I continue to marvel at the high number of companies that only use cost per lead as a basis for lead generation buying decisions.
I mean, I get the buzz around inbound marketing and marketing automation driving down the cost per lead. HubSpot's The State of Inbound Marketing 2010 survey found the average inbound cost per lead of $134 was 60% lower than the average outbound cost per lead of $332. (A side note—it's my sense that these dollar figures are skewed toward smaller company marketing spends as similar metrics for complex solution selling are significantly higher.)
With widespread distribution of stats like this, it wouldn't surprise me if I heard someone ask, "Why pay more than twice inbound's cost per lead for outbound leads?"
This logic—that something called a "lead" can and should be had at consistently lower price points where it will still deliver value—is at the root of a host of sales and marketing problems and deserves a closer look.
Putting three areas under the microscope illuminates apples-vs.-oranges factors and drives a corrective path around the "cost per lead" quagmire.
Lead definition is critical
As I mentioned in Part 1 of this blog series, Lead Generation 2.0: A Lead By Any Other Name, it's important for sales and marketing to agree on what a lead is.
Apples—Where a "lead" is a low level inquiry
The value of a lower cost per lead approach has merit early in the funnel where inbound marketing and marketing automation can be helpful in moving large numbers of prospects to raise their hands and express interest.
Oranges—Where a "lead" is a sales-ready buyer
But striving for a lower cost per lead when defining, developing and delivering a lead as a sales-ready buyer is a recipe for disaster. The high-volume initiatives marketing uses to generate big numbers simply can't be used because they don't include the personal communication and multi-touch engagement needed to validate qualifying criteria. Embracing a higher cost per lead in developing sales-ready buyers is as much a given as gravity.
The nature of the solution and selling process impact the cost per lead
In an earlier blog, I differentiated between two types of solutions and selling processes, and acceptable cost per lead will vary significantly based on the type.
Apples: Straightforward/Short/Low Solution Selling
Lower cost leads can be expected and are even necessary when the selling process is straightforward, the sales cycle is short and the investment is low. For example, it would be possible to generate a lead for a $10,000 piece of hardware for $350. Technical specifications are to the point, and the buying process may involve working directly with a single contact in a purchasing group.
Oranges: Complex/Long/High Solution Selling
Higher lead costs are expected when the selling process is complex, the sales cycle is long and the investment is high. Again, an example—a $250,000 software solution may require connecting with a CEO, a chief line of business officer and others. A business case may need to be built over time to drive a budget. The reality is generating a lead for a $250K software solution is going to be substantially more than generating a lead for a $10K hardware solution.
A reset on the best way to measure marketing performance
Using cost per lead to measure success incorrectly incents volume over quality.
Apples: Cost per lead as a metric
By its very nature, a cost per lead approach incents high volumes of leads—and ultimately adds costs when sales discovers many don't meet qualifying criteria.
Oranges: Cost per opportunity and cost per deal as metrics
While cost per lead may be a valid metric for high-volume, low-level prospect acquisition, cost per opportunity and cost per deal are better indexes when measuring initiatives for developing sales-ready buyers. These performance metrics are grounded—not in volume—but in opportunity quality, conversion ability and revenue generated on investment.
The reality is that leads cost what they cost—particularly in engaging and developing high-value opportunities in Complex/Long/High selling situations.
The next blog in the series builds on the importance of lead definition and getting beyond cost per lead blinders to see that fewer sales-ready leads that each cost more are a far better value than many poor-quality leads costing less.
(Part 1 of 3)
If you pay attention to the headlines, you might come to the conclusion that cold calling is dead. It appears all one needs to do today is to load email addresses in one end of a magic machine; then out the other end come highly qualified sales leads. Tough economic times and smart people make relatively inexpensive, quick and easy marketing solutions seem very attractive. However, I think a lot of C-level and senior marketing and sales executives are failing because they are giving up on what works in exchange for snake oil solutions that will apparently save money in the short run but will be very expensive in the long run.
To set the stage, I stipulate that generating highly qualified sales leads by investing in low-quality, smile and dial prospecting never has and never will be a viable or effective option in the B2B lead generation world. Yet, it is being used today by more companies than you can imagine; and the relative ineffectiveness of this medium is pushing companies toward snake oil solutions.
