I’ve talked before about how to calculate your cost per lead, and since it’s the beginning of a new year I want to talk about it again. Knowing your cost per lead helps set your sales goals and advertising budget for the coming year.
These aren’t difficult calculations and taking the time to do it is one of the little things that can make a difference in your bottom line. To calculate your cost per lead, you need to know two things: how many leads have come in, and your marketing cost.
How Many Leads Were Generated
Before you count how many leads you’ve received, you need to define what constitutes a lead. Should you count the requests that you burned off? The guy asked for the square foot cost of a room addition. You gave him a ballpark figure and he hung up. The person who sent a note via your website stating she’s already gotten five bids, obviously looking for the lowest price. You respond that you won’t be the sixth (using different words of course).
I wouldn’t call those leads because they didn’t stand a chance of becoming a sale. They were tire kickers. In my opinion, a lead is any sales call you go on. When a potential client contacts you, an appointment is set, and you go on the sales call, I’d call that a lead.
Set your own parameters for what is and isn’t a lead. The important thing is to not change the parameters once they’re set. Consistency is what matters.
That said, look back to see how many leads you received over the past six months or year. If you don’t have records, start keeping track of your leads over the next six months at least.
Your Marketing Cost
Advertising is everything you do that puts your name in front of the buying public. There are many ways contractors advertise their services. I’ve often heard contractors say, “We don’t advertise, we work by referrals.” But they have signs on their trucks, they hand out business cards, the crews wear company T-shirts, they post job signs on every job, and their company name is painted on their tools and equipment. They have letterhead and envelopes with their company name and logo. All that is advertising.
Other advertising costs to consider are:
- How many hours are spent by you or your employees on marketing, and what’s the value of those hours?
- How much have you spent on graphic designers? If you do your own graphics, what’s the value of your time and what’s the cost of your software?
- What’s your printing cost for marketing materials?
- Do you pay anyone to manage your social media?
- What did you pay for your website design? Developing a website can be a major expense, especially if it’s done right. Assume your website will last maybe five years before it needs to be redone, so spread your total development cost over five years.
- What’s your cost for website hosting and maintenance?
- How much have you paid for professional jobsite photos or videos? Do you use a drone for jobsite videos, and what’s the cost?
- Hopefully you don’t use any lead generating businesses or SEO experts, but if you do, include the total cost.
Your Cost Per Lead
Add those up along with anything else I’ve missed and that’s your total marketing cost. Divide that total marketing cost by the number of leads set, and that’s what you paid for each lead.
Example: You received 110 leads last year and spent $13,640 on marketing and advertising. Your cost per lead is $124.
Sales to Leads Ratio
Calculating your sales to leads ratio is even easier. If you had 110 leads last year and sold 31 jobs, your sales-to-lead ratio is 3.55. (110 divided by 31) You’re selling 1 out of every 3.55 leads, which is great.
As a side note, if you’re selling more than 1 in every 3 or 4 leads, you’re either a very good salesperson or you’re giving your work away. I often have people call who are selling 7 or 8 out of every 10 leads they go on. That’s usually a sign that their prices are too low and they’re giving their work away. When your sales to leads ratio is in about 1 in 3 to 1 in 4, you’re focused on profitable sales and are eliminating the tire kickers and problem clients you don’t need.
Now What?
Why take the time to do these calculations? Because if you want to ramp up your sales, you’ll want to know how much more to spend and where to spend it.
Here are the steps:
- How much additional annual revenue do you want or need?
- What’s your average job size? (Divide your annual revenue by your number of jobs. If you have a few jobs that are much larger than normal, or much smaller than normal, you might want to eliminate them from the calculation to get a better average.)
- Divide the additional revenue needed by your average job size to find the number of additional sales you’ll need.
Staying with our example, your company received 110 leads and sold 31 jobs. Your total revenue was $1,684,168, so your average job size was $54,328. ($1,684,168 divided by 31)
This year you’d like to see at least another $500,000 in sales. Assuming the job size will be similar, divide $500,000 by $54,328 and that means you’ll need to sell 9 more jobs. To sell 9 more jobs, you’ll need 32 more leads, because your sales-to-lead ratio is 1 sale for every 3.55 leads. (9 times 3.55)
Your cost per lead was $124. If you want 32 more leads, expect to spend at least $3,968 more on advertising. (32 times $124) If you spend at least $4,000 more in advertising, based on your company statistics, and you continue to sell 1 out of every 3.55 leads, you’ll reach your sales goal for the year.
These numbers are rough, but they give you an idea of what direction to go. If your records are good, look back to see what lead sources generated the most business last year. What lead sources generated the most profitable jobs? Were some lead sources more expensive than others, and were they worth the added expense?
You don’t just want more leads, you want quality leads from potential clients who want the type of work you do and understand that things cost money. That’s why it’s important to spend your money where you get results. We’re hearing from so many that their website is a critical tool in marketing efforts. If you’re a remodeling contractor and you don’t have a website, or your website isn’t quality, put your money there. I strongly suggest looking at MyOnlineToolbox, Brian Javeline has helped so many of our clients get the quality needs they need.
If you don’t know what your leads cost, then you will never know how much you need to spend to get the total sales in the door you need.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations.
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