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What is a Good Cost Per Lead?
What is a good cost per lead for contractors? This is a valid question, but a hard one to nail down. Have you ever run a lead generation marketing campaign, spent a little money, got a couple leads, and at the end of your day wondered if it was a good use of your funds?
Well, you’re not alone. As a contractor marketing agency, we get that question from a lot of home improvement contractors.
A good cost per lead, is the price you pay to remain profitable. There is no magic number, so we will look at the numbers. You should always know these numbers if you want to make money and stay viable as a contractor.
If you’re getting new customers but paying more than they’re worth in ad spend, it could mean an unsustainable future for your business.
You wouldn’t want to buy something for $10 and sell it for $5. You would lose money.
Should the cost per lead should be figured in as a percentage or a flat cost? Not all leads have the same value. Not all contractors have the same goals for their lead generation tactics.
A ready to buy lead for a full bathroom remodel is worth more than a customer who is shopping for a bathroom make over, of new toilet, vanity and flooring.
In this article we will talk about why you need to know your lead costs, compared to the cost to acquire a customer to see if you are spending to much or too little to get new customers.
We will also talk about how your goals effect what you should pay per lead. The answers will surprise you or open your eyes to your cost per lead problems.
Let’s jump in.
Cost Per Lead Table of Content:
What is cost per lead?
The cost per lead (CPL) is the amount of money it takes you to generate a new prospect for your contracting company from a current marketing campaign. These prospects or leads have seen an ad, clicked on it, then given some of their contact details and turned into a lead. Basic lead generation.
CPL lets marketing agencies or you know if they’re spending an appropriate amount on different avenues of acquiring new leads, such as Google Ads or Facebook Ads. The higher the CPL compared to other businesses in your industry, the less effective the marketing campaign are. Obviously, a lower Cost Per Lead is goal.
CPL is one of many things that your digital marketing company or you should often look at. Try not to confuse it with these other marketing metrics:
- Cost per Thousand (CPM) – The cost of 1000 users viewing the ad
- The Cost per Click (CPC) – The cost of one person clicking on the ad
- Cost per Action (CPA) – The cost of one person buying a product
Cost Per Lead Formula
This is simple. The amount of money invested in the advertising campaign, divided by the amount of leads you received from marketing campaign. That simple.
If you spent $1,000 and received 10 leads. The cost per lead is $100.
Now a $100 may sound like a lot. But if you are good at sales and closing these leads at 33% or one in three. Your cost to acquire is $300. That may seem high for some, which it could be, if what you are selling was low in cost.
But, if you are selling $20,000 bathroom remodels, have a good closing ratio, $100 per lead is cheap.
Why is Cost Per Lead Important for Contractors
Cost per lead measures how cost-effective your marketing campaigns are when it comes to generating new leads for your contracting business. The reason this metric is important is to provide you with a real dollar figure. So, you understand how much money you should to spend on acquiring new leads.
For Contractors Cost-Per-Lead Generation Campaigns Are Now More Important Than Ever.
With competition as high as it is today, not only from competitors, but others who are trying to sell you leads. You are all competing for the same amount of leads, thus driving the cost up.
There is risk in a business and generating leads is part of that risk. That is why it is important to not only advertise to get leads, but monitor the methods, make adjustments to maximum or reduce your cost per lead.
When you understand your cost per lead, you will know what the value of a lead is.
The lead broker price per lead problem.
With companies like Home Advisor, Angie’s List and Thumbtack or any lead seller for that matter, they give the illusion of a cost per lead. But what you should remember is that, the cost per lead is spread around for them to be profitable.
So, if you buy a lead from them it costs you $50, but cost them $100 to acquire it and they sell it to three other contractors, there profit is $50. But you think that that type of lead should costs $50. So, when you run your campaigns you see it cost you $100, you think it is expensive, which is not the case.
It is not about the cost, but the quality.
As more contractors move away from companies like HomeAdvisor or more companies become competition for them, they either have to do one of several things.
Get lower quality and cost leads or charge more per lead. To bad what they do is both, which is bad for contractors.
Is Your Target Cost-Per-Lead Realistic?
If you’re trying to get leads for your business online, there’s one metric that you always look at, your cost-per-lead.
If you’re good, you know that ultimately your most important number is your cost-per-sale or cost-per-acquisition, but that’s directly related to your cost-per-lead (CPL). Since your acquisition cost usually depends on sales closing ratios, you focus on the metric you think you can control: cost-per-lead.
But, how do you know if your target cost-per-lead is actually realistic?
- Does your cost-per-lead make sense?
- Will it deliver profitable results for your business?
- Is it actually achievable?
Picking a target cost-per-lead is important. Yet too many contractors tend to pick their cost per lead the wrong way. Resulting in, their campaigns struggling. They have a hard time getting the results they need from their budgets.
What should you pay per lead?
