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Thursday, Oct. 21, 2010 at 9:06 am

Lead Value: What It Is, How to Calculate, and Why

By Natalie Hart
October 21st, 2010

There’s no denying it: Conversion Rate improvements are great, but at the end of the day, data is nothing more than a bunch of numbers, while cash is something you can take to the bank! And more importantly, if you’re the Marketing Department, dollars are something you can take to the CEO and other decision-makers at your company to maintain buy-in for your Conversion Rate Optimization (CRO) efforts and spending requests. That’s why it’s important to always tie your CR improvements to an estimated increase in revenue.

E-commerce sites always have the “average order value” metric on hand. Analytics tools like Google Analytics track and report Average Order Value, Transactions, and Revenue directly (caveat: extra coding/tagging is involved), saving you the effort of having to do any number crunching to arrive at it. This makes estimating a revenue increase a matter of multiplying average order value by the increase in number of transactions.

If you are a lead generation site, you probably already know that Google doesn’t calculate an average lead value metric. Hence, the lead generation clients we start work with often haven’t made the effort to tie a monetary value to each lead. But, calculating an Average Lead Value from the data in Analytics is easier than you may realize, making it possible for Lead Generation sites to tie improvements to revenue, and demonstrate ROI on optimization efforts.

A Client Story…

We’re working with a client who is new to testing and optimization. They realized some nearly immediate gains in their conversion rate and other metrics from the first few tests and changes we recommended through our OnTarget optimization system. Naturally, we wanted to help the client tie those gains to monetary increases they experienced as a result of our work together. So, we requested their “lead value.” When they didn’t respond immediately with an estimated dollar amount, we realized that this was not something they had readily available.

Let’s take a look at steps we took together to get to the bottom line…

Step 1: Define a Lead & Understand What Lead Value Is

First, it is important to understand that any key performance indicator (KPI) represents a tangible action your visitors take that overlaps with a particular goal for your business, and to understand how that action relates to your bottom line. For Lead Generation sites, the primary KPI is a lead acquisition, but that is not a guarantee of revenue, since it is only the first step of a two-part sale (the second step is to close the sale). Further complicating the matter is the fact that becoming a lead can be the result of a variety of actions, even within the scope of one website: signing up for a newsletter; submitting a request for more information; filing an application, etc.

With that in mind, the first thing we did with the client was to define the variety of ways that someone could become a lead, and to make sure we were tracking those actions properly. Then, we discussed how that action was related to the goals of the company. Average Lead Value represents the average monetary value you derive each time a visitor takes the desired action(s) on your website and becomes a lead. It already accounts for the percentage of leads who then go on to purchase from you. What you are aiming to estimate is the average lead value to plug into your analytics program and for calculating the ROI of any optimization efforts.

Step 2: Collect the Data You Will Need

Next, we asked the client to gather the data they would need to do the calculation. Fortunately, the client was already collecting the information we requested. If you are not already collecting this information, you will need to start tracking the items for a period of time, and then make the calculation. The numbers you need are:

  • Average number of leads per time frame – e.g. 500 leads per month
  • Average amount of sales revenue during time frame – e.g. $3,125,000 per month
  • Average profit margin on a sale (If you want to be as accurate as possible, you should also account for your profit margins.) – e.g. Approximately 4% of each sale is profit

Make sure you measure each value over the same time frame. The period you use to calculate can vary – 1 month, 1 quarter, 1 year – as long as it’s the same for each metric you use in your calculation. It’s best to average the longest period of data possible to avoid seasonal fluctuations, good/bad months, etc.

Step 3: Plug-and-Chug Your Way to Lead Value

To calculate the “Average Lead Value,” divide the amount of sales that occurred within a particular time frame by the number of leads generated during that same time frame. Finally, multiply the result by the average percentage of profit you make each time you make a sale.

Lead Value Math-2

For our client, the numbers looked like this: $3,125,000 dollars per month/500 leads per month) x 4% profit = $250 dollars profit per lead.

Why Lead Value Matters

As a marketer, there are a multitude of reasons why determining Average Lead Value is important. According to our friends at ROI Revolution, 38% of Google Analytics reports for a lead generation site use the financial information of estimated goal values! Here are a few of the valuable ways you can use Average Lead Value:

  • As an indicator of fluctuations in lead quality – a decrease in Average Lead Value suggests less qualified leads are coming in through your efforts. Let’s say you decide to invest a greater amount of money into your PPC, and subsequently see a decrease in your Avg. Lead Value. You investigate further and find that although you had an increase in leads, the amount of sales revenue generated that month remained the same. When you dig even deeper, you are surprised to find that even though your total number of sales increased slightly, the average order value went down.
  • To help determine ROI for marketing efforts – Lead value is a way to demonstrate an increase or decrease in the number of qualified leads you get from your marketing investments. But that increase or decrease is tied to ROI (return on investment), or the amount of revenue you generate from the money you invest in your marketing. By plugging your average lead value into your ROI calculations, you can determine if the money you are spending on PPC, SEO, email, and other efforts intended to drive traffic to your site is paying off, or if you need to rethink your approach. You can also use the number to calculate ROI on any CRO (conversion rate optimization) efforts you may be doing to improve the number and quality of leads.
  • To build company support for your marketing efforts – By attaching a monetary value to each lead, data is transformed from a mere metric to tangible financials. Tying your efforts to discrete revenue increases is a particularly compelling way to develop your credibility among Management, keep them on board with your current efforts, and gain leverage for future budgets and projects. Those same dollars can be used to incentivize as well. If your efforts require cooperation with other departments at your company, showing your colleagues the dollars and cents can help secure a higher priority to the work that you do together, making it possible to generate money more quickly.

