In my previous blog Are You Wasting Budget On Low Quality Leads?, we explored what a qualified lead is and how you can track and improve the quality within a given budget.
B2B companies often tell me they have a budget of X to put towards their marketing. When I question what this is based on, it has all too often been passed down from those above, rather than a well calculated figure based on what they truly are willing to invest in order to achieve the ultimate goal.
This month I have compiled an easy to follow guide on calculating a realistic Cost Per Qualified (CPQ) lead.
Don’t start with budget
It may sound odd, but the mistake is often made at the start of the process by focusing on the budget rather than the end goal.
Why is this wrong?
Let’s say you have £5k per month to spend on digital marketing. Already it is being viewed as a “budget” or a “cost”, opposed to an investment for return.
Because of this, the agency or inhouse team are focused on spending that £5k, when actually they should be focussed on the end goal and working on how those goals might be achieved.
Secondly, how does that £5k relate to your business, product or service costs? What is your margin on each sale?
If you think about it, how can anyone accurately determine what budget they need to invest when they don’t know how much each lead or sale is truly worth to them?
They can’t, so therefore – don’t start with the budget!
Understand where your leads and sales come from now
Before you plough a load of money into any marketing project, it is important to understand what is driving current success and where you are expecting the additional growth to come from.
Potential channels most likely to drive sales are:
- Account Management – Upselling services
- Account Based Marketing (ABM) – New opportunities within current clients under new divisions
- Sales calls and outbound sales – Engaging contacts, old clients, creating new connections
- Word of Mouth (WOM) and referrals
- Marketing – Increasing awareness driving both net new leads and supporting sales outreach
How much is currently being invested into each of these new business techniques? How much are you getting back from each investment? How much are they influencing each other? How much does each one cost in time, resource, money, etc…?
There are often so many unknowns even with the most sophisticated tracking and CRM integration. However, there is always a benchmark you can put in place and this will give you a better understanding of where to direct your efforts.
Start at the end – work backwards
Where are you trying to get the business to and where does marketing fit into that business mix?
For example, if your overall growth target for the business is 20% uplift in revenue year on year, where are you expecting that growth to come from? What does that growth actually look like in revenue? How does that break down to the number of new sales needed, what is the Average Order Value (AOV) of each sale?
Let’s work it out –
Start by breaking down what your inbound sales look like. This may vary month on month, in which case you need to expand the time range and take an average:
Direct source of sales:
- Account management – 30%
- ABM – 10%
- Sales calls and outbound sales – 5%
- WOM – 50%
- Marketing – 5%
The chart below demonstrates an example of the activity output, compared to the direct source of the sales being made.
So we can see outbound sales have the highest percentage of activity, but the lowest direct sales. This can be more easily understood by thinking about the role of a sales person. The majority of their time is spent on direct activity to drive sales, and from that some sales will be directly generated. In comparison, word of mouth has no outbound activity but sales are often directly attributed to that source.
It’s important to note that although a referral may come from word of mouth, the referral lead will nearly always do their due diligence first. That could be anything from searching on Google for your company or looking at your LinkedIn company page or other social profiles. They could even be looking at you on LinkedIn, seeing what content and topics you are discussing within the market. All of this adds to how word of mouth sales could have been influenced by marketing.
The same goes for each of the sources responsible for sales above. Each actual sale is nearly always influenced by marketing at some point along the buyer journey.
In order to understand the influence that marketing has on each of the sources above, apply my *magic rule of thumb calculation*:
- Take your original sales percentage by source (as per the table above)
- Divide each sales percentage by 3 other than marketing
- Then allocate the remaining percentage into the marketing
- Account management = 30% / 3 = 10%
- ABM = 10% / 3 = 3%
- Sales = 5% / 3 = 2%
- WOM = 50% / 3 = 17%
- Marketing = 5% + remaining % = 68%
Based on those calculations, the pink bar in the graph above demonstrates the attributed sales. In other words, the percentage that has influenced total sales via that channel.
NOTE: This method is based on an internal study that shows 3 touch points from marketing channels prior to conversion via any route to sale. This is a model and not an exact science, so test it out on your own data and see what attributed sales your marketing may be having on total direct sales.
So now we have a guide for the marketing attribution figures, let’s look at the cost per sale.
How much would you pay for a sale?
How much ‘should’ you pay for a sale? Depending on your goal, whether it’s revenue growth, profit, or cost saving for example, we can apply a cost per sale figure relevant to achieving this goal.
The following calculations don’t take into account any ongoing revenue and margins. In most cases the margin may increase with the lifetime value of a customer, plus the account managers may be upselling as per the previous point. This leads to the overall value and profit from each sale increasing.
If the goal is revenue growth, are you happy to break even on profit in order to achieve maximum growth? Or are you looking for revenue growth but only with a profit of say 5%?
Once you are clear on this, you can start calculating.
- If each sale is worth £36k over the year (average £3k per month)
- You make a margin of 30% on each sale minus all your costs (salaries, assets, rent, phone bills, internet connectivity etc..)
- That means £10.8k profit per sale
NOTE: take into account your average customer lifecycle – if that is 3 years, then the actual profit from one client increases, meaning you can afford to invest more into your efforts to gain one client.
If you are interested in growth but not profit, you could invest the whole £10.8k into achieving one sale. The Cost Per Sale (CPS) cap would therefore be £10.8k.
However, it is likely you need to make a profit so let’s assume a target of 10% profit on each sale:
Therefore 10% of £36k is £3.6k, meaning your Cost Per Sale cap would be £10.8k minus £3.6k = £7.2k CPS cap. Any sales which come in for less all add to the profit line.
How to calculate a realistic Cost Per Qualified Lead?
So let’s assume for this example that the CPS is £7.2k. How do we then work out a realistic Cost Per Qualified lead?
Let’s put some numbers to that example:
- £5mil turnover last year
- 20% growth is £1mil
- Meaning £6mil turnover target this year
- AOV = £36k per year
- £1million new customer revenue / £36k AOV per year = 28 new sales required
28 new sales @ £7.2k maximum Cost Per Sale
= £200k investment per year
Based on your previous qualified lead to sales data, you should have a good idea of the qualification to sales percentage.
Let’s assume that 30% of qualified enquiries turn into a sale.
28 sales / 30% qualified rate = 93 qualified leads needed
£200k investment / 93 qualified leads = £2.15k cost per qualified lead cap
Now knowing what you know about the influence of marketing in point 3, and taking your annual budget of £200k over the year, finally we have our figures:
- Required Revenue £1m
- Required sales 28
- AOV £36k per year
- Cost Per Sale (for 10% profit) £7.2k
- Qualified Rate to Sale 30%
- Cost Per Qualified lead £2.15k
- Marketing investment 68% = £136k over the year or £11.3k per month
All figures included are a representation and rounded up in some instances, your own figures will vary but the method applied is the same.
If you have any thoughts or feedback on the process above, get in touch or message in the comments below.
If you need help calculating your budget investments and Cost Per Qualified leads, let’s have a chat.