Calculating Target CPA Maximum Allowable Cost Per Lead for B2B Marketing Campaigns
Getting a steady flow of profitable leads is the holy grail of B2B marketing. These days, just about every online marketing channel has become more competitive, expensive and time-consuming than ever in the past to generate leads profitably. With Google Ads, long a favorite lead gen source for many B2B marketers, costs per click can be extremely high in most high tech B2B niches—in some cases reaching $30-50 per click—with low monthly search volumes to boot. In these markets, even a perfect 10 quality score on AdWords won’t send you cheap clicks when all of the advertisers in your space are bidding $40 or $50 per click on a high-converting keyword.
Still, online channels for lead generation—be they from PPC, SEO, social, email, content marketing or any other channel—are still an absolute necessity for most B2B companies. And if you’re going to spend time and money marketing your business, then it’s absolutely essential to determine how much it costs you to acquire a customer. Yet, many B2B companies surprisingly never take the time to understand what a customer a new is worth to them in financial terms.
Simply put, if you do not understand how much it costs your business to acquire a new customer, then you are quite likely going to lose money on your marketing campaigns—and in your business as well. A solid understanding of your business’s true cost of customer acquisition will allow you to confidently evaluate any marketing channel against this yardstick so that you avoid paying too much for marketing channels that do not deliver customers profitably.
For B2C companies that sell low-consideration types of products (i.e. low priced consumer products), figuring out the cost per sale is a relatively straightforward exercise. For a business-to-business (B2B) company however, the sales cycle is much longer and involves a lot if upfront costs that may or may not be recouped on the back end if a sale is made. For B2B marketers, one of the most important metrics to understand and track is your maximum allowable cost per lead or (MACPL).
Maximum allowable cost per lead is simply the absolute highest price that a company can pay for a closed lead (or sale) before that company will begin losing money. In this post, we will walk through the steps to calculate a hypothetical MACPL that can be applied to any lead generation campaign.
Lead Acquisition Cost
Depending on the marketing channel in question, these costs can be fixed and one-time or ongoing. While only you can ultimately answer all of the cost questions related to a particular campaign, some of the costs you need to consider are:
Creative Development Costs
- Any creative or development team salaries during the time of the campaign build and launch
- Any outside agency or contractor costs during the campaign build and launch
- Landing page design costs
- Banner ad or any graphic design costs
- Asset development such as white papers or webinars
- Content creation costs
Paid Advertising Costs
- Any ad spend budget (SEM, social, display, programmatic, media buy, etc.)
- Outside agency costs to manage ad campaign (if any)
- Any software vendor costs (marketing automation software, landing page testing software, etc.)
Some types of campaigns, in particular SEO and content marketing campaigns, are usually ongoing over long periods of time. In the early stages, these kinds of efforts do not often yield much in the way of results. These channels take time to bear fruit but can yield a substantial volume of leads and sales over time.
To account for the delayed gratification of things like SEO and content marketing, you need to bake in the cost of things like content writer salaries, developer resources for website code changes, and the cost of link building services over a period of many months in combination with the projected number of leads you are likely to get from your SEO efforts. While these traffic sources can seem less costly than paid advertising up front, they can actually be quite a bit more expensive and less certain over time.
Paid advertising campaigns such as PPC campaigns on Google AdWords, Bing Ads and Yahoo, programmatic ad buys and paid social media campaigns will yield quick results in terms of traffic and, if you’ve designed an effective campaign, conversions. These channels require the upfront costs of the ad purchases and perhaps the cost of the campaign manager (agency or in-house). However, it is usually easier to gauge conversion results much more quickly and more cost-effectively from paid channels than through the longer-term but less certain “organic” channels like SEO and pure content marketing.
No matter whether the channel is one where the costs come up front and results are faster like SEM or display advertising or whether the costs accrue over time and results more long-term like SEO or content marketing, the bottom line is that you need to develop as accurate a cost picture as possible.
Once you have figured out both the creative and paid advertising costs, add them up together like so:
| Campaign Costs | |
|---|---|
| Creative Development Costs | $3,000 |
| Ad Spend Cost | $15,000 |
| Total Campaign Costs | $18,000 |
Campaign Inquiry & Cost Per Inquiry
There are a large number of variables that go in to making a campaign successful for lead generation. Are you bidding on the right keywords? Is your ad copy compelling enough to get clicks? Does your landing page do a strong job of converting or do your customers bounce or exit your sales funnel? Is your offer compelling? How well does your sales team nurture the leads in question? How does your product stack up against the competition in terms of features and pricing?