For a number of reasons, there are those who feel you can outsource lead generation for complex solutions domestically for $28-32 per hour and generate qualified sales leads. Others outsource to far flung parts of the world to save money and expect to generate quality B2B leads. In fact, large organizations that depend on channel partners for revenue are often the biggest offenders—sending poor quality, unfiltered and unqualified suspects to resellers and calling them leads.
| I once asked eight out of the ten of the largest resellers for one very large software company what they thought about the leads they got. They answered, and pardon the vernacular, "they suck". Then I asked why they did not do something about it and they said, "I am afraid they will stop sending me leads". Honest. That is what they said. |
The problem in many large companies, and even some smaller ones, is that one department demands a certain number of leads, another department budgets and a third department is responsible for generating the leads within the budget. Since marketing historically receives little or no feedback on a lead-by-lead basis, a cost per lead mentality pervades and results spiral ever downward.
There are hundreds if not thousands of discussions going on in the B2B market right now about "how buyers buy" and "what sellers should do to sell more". Every single market research report about lead generation that I read states that quality is as important, if not more important, than quantity; and that lack of lead qualification criteria and failure to nurture effectively sinks ROI—yet the vast majority of marketing and sales executives give their company low marks for lead quality, lead definition and nurturing programs.
Most senior managers I speak with understand why it is important to provide field sales with high quality leads. However, there is a disconnect between that understanding and what is needed to execute a solution to the problem. Next week we will talk about the source of that disconnect.
Post by guest blogger Karen Hayward, Executive Vice President & Chief Marketing Officer, CenterBeam.
Lead generation is a significantly more complicated and complex process given the technologies, automation and rising expectations of sales people.
This leads to the need for real best practice expertise—not only in one single aspect i.e. telesales or teleprospecting ... but in all of the aspects of the integrated lead generation process that must come into play to drive a successful outcome. So database management, process management, recruiting & staffing, training, program management, and data analysis and content are all key to the success of a program. To drive revenue in today's tough environment, it's more important than ever to find a partner that can offer you expertise in every one of these areas.
As an experienced buyer of these services, I offer the following considerations:
Beware ... make sure you get what you pay for and pay for what you get! Watch out for pay-for-lead approaches. It may seem like a good deal, but remember, the firm will be incented to provide a quantity of leads—quality will take the back seat. Recognize the value of a longer-term, nurturing approach. Ask your potential partner's clients what percent of closed deals in the last period were based on outsourced leads. Number of leads is not meaningful—closed deals are, and worth a premium.
Many service providers claim that they can call the CXO level ... be careful! Check them out ... they may call them but are they able to engage in a successful dialogue ... do they use a script or are they truly able to have a 20-30 minute business level conversation that results in an understanding of business priorities, a meaningful next step ... or in other words a qualified lead. CXOs engage in conversations when they perceive parity in business stature and quickly exit scripted conversations.
Don't forget to check out training infrastructure. Due to turnover, it is important to assess the training process for speed and completeness and the coaching capacity to ensure as a client you have uninterrupted coverage or at least minimize the effects of unexpected staff changes or performance management.
Follow the lead. A disciplined quality assurance process is probably among the most important attributes of a successful program. Evaluate the process to make sure that when a lead is sent from Marketing to Sales—it is treated with professionalism and a tremendous sense of urgency and appreciation.
Be prepared to be involved. Your success relies as much on your contribution to the program as it does on the partner. Expect to dedicate time weekly to drive continuous improvement and to tweak the focus as your prospecting needs change.
Why look outside for help? Using a partner has freed up our time to focus on the more strategic aspects of our marketing efforts and has placed the accountability for day-to-day program management in the hands of a team with the necessary specialized expertise, processes and technology to make it work. As a CMO, I always ask myself, what value I would really bring to managing this process in-house versus having on demand access to expertise, operational excellence and data analysis that comes as part of a partner's complete solution.
Everybody, it seems, wants more high quality leads and this demand is driving marketing buyers toward solutions that just aren't working. Whether attracted to pay-for-performance (what I call pay for failure) or bait and switch (low base rate programs that end up costing a mint after all costs are loaded on), the frenzy is on and will undoubtedly end up like the tulip crash in 1637.
Before you jump on board, consider the following:
Which of these scenarios are you interested in:
1. Your market is "creamed" and your sales reps are sent leads prequalified as lightly as possible so that the provider gets paid as much as possible. Meanwhile, the low base rate you thought you were paying has just increased by 35%. You wouldn't want poor customer service, would you? Each and every one of their reports is custom—and expensive...