There is no set cost. You should pay as much for a lead as is profitable for your contracting business and no more. This doesn’t mean that you won’t pay more for leads at some point (normally in the beginning of your campaigns), but you should always be working to lower your lead costs or raise your closing rates so you are profitable.
A lead that costs $200 is worth it if you are profitable. A lead for $50 may not be worth it if you are not profitable.
This is why knowing your numbers is so important.
If you are selling a service that is $1,000, and your costs to deliver the service is $500 leaving you $500 in gross profits, then paying $100 for that lead is money well spent.
But, if you are spending $100 for a lead where your gross profit let’s say is $200 after all is said and done, it may be too high.
For my clients I like to say 5-8% of the cost of the job or project is a profitable percentage for lead costs, if you price your projects right. This is for sustainable growth figure. If you are looking for revenue growth the cost may be higher.
Of course, your closing rates will affect this percentage. If you are only closing 1:10 or 10%. These percentages are way to low. You have a lead quality problem, a sales problem or both.
The question you should be asking yourself or your marketing agency should be asking you is what are the numbers. That way, your lead generation plan, costs and strategies can be measured.
Cost per lead example for a tree service company.
With a tree service client of mine, we took his yearly total in gross sales, divided it buy the number of tree service jobs he did that year and came up with an average cost per job. Once we knew this number, we could come up with a cost per lead objective.
In this example, his average cost per project was $1,357. His average closing rate was around 40%. We also know his operating expenses for the year and used that as a cost per project. That number was $678. Leaving him with an average of $679 per project in gross profits.
Our lead costs varied from $36 to $64 with an average of $52. His costs for 10 leads $520. His gross profits on those ten leads are $2716. When you are doing 20-30 leads per week those profits add up.
Cost Per Lead (CPL) vs Cost Per Acquisition (CPA)
Now that we understand the cost per lead formula and the ways of putting a value on the leads, lets look at the cost to acquire a customer.
Using the example above we know a lead costs $52. And my client has a closing rate of 40%. So, 10 leads are $520. He acquires 4 customers for that amount. Which leaves him a cost to acquire at $130 per project. Formula: $520/4 = $130
There are few ways we can reduce the costs to acquire.
- One, reduce the lead costs. Which you should always be striving for.
- Two, increase your sales ratio without reducing project costs.
- Three a combo of the two.
If my client could close at 50% his lead cost would be the same, but his cost to acquire would go from $130 to $104. Thus adding $26 to his gross profits or 4 as a percentage.
Now 4 cent may not seem like a lot, but on a million dollars a year business it is big money.
95% of the contractors I talk to say they are good at sales. But, when I see the messages and the closing percentages, I know that most are not.
So, is it the quality of the lead or is it the salesperson who is driving up the cost to acquire?
Could be a little of both.
$7 out of every $10 is wasted on advertising.
Let us help you stop the waste.
- We can manage your ads
- Pick the right search terms
- Decrease your cost per conversion.
What Can You Afford to Spend on a New Lead?
Once you know how much you can afford to spend on a new customer, you need to work backwards to figure out how much you can spend on a new lead.
It would be sweet if every lead became a customer. But, that is unreal in the real world. So, to calculate how much you can afford to spend on each new lead, follow the formula below:
Profit per customer X (Monthly sales closed / Monthly leads) = Maximum cost-per-lead
Say your profit $500 per project.
You get 20 leads a month and closes 5 of them. You can afford to spend $125 per lead ($500 X (5 / 20) = $125).
If you spend any more than that, they’re losing money on every customer.
How Much Do You Want to Spend per Lead?
Knowing how much you can afford to profitably spend to get a new customer still doesn’t answer the question, “What should my target cost-per-lead be?”
The answer to that question depends on your goals.
Your target CPL needs to based, on your business goals. If your goal is to maximize profits, you’re going to have a very different cost per lead, than you would have if you’re trying to double your annual revenue.
Picking the right target CPL comes with more benefits, too. If you know your goals and what you’re willing to spend, it’s easy to evaluate your various advertising methods. Thus, determining where to spend your marketing budget.
Do you want more gross revenue or more profit? This will help you determine your cost per lead.
- 5% profit of a Million dollars is $50,000.
- 20% profit of $200,000 is $40,000.
There is no right or wrong answer on the cost per lead. But there is a right answer based on your contracting business goals.
Conclusion to “ What is a Good Cost Per Lead?”
Picking an amount for what our cost per lead will cost you and how you use the leads is up to you. Some contractors want more profit, others want more revenue. That choice is up to you and you alone. And your marketing efforts should always be based around your goals, not an industry standard or what the Guru’s, of the marketing world tell you.
As always, if you need help getting your marketing and advertising working to meet YOUR goals, get in touch with Contractor Marketing Network. If nothing else, you’ll leave the conversation educated and with a better understanding of how we can help you.