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How Much Should You Pay for a Lead

Jay (Jason Van Orden) 9 Comments

E-Mail SymbolThis week in the Academy Mastermind Forums, the questions was asked: how much would you invest to acquire one e-mail sign up?

This is an excellent question and something that every Internet business should consider. It all has to do with the numbers. Here’s an example of how we determine how much we can spend to acquire each e-mail lead.

Let’s Run the Numbers

We are in the process of writing a new set of autoresponders for our e-mail list subscribers. This series of e-mails will have the purpose of showing the value of joining our Academy to convert subscribers of the e-newsletter into members of the site.

If we know how many of those e-mail subscribers we can convert to a membership and how many of those we keep within the first month, then we can come up with an important stat Value Per Subscriber for that first month.

So let’s pick some easy numbers to run the math. Let’s say within a month we have 100 optins and 10 of those sign up for the Academy. At the end of the month, 8 of those stay subscribed to the Academy.

We have made 8 * $97 = $776.

$776 earned / 100 optins that month = $7.76.

Now we should technically take out some operating overhead that has to be paid. So let’s say that we have 20% operating costs leaving us 80% of our new money.

$7.76 * 0.80 = $6.20

So our Value Per Subscriber is $6.20.

The questions now is: how quickly do we want to “cut even?” Let’s assume that we want to cut even in the first month. That means that we can spend $6.20 to acquire each new optin.

So the biggest things to consider are:

  • How much can you net from each optin?
  • How quickly do you want to cut even?

The Academy is still new. Essentially this will be the first time for IBM that we will start doing PAID things to acquire new leads (it’s been largely the free podcast until now). So we don’t have any actual numbers yet. I plucked the above figures out of the air for the sake of easy math. However, it illustrates the exact process that we will use for calculating how much we want to invest in acquiring each lead.

Take Action

Here’s what you should do now.

  1. Use the above process to calculate a Value Per Subscriber
  2. Decide how quickly you want to cut even
  3. Use these numbers to derive the amount that you can invest in acquiring each lead
  4. Track these numbers over time. Set goals. Test, track and tweak in order to improve your conversion.

What Do You Think?

  • How do you decide how much you can invest in acquiriung each new lead or customer?
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9 Comments Leave a Comment



Jon

I think that your methodology is pretty sound. However, your opt-in leads are probably some of your highest converting leads. Using only opt-ins for your calculation may overstate the per lead value if you are embarking on a paid marketing campaign via other channels.

Other than that, I think your equation useful.

Jon

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Jon,

I see your point. I should clarify that in calculating conversion for the case above, we would *only* look at the e-mail optins leads that converted when calculating a percentage.

Likewise, when calculating numbers for a PPC campaign, we would only look at the sales from PPC to calculate a separate
conversion number for that case.

So in the end we would have a different value for each lead as well as a different max investment figure for each marketing channel.

Now, there are also times when we might want an overall
value per subscriber.

Thanks for bringing up that clarification.

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Ideally, with the create-authority-through-blogging strategy, you wouldn’t be paying for leads at all.

With money anyway. You are investing your time to build an audience and create the sort of content that inspires visitors to sign up for newsletters and eventually buy products. Fortunately time that you put in once to write an article or get links to your blog, pays you back again and again.

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interesting point. on createing authority. If we paid for a lead how do you verify they are good leads? If I am specializing in an area would I be better off to pay for ads on a similar or like minded sites?

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@Lindsay,

When it comes to the “getting leads for free” strategies then the consideration is more about how much of our time is it worth putting in for each lead? This helps us evaluate all the possible free marketing tactics we can put into action to see where we get the most for our effort.

Really, it’s best to do a combination of free and paid strategies to attract clients. If you can make the ROI work out, then why not do more of whatever you can to grow as fast as you can?

That said, obviously you add what you can over time to your marketing efforts. There is a lot of marketing ideas that we haven’t done with IBM that we plan to start doing soon.

I guess on the one hand, we have been really fortunate that the free traffic generated by the podcast has worked so well for us. We definitely are done with leaving money on the table, though, and plan to expand our marketing efforts.

@Mike,

A “good lead” is one that opens their wallet. Well, I say that a *little* tongue-in-cheek, but it’s true. It comes down to the numbers. Look at the amount of money a lead gives you (or is likely to give you) over time.

The other thing to consider is the time and energy investment a lead requires. It’s best to identify and eliminate people who, even though they pay you money, drain your time and energy. Ditch the high maintenance people. Set up marketing and systems to weed these people out before you have to deal with them.

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Jason,

I think there is other means such as focusing on your affiliate program than wasting your time and money on a PPC program. I had been doing PPC for three years and following all the PPC guru’s advice on the best practices as well as the SEO components and landing page components as well. The end result of all that was a lot, I mean a lot of users from other countries, I know they are supposed to not be able to access my pay per clicks but they go to google.com too. So I get a bunch of CLICKERS who have no intention of buying anything and I am paying .50 to $3.50 for their clicks.

Bottom line, I gave up on PPC and focus in on other areas such as blogging, speaking, webinars, eNewsletter, podcasts, SEO, etc. I believe in the synergy of all of those things winning out—oh and having a great product everyone wants doesn’t hurt as well.

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Anthony Blando

Jay,

Great advice that your marketing should weed people out that are high maintenance and hard to work with.

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Thanks for the information, Jason. I agree that one would need 2 spreadsheets – one for PPC and the other for Cost-Per-Lead. Some more thoughts that occurred to me:

- If you are an agency or contractor trying to perform marketing services on behalf of a new client, you have to take into consideration the Cost Per Lead that that client is used to paying. Sometimes they have already found a low-cost method of acquiring opt-ins, and you’ll have to beat that figure if they’re going to hire you.

- On the other hand, whether you’re working for a client or for your own company, the lowest Cost Per Lead is not always necessarily the best. The question to ask yourself when considering an advertising channel is – would an investor in your company be satisfied in the way you acquired the names in your database?

Here’s a concrete example. I have a new client whose most “successful” campaign before we contracted with them had cost $1.35 per opt-in email. The client’s product is a green-lifestyle newsletter. The opt-ins were from an incentive program, where people were “paid” in points for signing up and then after a certain # of accumulated points the opters could win prizes.

Obviously, the quality of these leads is suspect. The campaign may be successful in terms of reporting a raw figure to one’s boss or board of directors. But if this client tried to seek venture capital funding, a savvy investor would not think highly of their database. And potential advertisers in their newsletter would wonder whether the opt-ins really ever read the newsletters or just open them to get more points.

So the Cost Per Lead is not the only consideration – the quality of those leads is very important as well. Quality could be topical, demographic, something that indicates sincerity of the opt-in’s interest in the product or service.

As for this client, by the way, it turns out we were able to double their opt-ins in half the time, with half the budget, just by doing our homework and coming up with creative ways to implement the project. I guess we got lucky this time! If you put your mind to it, you can too.

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Critically important. I have always taken a close interest in the numbers and would advise anyone just starting out to do the same.

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