2. Compare that to a partnership where both the client and the provider/partner are aligned. Of course generating leads and increasing revenue are primary objectives. However, what about weeding out those names on your lists that are absolute garbage (you will never identify them and weed them out with scenario #1). What about companies that are fully qualified (type, size, vertical, environment...) but just not sales-ready? If 30 - 40% of the average list contains qualified companies with no immediate interest—but that same list is a great source of future opportunity, wouldn't you want to know that AND stay in front of that market until ready-buyers are produced? Of course!
Do you want high quality leads from a best in class provider/partner or an argument about how this low-level lead really does or does not meet the qualifying criteria?
| Best-of-class prospect development focuses on qualified revenue opportunities: |
Standard lead generation focuses on quantity rather than quality: |
| Fills your forecast with qualified prospects |
Floods your pipeline with so-called leads |
| Delivers fewer, yet more qualified leads that improve results |
Claims inflated lead rates without regard for quality |
| Gives you sales-ready prospects in seamless transition |
Clutters calendars with unqualified meetings |
| Segments, mines databases for maximum effectiveness |
Uses standard lists, and hopes for different results |
| Offers program ROI—averaging 10x investment |
Offers programs that incent volume, not quality |
| Measures value by revenue generated |
Measures value by cost-per-lead |
For more information about quality Prospect Development:
Prospect Development | Business Case
No doubt one of the biggest problems with marketing today is that more and more companies base lead generation buying decisions entirely on cost per lead. Companies of almost any size will spend thousands of dollars on a trade show and then balk at paying more than a few hundred dollars per lead.
Why is this wrong? Because the decision isn't being made based on the quality of leads. Nor is it being made based on results or ROI. Instead, the decision is being made solely on the basis of what each lead costs. In the B2B world of the complex sale, it's easy to see that fewer sales-ready leads that each cost more is a far better value than many poor-quality leads costing less. Yet the quantity vs. quality mentality persists—and it's a big mistake.
What are the ramifications of measuring cost per lead? In reality, no one knows. Field sales forces and resellers (or other descriptions for channel partners) are so conditioned to expect poor quality leads from marketing departments that they ignore most of the leads they get anyway. No wonder marketing bangs their heads against the wall. No wonder there's pressure to lower the per-lead cost.
The Proof is in the Numbers
Allow me to demonstrate the fallacy of measuring the success of lead generation programs solely on the basis of cost per lead. (Figure 2):
Figure 2 - Cost per lead comparison
|
Prospecting Campaign Summary |
Worst Case |
Expected Case |
Best Case |
|
# of Companies |
1000 |
1000 |
1000 |
|
# Contacts per company |
3 |
2.5 |
2 |
|
Touches per prospect |
5 |
5 |
5 |
|
Total touches |
15000 |
12500 |
10000 |
|
Touches per day |
100 |
100 |
100 |
|
# days required |
150 |
125 |
100 |
|
Fee per day* |
$500 |
$500 |
$500 |
|
Short-term lead cost
(40 leads) |
$1,875 |
$1,563 |
$1,250 |
|
Short and Long-term lead cost
(80 leads) |
$938 |
$782 |
$625 |
*Assumes a salary of approximately $50,000 plus benefits, equipment supervision, technology and other costs.
Let's assume you have been mandated to reduce the cost per lead to $350. Even in the best case scenario, you only have two options:
Option 1: Reduce the base salary for the individual creating the leads from $50,000 to $14,000.
Option 2: Increase the number of leads per individual per week to seven from two.
Which of these scenarios do you want to bet your company on? Most reasonable executives agree that Option 1 is unlikely. You cannot buy the labor required to accomplish this task for $14,000 per year. And to increase the number of leads per week from two to seven, one would have to believe that any of the following is possible:
1. Touches can be increased from 100 to 315 per day. (Impossible.)
2. Short-term lead rates can be increased from 4% to 14%. (Dream on.)
3. Instead of talking to two line-of-business contacts per company, you can get by talking to .56 contacts. (How would that work?)
4. Why waste five touches on every contact? You can really get by with just 1.4 touches. (With next to no results.)
The reality is that leads cost what they cost. The market is relatively efficient. Lead generation companies can no more over-charge companies for services (at least for sustained periods of time) than companies can substantially reduce the cost of maintenance services without a substantial decline in actual and perceived value of those services.
Measuring marketing success on cost-per lead: Short-sighted? Yes. One-dimensional thinking? Yes. Killing company profits? Yes. Click to read marketing success case studies.