they either pay per impression or conversion. In either case, the amount they pay is determined by factors like demand, target market, and competition.
Within each campaign, certain keywords, audience members, topics, groups, etc., are less costly to target than others. Although that doesn’t mean they’re more profitable, knowing the cost of each makes it easy to understand the bottom-line impact it has on revenue.
Suppose a customer relationship management (CRM) software vendor wants to run a paid search campaign. They sell enterprise contracts that regularly range from $10k to $25k each, and they want their landing page to be the first thing that shows up when someone searches “CRM software.” At around $40, it’s an expensive keyword to run ads for. Assuming a landing page conversion rate of 5%, that means each lead costs $800.
If they’re highly qualified and show solid potential to become a customer worth $25k annually, that’s money well spent. If they’re unqualified, the marketing team would need to know this quickly and adjust their strategy. In that sense, it’s impossible to understand CPL in its full context without analysis.
Other Metrics Required to Analyze Cost Per Lead
Alone, CPL doesn’t tell you much — it only shows you how much you’re spending on each lead that you get. It’s important to look at the following marketing metrics in combination with CPL for a more comprehensive analysis:
- Customer lifetime value (CLV): CLV shows you how much your typical customer will spend over the course of the customer lifecycle. If a lead you spend a lot of money on could potentially turn into a high-value customer, it’s more likely to be worth the cost.
- Customer acquisition cost (CAC): CAC is the total cost of acquiring a new customer from lead to deal closure. If the total cost of customer acquisition is already high, it might be difficult to justify spending a lot on leads.
- CAC:LTV ratio: This ratio shows the relationship between customer acquisition cost and customer lifetime value. If the CAC:LTV ratio is too high, it indicates that you’re spending more money on acquiring customers than they will spend in return, which underscores inefficiency or poor targeting.
- Close rate/win rate: The close rate indicates how many leads actually end up converting into paying customers. If the close rate is low, it might be an indicator of poor lead quality or an ineffective sales process.
How to Analyze Cost Per Lead
Analyzing cost per lead can be broken down into four steps:
1. Establish a Baseline CPL
Knowing your target CPL is the most critical factor in launching a successful advertising campaign. This calculation will help you fine-tune your campaign to meet its objective and achieve the desired CPL.
Calculate it by looking at your CLV and lead-to-customer conversion rate to understand how much wiggle room you have. Then, decide what your target return on investment (ROI) is (20% is a good start, or 10% of you’re going for volume), and adjust your CPL goal accordingly.
2. Calculate Your CPL
Once you have your baseline CPL, calculate it for each campaign and compare it to the baseline. The formula is as follows:
CPL = Total Cost of Campaign / Number of Leads Generated
For instance, if you spent $10,000 on a campaign and generated 100 leads, your CPL would be $100. It helps to calculate this on an ongoing basis to understand whether or not your campaigns are meeting their goals and make changes in near-real-time.
3. Analyze Other Metrics
While CPL offers a snapshot of the cost-effectiveness of your marketing efforts, it’s crucial to analyze it in conjunction with other key metrics for a holistic view.
- CLV gives you insight into the long-term value of each lead and helps you determine if the CPL is justified.
- CAC goes a step further by incorporating all costs associated with acquiring a new customer, including sales and research expenses.
- The conversion rate tells you how many leads actually convert into customers. A low win rate might suggest that while your CPL is low, the leads you’re attracting may not be high quality or well-targeted.
4. Adjust and Optimize
After analyzing your metrics, it’s time to adjust and optimize your campaigns. Look for patterns and trends in the data. For instance, if you notice that a particular campaign or marketing channel has a high CPL but a low conversion rate, it might be worth reallocating resources to more efficient channels.
Experimentation is key here. Try testing different ad creatives, targeting strategies, or platforms. Use A/B testing to identify what resonates best with your target audience and drives the most valuable leads.
Remember to monitor your metrics closely during this process. By continuously analyzing and adjusting your strategy based on data, you can optimize your campaigns for maximum efficiency and return on investment.
Final Thoughts
Analyzing cost per lead is critical to any successful marketing strategy because it helps marketers understand which campaigns are most effective at acquiring quality leads, and where they should be investing their resources. Following the steps above, you can better understand how to analyze cost per lead and develop your marketing strategy accordingly. By understanding this metric in the context of other metrics, you can make data-driven decisions that will maximize the return on your investment.
With a solid foundation in technology, backed by a BIT degree, Lucas Noah has carved a niche for himself in the world of content creation and digital storytelling. Currently lending his expertise to Creative Outrank LLC and Oceana Express LLC, Lucas has become a... Read more