While each piece of the sales funnel can be tested and tuned over time, it is usually quite difficult to gauge how a particular campaign will perform before it has been run for a time and data has accrued. Still, it can be useful to create an initial model on how your campaign might perform under different cost and lead conversion responses beforehand.
For our intents and purposes, let’s say we don’t have any campaign data yet but we want to build a model that will allow us to look at different scenarios. For instance, let’s say that our $18,000 in campaign costs shown above yielded us 200 inquiries which, based on our campaign costs we calculated gives us a cost per inquiry of $90. An inquiry could mean that the person filled out a form and downloaded a white paper or signed up and attended one of our webinars:
| Campaign Costs | |
|---|---|
| Creative Development Costs | $3,000 |
| Ad Spend Cost | $15,000 |
| Total Campaign Costs | $18,000 |
| Number of inquiries from campaign | 200 |
| Cost Per Inquiry (Campaign Cost / # of inquiries) | $90 |
Note: Some people like to refer to the inquiries we receive from a first touch as leads. Such as cost per lead instead of cost per inquiry. We’ll see why it’s not a good idea to call these leads just yet in a moment.
Marketing Qualified Leads
A large number of the inquiries that you receive from a given campaign will not be qualified due to a number of factors. Because there is always a discrepancy between the number of initial inquiries we receive from a campaign and the eventual number of qualified leads within those inquiries, we need to further assign the cost of qualifying our leads to our campaign ad spend and creative development costs from above.
However, lead qualification costs are notoriously difficult to determine on an individual campaign basis. There can be multiple people involved and multiple touchpoints of contact over the course of many months. Because of these factors, it can be difficult to tie the true lead qualification costs back to the campaign that first brought the inquiry in.
The only way to assign the costs of lead qualification in any kind of manageable way is to take the average lead qualification costs over a given period of time such as a month, quarter or a year. These costs can range from sales salaries and commissions as well as any additional lead qualification and nurturing costs such as CRM software, phone bills, in-person meetings, etc. The longer the period that you use, the more you will smooth out any seasonal irregularities that may distort the number. However, in the beginning of this process you will have to use smaller time periods for your initial analysis and then continue to run these numbers as more time passes and data accrues.
The number of leads that the marketing team has scored as acceptable to be passed on to sales for further qualification due to indicated buying interest or buyer persona fit are deemed as marketing qualified leads or (MQLs).
Continuing with our own analysis, let’s say we have run our internal cost numbers for a year and have determined that it costs us $75 to qualify an inquiry as an MQL. By adding this number to our initial cost per inquiry of $90, we arrive at a $165 as the cost per inquiry qualified to become marketing qualified:
| Cost Per Inquiry (Campaign Cost / # of inquiries) | $90 |
|---|---|
| Average cost to qualify an inquiry as an MQL (back-end handling costs / inquiries for a year) | $75 |
| Total cost per inquiry qualified to become an MQL (cost per inquiry + avg. cost to qualify) | $165 |
Sales Accepted Leads & Sales Qualified Leads
Even after the marketing team has passed the MQLs on to the sales team, sales reps will often want to qualify these leads further before they are accepted as bone fide sales accepted leads (SALs). There can be a variety of reasons that sales teams will reject certain MQLs due to contact data being incorrect, the product being the wrong fit for the buyer or the timing simply being wrong.
Once a lead has been accepted by sales, it must be further qualified to make sure that the lead has the necessary budget to purchase the product, the authority to purchase the product, the need to purchase the product and a reasonable time frame in which to close as a sale. These factors are often referred to as BANT (Budget, Authority, Need & Timing). Leads that meet these criteria are known as sales qualified leads (SQLs).
