Cost Per Lead (CPL)
Lead (or demand) generation is a major part of any marketing team’s budget — no matter the size of the company.
A healthy pipeline is a good indicator that marketing efforts are paying off, but more often than not, good sales leads don’t come free. However, in most cases you shouldn’t be shelling out thousands of dollars on each lead you add to the pipeline, either.
In this article, we’ll take a deeper look at the costs associated with lead generation, how to calculate the cost per lead (CPL), and the importance of knowing (and reducing!) your CPL to optimize marketing and sales efforts.
Let’s dive in.
What is Cost Per Lead (CPL)?
Your cost per lead is the amount of money you spend to acquire a new lead. You can calculate your CPL for any time period (day, month, quarter, etc.) and slice and dice your data by campaign, channel, market, and more.
Ideally, you have an average cost per lead across all marketing channels. However, understanding your CPL per channel (social media, email marketing, display ads, etc.) will allow you to better optimize campaigns for lower-cost acquisition channels to ultimately reduce your CPL and bolster your sales pipeline.
Cost Per Lead vs. Customer Acquisition Cost (CAC)
Some founders make the mistake of lumping CPL and CAC together, or using the terms interchangeably. However, they are two different metrics.
In order to understand the difference, you need to know the difference between a lead and a customer:
- Lead: Someone who may be interested in buying your product or service.
- Customer: Someone who has purchased your product or service
CPL is how much it costs you to acquire a lead, while CAC is how much it costs you to acquire a customer. Read our customer acquisition cost article to learn more about how to calculate CAC.
How to Calculate CPL
To calculate your CPL, divide your total expense for a marketing channel by the number of leads you acquired for that specific channel or campaign.
Cost Per Lead Formula
Marketing expense / Number of acquired leads
For example, if you spent $5,000 on LinkedIn ads in a given time period and acquired 50 leads, then your CPL is $100.
Why CPL is Important
Your CPL is an indicator of how efficiently you can grow your customer base. As we mentioned earlier, in most cases (particularly for SaaS companies), before someone becomes a customer, they need to become a lead. And the more it costs you to acquire a lead, the higher your customer acquisition costs will be. Knowing your CPL allows you to understand and maximize your marketing budget to focus on the lowest-cost acquisition channels.
For example, let’s say you just finished up a multi-channel marketing campaign driving traffic to your “Schedule a Demo” page. You used Facebook Ads, newsletter sponsorships, display advertising and Google search ads. You spent $7,500 across all those channels and got 150 new demo signups (leads), making your CPL for the campaign $50.
However, 100 of the 150 leads came from the Google search ads. You only spent $2,000 on the search ads, so that CPL is far lower than the campaign average. This is a clear indicator that you should be investing time, money, and resources into search ads, as this is a cost-effective channel to acquire leads.
On the flip slide, you also want to ensure that there aren’t inefficiencies in your lead generation program, where you end up losing money over campaigns that went on for too long and didn’t generate the leads you were looking for. This data also helps you to understand if your campaigns met the desired objectives (was the campaign optimized over time to reduce and meet the target CPL?)
Finally, understanding your CPL will allow you to plan for future marketing campaigns. If your typical target CPL is between $25-50 and a sponsorship opportunity that costs $3,000 guarantees 75 leads from the campaign ($40 CPL), then you may be more apt to move forward as this is in the ideal range for your budget.
What’s a Good Cost Per Lead?
Just as there’s no standard price for a SaaS product or service, as it depends on the industry, market size and saturation, etc., there is no standard CPL that a startup should be aiming for.
As mentioned above, if you’ve typically had a CPL in a specific range based on initial campaign data, then you can use that as a baseline for future campaigns. However, you’ll want to ensure that new campaigns aren’t too risky (you’re spending too much much on too few leads) so you don’t end up losing money.
You can also estimate your target CPL by working backward based on your customer lifetime value (LTV), lead conversion rate, and how much ROI you want to generate.
This calculator from Jellop takes the complications out of manually calculating a potential target CPL. Make sure you have your LTV, conversion rate and ROI handy
How to Lower Your CPL
There’s no magic formula to reduce your CPL in your marketing campaigns, but making changes and optimizations throughout the campaign lifecycle can help to maximize your budget.
Consider the following:
1. Improve Campaign Ad Quality
There’s no such thing as “set it and forget it” in marketing and advertising. Campaigns must be continuously tweaked and optimized to reach target goals and metrics.
If you have an ad campaign and certain ads are performing far better than others, consider tweaking the ad copy and design to match the ads that are performing the best.
2. Understand Your Target Audience
Many marketing channels have granular audience targeting — allowing you to market to a specific title, location, interest, and more.
When you understand exactly who you want to target for your campaigns and create messaging to address these potential customers’ pain points, more often than not your CPL can decrease as more quality leads are coming into the pipeline.
3. Perform A/B Tests
If you’re lucky, you’ll create an awesome campaign that generates thousands of leads on the first try. But most aren’t that lucky.
As alluded to above, creating several ads within a campaign allows you to optimize (and remove) ads based on performance. But you should also be testing new ways to reach your audience with ad copy, design, layout, and more.
Having A/B tests, where you change only one variable at a time, will allow you to truly understand the types of ad content that converts leads the most efficiently.
Your CPL Could Be The Key to More Efficient Growth
If you can’t acquire leads for a reasonable price, it’s nearly impossible to grow efficiently. You’ll end up spending more money to acquire leads than you’ll ever make back.
On top of that, knowing your CPL allows you to more accurately forecast revenue growth, which you can do directly in Finmark!
Our software takes the guesswork out of developing a strong financial model, including setting up marketing-led revenue drivers to give you more flexibility and control over growth plans.
This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Please consult your advisor with any questions.