Knowledge is power. Knowing your Average Lead Value facilitates evaluating the effort (or money) you’ve invested in a specific task and calculating if this is an effort you want to continue with. Comparing Lead Value month over month or year over year can give you a benchmark of health to work off of and see the progress that you’ve made (or the potential for progress), or even ground you may have lost. I can think of nothing more important than understanding your own metrics, especially when working with other specialists.

Are you already calculating your Average Lead Value and using it to monitor your marketing efforts? Do you have uses for this important metric that you’d like to add to our list? Let us know! Or, are you struggling to do the calculation, and to know what to do with it? Reach out today and find out how we can help »

Add Your Comments

Comments (15)

  1. Hi Natalie, thank you for your clear explanation on how to calculate average lead value. But it’s not clear to me how you generate these reports. Can I create these reports in Google Analytics or do I need an other software solution?

  2. I like to use google analytic but it’s not 100% satisfying reporting. Can you suggest any reporting tool for e-commerce site?

  3. You hit it right on the nail. Ultimately, leads must convert to cash and more importantly with a certain margins so you know your advertising dollars are well spent. It does not make sense to get a lot of leads that does not convert to a paying customer. It also does not make sense to have a lot of conversion that is not profitable or does not cover your advertising expense in the long run.

  4. Excellent article. You really need to compound a secondary data set into leads to determine the true value – even Google can’t do this for you! That data is of course qualification and sales (if you are involved in non internet selling of course, for example financial products)and you can use the above ideas to set value for PPC, marketing outlay based on real world value.

  5. I’d like to share my experience using PPC Adword, before Google banned so many IM account.The problems with conversions, related to high paying keywords and ROI seems just don’t work.I have used 12 techniques from polling,etc, but results is disappointed.So back to square one, you need lots of back link from higher PR blog do follow, and the rest is making unique content blend with keywords.And what really works, is make forum and community to your products, interface with your readers and persuade them to buy or do something to make that conversions.I have “community” and earn money conversions very fast with the help of exhibition and seeing real people.Please try, otherwise you’ll end up buying so many software, where Google is going to de-indexed your blog. Cheers

  6. Thanks Natalie for sharing the info. You are right about Average Lead Value. It is a mandatory thing to keep track of.
    @Inge.. Not sure about Google Analytics. Its great for many other things though. You can very easily trace the user’s pattern on your site thru it.

  7. Hello,
    I’m using Google Analytics, but not really more than I used to measure traffic, know which countries enter, with what speed of connection and keywords, this helped me to improve some things in my website. Also allowed me to realize that people coming to my site not being persuaded, as the words used were not 100% correct.
    My experience with Adwords:
    Investment: € 1200
    Earnings: € 0.00 (Zero)

    Greetings!
    Sergio Vergara

  8. Google Analytics is a powerful tool if you know how to use the information it offers. the thing is most people who use it only use the most basic of functions.

  9. This was very helpful, thank for that insightful post. Some web owners think that generating traffic is the only way to measure the success of the site, but they disregard the importance of conversion leads. I don’t know which is more important, but I do think that conversion leads are more quantifiable in terms of sales.

  10. It’s amaziing how many business owners don’t understand the importance of ROI. For leads and ALL marketing activities. Lifetime value is another vital number to know…

  11. Its good You really need to compound a secondary data set into leads to determine the true value – even Google can’t do this for you! That data is of course qualification and sales (if you are involved in non internet selling of course, for example financial products)and you can use the above ideas to set value for PPC, marketing outlay based on real world value.

  12. This is so spot on. The conversion rate is absolutely everything. Without a good conversion rate then the client is wasting their money, and time. Lead value may not always be monetary though, it really depends on the type of business and their overall goals.

  13. I think a lot of people only take the initial sale into account when looking at lead conversion. If you have created a quality auto responder series then the same lead could buy multiple products.

  14. Thank you Natalie. This formula seems to be the response for a lot of problems generated by the financial crisis. I know a lot of companies from my country which have problems because they don’t follow these rules. However, it depends very much about the niche but I think with this type of vision, you can obtain better profit per sale.

  15. While this is a great rule of thumb to follow for lead value calculation, it does not take into account value of future sales/revenue from each current conversion, which can greatly increase the overall average value.

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Natalie is a Persuasion Analyst with FutureNow.

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