Why cost-per-lead budgets fail and fewer leads are better

A reader asked me to explain why fewer leads are better and why “cost-per-lead” budgets fail. These are two great questions that have the same fundamental answer: quality first then quantity.

The truth is that sales people care very little about the cost of the leads we generate. What they really care about is how many of those leads will actually become viable sales opportunities.

For this reason, I think cost-per-lead measurements are irrelevant unless we can answer another fundamental question first, “What is our rate of lead acceptance (a.k.a. sales pursuit) into the sales pipeline” and then “What is the cost per opportunity?”

Sadly, I find that a lot of marketers tend focus on cost-per-lead because they really don’t know what happens to their leads after they hand them off to their sales team. This is why closed loop feedback and lead management are so important.

B2B Marketers must start measuring cost-per-opportunity now! Why? It’s the one metric that can help you understand how well your sales team accepts and pursues leads.  Ultimately, it shows if your leads are actually helping our sales team sell and if we’re positively contributing to their pipeline.

Lead acceptance into pipeline is primarily a function of lead quality.  There are other influences such as sales training and refining the lead handoff process, but lead quality stands out as the single largest factor driving the real ROI of our lead generation programs. 

In a cost-per-lead model there is a tendency to drive down the cost of each lead by generating more leads, which is good if the quality does not suffer.  However, this is rarely the case since there are a finite number of high quality sales ready leads in your target market at any given time.

The real question is, “Are these leads helping our sales team sell more and will these leads become profitable customers?” 

In most cases in order to get more leads to sales (as they demand more leads now!), marketing is forced to send early stage leads, often at the inquiry stage in order to meet quota or cost per lead requirements. Of course, the need for more leads does not come with a commensurate budget increase!

Simply sending more leads over the fence to sales will only result in more early stage leads being lost, ignored or discarded.  And if your early stage leads are not being cultivated with lead nurturing and given the attention they need, they will go to waste. Unfortunately in a cost-per-lead scenario this waste will not be measured, rather only your lead production costs.

There is no doubt that a cost focused mindset is a lot different than a value driven mindset.  The cost focused mindset often drives decisions that are arbitrary to the objectives of a lead generation program. The most valuable leads are those that your sales team can convert to viable sales opportunities, not just leads that drive more activity.

Pushing more leads and creating more activity can give marketers a false sense of security in the short term, but in the long term the cycle of failed campaigns will continue as past failures are dismissed, overlooked or as fingers are pointed.  To break the cycle, we must close the loop with sales and start measuring opportunities.

The following are real-world metrics that every marketer should track in their lead generation program:

• # of inquiries? 
• # of leads? (qualified as "sales-ready")
• # of opportunities (leads in moved into sales pipeline)? 
• # of closed deals from marketing leads?

If you know those metrics you can start to track the following key performance indicators:

• Inquiry to lead ratio
• Lead to opportunity
• Lead to proposal ratio
• Lead to sale (win) ratio

A value driven mindset requires leaders and marketers to plan and budget for the long term and to take a more holistic view that goes beyond cost-per-lead budgets. Cost-per-lead budgets are irrelevant unless you can first measure cost-per-opportunity or cost-per-lead-pursued and lead quality is a key driver in insuring that those leads are pursued.

What do you think about cost-per-lead budgets or sending fewer high quality leads to sales people? 

Comments

[Craig Klein]

Excellent point of view!

The other side of this coin is that the sales staff's time is wasted with increased volumes of leads at the expense of quality.

Of course, few organizations have the "closed loop" in place to be able to measure this accurately and therefore much money and time is wasted.

[Ryck Marciniak]

The lead to customer conversion process is a chain of activities, and it is only as strong as its weakest link. Just as poor quality leads can dramatically reduce the conversion rate to customers, so can underperforming sales organizations. And, in these latter cases, they can make marketing look weak and inept. Ideally, it would be great if there was an independent definition of a quality lead. This would provide marketing with a goal of what to aim for in leads, and equally, it would provide an objective input into sales, thereby allowing analysis of sales' ability to convert quality leads into customers. The key issue with the definition of a quality lead is that it varies from organizaiton to organization, and even in the same organization sales and marketing can't seem to agree on how to define it.

[Jason Kort]

I agree that sales could care less about a large volume of unqualified leads. A good indication of lead quality is if your leads are being embraced by sales. I call it a 'lead addiction' where they can't wait to see if a lead has been loaded into the CRM.

On the flip side, you know if things are not working when sales reps are indifferent to new leads (i.e. lack of follow up/excitement).

Closed loop feedback provides for this dialogue versus waiting to find out at the water cooler.

[Lisa Cramer]

I agree 100% that its about quality not quantity. As well ROI should be based on sales revenue not website activity. We have found that behavior tracking and lead scoring help marketing determine when to pass a lead on to sales. We can see all interactions that lead/suspect has with the company. Where are they going on our website, what whitepapers did they download, what Google Adwords they clicked on and more. Based on the lead's interaction with the company, a lead score can be automatically assigned. If the lead score is higher than a certain threshold, the lead can "move" to sales. If not, then marketing can nurture that lead further. Sales is more "accepting" of the leads coming from marketing. They not only see a lead score but see all the interactions that lead has had with the company. As well, marketing can continue to nurture leads to increase their score.

[Charles]

I've always found lead metrics to be affective by the boundaries of campaigns. In other words, if the same lead/contact is obtained by two sources (for example, a trade show and an advertisement), to which source is the lead credited? Often times it is double counted.

Expanding the boundary of the campaign to include both sources may solve the double-counting of the lead somewhat, but if the boundary gets to be too broad it dilutes the effectiveness of the information (e.g. was that trade show an effective use of marketing dollars?)

[Sylvlie MacKenzie]

Well, I agree with all of the comments. It is a no brainer that we need a closed loop system, we need to know Marketing ROI, ie a closed loop system that will effectively tell us the ROI of each marketing campaign..YET, I never found anyone who could effectively SHOW me how to do this. Yes, on paper, it's great, you have a tracking code for each lead and when sales closes the lead as a win, here you go. Well, beautiful, but HOW? Especially in a complex sales environment, when you get leads at the low level of the food chain, and then SALES closes the deal with the CIO. How do you establish the relationship? How do you establish ROI? based on the first lead that closed? based on the potential opportunity over the next 5 years?
some claim: use SF.com or use SIebel or use this,
yet technology is only as good as your process and I haven't found anyone who could reengineer our marketing, sales and accounting processes to close the loop. Any example would be greatly appreciated.

[Bizzhy]

Good points. I accept what you said. but, most of the marketers are using cost-per-lead concepts. However, In cost-per-opportunity concept also, success is solely depends upon how effective the sales team is.

[Jennifer]

Good points. We have been tracking 3 of the indicators you mentioned; however, we struggle to find industry "standards" for the key performance indicators to measure against. Any thoughts?