Cost Per Lead is Not a Performance Metric

Cost Per Lead is Not a Performance Metric - Old SchoolUnfortunately, those that do not understand the marketing function try to simplify it and, in the process, set the function up to fail – cost per lead is not a performance metric.  Specifically, the term cost per lead (CPL) is thrown around a lot. It has caught on with the financial community because it is easy to calculate and sort a column from maximum to minimum values.  The issue is that B2B complex sales are just that, complex.  In a solid go to market strategy, Marketing supports and is integrated into the sales process.  This marketing strategy has to include a well-thought-out and executed demand creation and demand management plan to be efficient and effective.  One and done programs that are selected from a sorted list of lowest cost per lead is NOT the answer-move beyond this old school thinking.

So what’s wrong with cost per lead as a metric in a B2B complex sale?  A lot, but let’s focus on a few things:

Cost per Lead Focuses on a Singular Program

A fundamental flaw in a Cost Per Lead (CPL) mentality is that it separates Marketing into independent, isolated, disconnected and fragmented programs.  Some organizations are tempted by drive by Marketing programs as it is easy to list them in an Excel spreadsheet, sort the cost per lead column, whack the tactical programs with the highest CPL cost and “double the order” for the lowest cost per lead activities.  And, if an organization is really backwards, the finance group may even require a CPL to be entered in the purchase order (PO) creation process with a condition that rejects PO requests if the cost per lead is over a certain value. The concepts of integrated campaign, qualified opportunities or revenue impact of course are nowhere to be found in this type of Marketing organization.

The fact is that Marketing is part art and part science, and there are no silver bullets.  In a complex B2B sale the homework has to be done to create a marketing blueprint within the go-to-market strategy.  This means that there needs to be:

  • Cost Per Lead is Not a Performance Metric - Island
  • A demand creation strategy
  • Persona development
  • The creation of a buyer behavior model
  • Detailed journey boards for each persona
  • A reverse engineered plan directly correlated to revenue
  • Automated systems and processes
  • KPIs, dashboards and metrics of meaningful and relevant information to effectively manage the sales pipeline

In short, there has to be a demand creation and management plan that is holistic, integrated, sustained and aligned and integrated into the business.  Unfortunately, almost no one outside of Marketing understands these concepts and of those that do, only a fraction have mastered the skills necessary to be successful.

Organizations that focus on cost per lead normally have a one and done mentality- we create a lead, now we throw it over the fence and the sales team needs to “close it”.  In the best run organizations, lead generation and lead management (ideally referred to as demand creation and demand management) are integrated, sit in the same organization, are mutually supported and respected by Sales and Marketing, and have the singular goal of producing closed/won deals.  The goal is NOT to create a lead and focus on the cost per lead.  The goal IS to create a qualified opportunity that has a high propensity to become a closed/won deal!

Cost Per Lead – All Leads Are Not Created Equally

It is a fact that all leads are not created equally.  Different demand creation vehicles produce different results or responses.  For example, should the responses from the following programs below be termed the same?  Treated the same?

  • A web form download
  • A contact us form completion
  • A webinar attendee
  • A seminar attendee
  • A business card collected at a tradeshow
  • A list of attendees at a tradeshow
  • A response to an email
  • Attendees of a customer presentation at a conference
  • Someone who has a live conversation with a sales rep
  • Someone who has a face-to-face meeting with a sales rep

The demand creation vehicles used to generate the responses noted above are different, have a different focus, are designed to be used at different stages of the sales process and generate different information.  So, how can a cost per lead metric be slapped onto each of these programs and an intelligent and meaningful comparison be made?

It’s true that some organizations account for this differentiation with classifications such as:

  • Lead
  • Marketing qualified lead
  • Potentially qualified lead
  • Sales qualified lead
  • Totally qualified lead
  • Sales accepted lead

This is a good practice, assuming that Sales and Marketing have mutually agreed to these terms and their definitions, and there is a system to store, retrieve, track, manage and report on this information.  But, it requires a cost for each lead type to be established and NOT a generic cost per lead slapped on each.

However, each of these terms is used at a different phase in the sales process and as such, has a different value and cost associated with it.  Cost Per Lead  does not account for these variations as it is an old school, rudimentary metric favored by non-marketers because it is one number that’s easy to toss around and it dismisses the requirement of possessing any Marketing knowledge.  The bad news is that this type of thinking is counterintuitive to a successful Marketing organization.

More importantly, the terms discussed so far are really only focused on lead generation or demand creation. Lead generation is a necessary and required step in the revenue generation process, but it is meaningless unless it is integrated and synchronized with demand management.  The focus for Marketing should be to create qualified opportunities with a high propensity to close, not to create leads or a derivation of a lead.  Qualified opportunities are those responses to integrated marketing campaigns that are executed under the demand creation strategy umbrella.  Furthermore, they have been vetted by a salesperson (a live conversation) with the conclusion (based on a documented and mutually agreed upon set of criteria by Sales and Marketing) that a real sales opportunity exists–this means the opportunity is in the sales force automation system, has a weighting assigned to it and appears in the sales pipeline management report.

Cost Per Lead – Wastes Expensive Resources

Cost Per Lead is Not a Performance Metric - Wasting MoneyIn general, decreasing the cost per lead usually results in the creation of more leads – i.e. quantity over quality.  All of these cheap leads now require additional resources to be applied to follow-up.  Typically, these additional resources have a cost to them, and when the math is done, the cheap leads become quite expensive.  In general, the leads are left for the sales organization to follow-up on and a fully load, B2B, direct sales rep is approximately $1800 per day, or $200 per hour–a cost that the cost per lead figure did not include.  The sales organization will figure this out, this “lead dumping” policy, quickly as the number of follow-up tasks for the sales reps increases.  The amount of energy required by Sales to follow-up and the corresponding positive impact on the funnel will be disproportionately out of whack.  But, the cost per lead was low.