Getting back to our analysis, when we’re trying to estimate our allowable cost per lead, it’s necessary for us to make some assumptions about how many SQLs we will be able to harvest from our MQLs and SALs. Because we can’t know precise numbers ahead of time, it’s better to plug some percentages into our model to come up with different possibilities. For this example, we are going to estimate that 30% of our MQLs and SALs become true SQLs. Along with our total cost per inquiry qualified to become an MQL above, we can simply divide our cost per inquiry by our lead qualification rate to get our effective cost of a sales qualified lead:
| Total cost per inquiry qualified to become an MQL (cost per inquiry + avg. cost to qualify) | $165 |
|---|---|
| Lead qualification rate (% of MQLs and SALs that become SQLs) | 30% |
| Cost of a sales qualified lead (cost per lead / qualification rate) | $550 |
In most cases, many B2B transactions take months to close, multiple sales people and several points of contact to ever be booked as sales. For the purposes of our example, let’s say that our well-trained sales team has historically closed about 25% of its SQLs per year. To get our cost per closed lead, we simply divide our cost of a sales qualified lead by our estimated SQL conversion rate:
| Cost of a sales qualified lead (cost per lead / qualification rate) | $550 |
|---|---|
| SQL conversion rate | 25% |
| Cost of a closed lead (cost of qualified lead / lead conversion rate) | $2,200 |
So our original $90 cost per inquiry from our initial marketing campaign turned out to cost us $2,200 to turn in to real revenue. “OMG!”, you might say. “That’s a lot of money to close a sale!” And it does appear that way. However, the real question is, did we make a profit on the sale? To figure this out, we need to look at our sales data.
Sales & Average Order Value Data
Now that we have a reasonably accurate picture of what it costs us to acquire a lead and turn that lead into a sale, we next need to figure out if our revenue earned from that sale will enable us to earn a profit.
The first thing we need to determine is our average revenue per order. For sales that happen one time, this number is relatively straightforward to determine. For sales in the “As a Service” subscription model where payments happen on some kind of schedule, we need to know our average lifetime value (ALTV) for a customer.
Since this is a simple example, we are just going to take our revenue as a straight number and not get in to calculating average lifetime values. To calculate our average order value (AOV), we simply take our total revenue for a given period (in this case a year) and divide it by the number of orders (sales):
| Annual revenue | $11,000,000 |
|---|---|
| Annual number of orders | 1,000 |
| Average order value (AOV) (Annual revenue / Annual number of orders) | $11,000 |
In this case, we had 1,000 orders off $11 million in sales. Thus, our AOV was $11,000.
Next, we need to adjust the average order value to account for what it costs us to make the product we sell. This number is called the cost of goods sold (COGS) and it reflects the costs involved in making our product.
| Average order value (AOV) (Annual revenue / Annual number of orders) | $11,000 |
|---|---|
| Less: Cost Of Goods Sold Per Product | $4,000 |
| Gross Profit Per Product | $7,000 |
| Gross Profit Margin Per Product | 60% |
Calculating Our Maximum Allowable Cost Per Lead
After we have figured out what our gross profit per sale is, the only other adjustments we may need to make to the gross profit is for any additional selling, general or administrative (SG&A) costs that we did not account for earlier when we were calculating the cost to qualify our leads.
SG&A expenses are usually a “catch-all” line item in an income statement and usually includes things like sales commissions, advertising, compensation costs for management, marketing, sales, finance and administrative staff and also things like the rent, utilities, supplies, and computers that are outside of the manufacturing function (which gets allocated to COGS). While we have already accounted for some of these costs, you may want to be more thorough by including all relevant SG&A costs for your own company on a per-unit basis to get a more accurate picture of profit and loss.
Once we have arrived at an acceptable SG&A number per unit, we can simply subtract that from our gross profit per product to arrive at our maximum allowable cost per lead. In this case, our SG&A costs of $2,500 per until subtracted from our gross profit per unit leaves with a maximum allowable cost per lead of $4,500. If we subtract our current cost of a closed lead of $2,200 from the maximum allowable cost per lead we get a profit per sale of $2,300.
| Gross Profit Per Product | $7,000 |
|---|---|
| Less: any additional selling, general or administrative expenses (per unit) | $2,500 |
| Maximum Allowable Cost Per Lead | $4,500 |
| Cost of a closed lead (cost of qualified lead / lead conversion rate) | $2,200 |
| Profit Per Sale | $2,300 |
Conclusion
While calculating your maximum allowable cost per lead is not necessarily an exact science, the act of going over all of your numbers from initial inquiry to closed sale is an imperative for any B2B company. To paraphrase the eminent British economist John Maynard Keynes “I would rather be vaguely right than precisely wrong.”
Even if our numbers are not 100% correct, the act of calculating these numbers forces us to look at the entire customer acquisition cost structure of our business and to hopefully go into today’s expensive and competitive online B2B ad marketplace with confidence that even though a particular marketing channel may appear expensive, our efficient back-end sales process will allow us to be profitable in that channel.
Armed with this information, we can begin to make intelligent choices for testing and optimization that will improve the returns on our marketing campaigns and lead generation over time.