In the best run organizations, Field Marketing is integrated with Sales and is chartered to develop leads into qualified opportunities.  In this scenario, a managed and repeatable process is established with discrete steps, specific roles and skillsets applied to nurture a lead to a qualified opportunity.  This is usually accomplished within a cost structure that is much less than that of a direct sales rep and more effective.

The goal should be to apply the most resources to the best opportunities to win a new customer, not buying leads by the pound!

Cost Per Lead – Ruins the Reputation of Marketing

Whenever Marketing passes a large volume of low quality leads over to Sales, it creates a breeding ground for an unhealthy relationship between Sales and Marketing. In fact, the sales team learns very quickly that the cheap leads are usually not worth their time and energy.  In short, Marketing is viewed as superfluous by Sales because they are thought to not provide any value.  This basic disconnect is that the Sales team is focused on signing a customer that brings in revenue and the marketing team is focused on driving down the cost per lead—there is no goal alignment on outcome.

Because most sales organizations prioritize quality over quantity, Marketing chasing a low cost per lead is diametrically opposed to a fundamental sales concept – qualified opportunities.  The bigger issue however is that the reputation of Marketing is now tarnished.  Sales people will not segment what leads came from what source and what portion of Marketing does this or that.  Sales people will simply conclude that “Marketing” floods their inbox with dribble that is not worth their time and effort.  Fast forward to a quarter that the bookings target is not met and the finger pointing begins and Marketing does not have a solid leg to stand on.

Unfortunately, the sales team does not spend the time or energy, nor should they, to determine which leads were driven by the low cost per lead directive and which leads were generated via programs that may have strayed from the low CPL directive.  In short, Sales generalizes that Marketing generates junk leads and the downward spiral for the relationship between Sales and Marketing begins.

Cost Per Lead – Demand Creation Not Aligned With Demand Management

In short, leads should not be the focus for Marketing — closed/won deals should be the focus for both Sales and Marketing, and qualified opportunities pave the way to that goal.

Cost per lead in complex B2B sales does not focus on what is important.  What is important is the cost of customer acquisition.  CPL is a tactical, isolated, independent metric that distracts focus from what is of the utmost importance — to drive a qualified sales pipeline that facilitates attainment, or overachievement of quota.

The part of Marketing most tightly correlated to revenue is Field Marketing.  Field Marketing has the most value when it is an integrated part of the sales process—when Sales and Marketing sit down and carve out the front-end of the sales process and delegate a portion to the Field Marketing team.  Technically, Field Marketing is part of the sales process and as such should share the same end goal – revenue.  To that end, the focus for Marketing should not be a lead or how cheaply a lead can be generated.  The focus for Marketing should be on revenue generation and customer acquisition.  Hence, the important metric is the cost of customer acquisition.

Granted, it is hard to think about the best way to acquire customers and how to do it efficiently and effectively.  That’s why it is critical to have a solid demand creation and demand management plan.  Once the plan is in place, then the focus can turn to flawless execution and improvement through institutional memory.

The reality is that:

  • Customer’s will find and disqualify vendors before vendors are aware of them
  • Over 20 individuals will be involved in the purchase of a complex sale
  • Sales cycles for complex B2B sales are typically 6-12 months
  • There is no silver bullet – there is not “one” program and game over
  • Depending upon the stage of the sales cycle, the information needs of a customer varies
  • Depending upon the role of the individuals in the sales cycle, the information needs of a customer varies

It is counterintuitive for Marketing to isolate itself from Sales and generate cheap leads that are then thrown over the fence to Sales.  Why?

  • Sales resources are more expensive than Marketing resources and the last thing one wants is an $1800 per day resource chasing a cheap lead
  • The relationship between Sales and Marketing will suffer as cheap leads will result in the sales team turning a deaf ear to Marketing as the leads are not worth the time required for follow-up
  • Marketing spend will be inefficient as it is based on drive by lead generation
  • The organization suffers as “one and done” programs do little to build and support the brand
  • The focus is not on the goal – cheap leads do not correlate to closed/won deals

The Bottom Line – Cost Per Lead is Not a Performance Metric

To set the marketing function up for success both the Marketing and Field Marketing functions should be aligned to revenue.  Ensure that goals are in alignment with the primary goal being revenue.  It’s fine to reverse-engineer revenue, but do not lose focus of the primary goal.  One way to do that is to focus on KPIs, dashboards and metrics that prioritize the outcome that aligns and synchronizes Sales and Marketing.  At the end of the day, it is all about customer acquisition, and that requires a skillful marketer’s planning and execution of a demand creation and demand management plan.

3 Responses to “Cost Per Lead is Not a Performance Metric”

  1. Thoughtful article with solid points around cost per lead I couldn’t agree more with. What the real question is how to best account for the true cost of acquisition in a world where its really difficult to effectively track every interaction a lead has with your brand and team leading up to a closed won opportunity.

    • Agreed, in a SaaS world it’s CAC and LTV (there are several ways to calculate each). At the end of the day, marketing should share the same goal as sales and that is acquiring customers and increasing the share of each customer’s It spend.

  2. Very interesting Peter, many thanks. My view (B2B): Well, yes & no, it depends on a few variables (goals, sector, customer base, size, efficiency etc) and it is only one of 10+ metrics (I have 20 in my dashboard) to analyse, true,… just like CPA is also only one of many… ROLI (ROI on lead investment) would be more relevant (e.g. annual revenue generated on average per lead vs CPL)

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