Lead Conversion Rate
Ask any startup founder what their top goal is and a good chunk of them will say acquiring new customers.
But akin to acquiring customers is knowing how they got there. Understanding your marketing funnel and sales pipeline will help you to better understand how many leads you’ll need to acquire that shiny new customer.
Your lead conversion rate can help to be that North Star to help define and measure your marketing goals and lead pipeline.
Keep reading to learn the definition of lead conversion rate, how to set benchmarks, and how to improve your conversion rate over time.
What is Lead Conversion Rate?
Your lead conversion rate is the percentage of leads that will convert into paying customers.
Similar to other marketing metrics, like Cost Per Lead (CPL), your lead conversion rate can be sliced and diced several ways, depending on marketing source, campaign, lead stage and more.
With your lead conversion rate, you can make estimates and predictions on customer acquisition based on the number of leads you acquire. Your lead conversion rate allows you to future-proof your marketing metrics, providing an opportunity to set growth goals.
How to Calculate Lead Conversion Rate
To calculate your lead conversion rate, divide the number of paid customers by the total number of leads you received.
Lead Conversion Rate Formula
Number of new customers / total number of leads received
For example, if your monthly PPC (pay per click) ad campaign garners a total of 150 leads and 15 of those leads convert to customers, then your lead conversion rate is 10%.
This means, for future PPC campaigns, you can anticipate that 10% of leads will convert into paying customers.
Why Your Lead Conversion Rate is Important
Your lead conversion rate is important because it helps you understand how much you can afford to spend to acquire leads. If you have a lower-cost product (i.e. $20/month) and your lead conversion rate is 5%, you need to plan your marketing budget accordingly.
On top of that, understanding your lead conversion rate allows you to create a more accurate financial model.
Building a model requires you to estimate your future customer growth. If you have an idea of how many leads you’ll get per month, and what percentage of those leads will convert into paying customers, you can build a more accurate financial model.
Note: it’s also important to understand the length of time it takes to convert a lead into a paying customer. Depending on your product and the pricing model, it may take several conversations, touchpoints, or nurture campaigns to get a lead to sign on the dotted line.
With this in mind, you can’t assume that once a lead comes in, they will automatically convert into a paying customer. This is extremely important to account for when you’re building a financial model and projecting growth.
For instance, let’s say you’re a SaaS company and your average lead conversion rate for Facebook Ads is 7%. You expect to get 1,000 new leads per month from your Facebook campaigns. So for every 1,000 leads you get, about 70 of them will turn into paying customers.
Here’s where the mistake can happen.
Those 70 customers probably won’t all convert immediately, particularly if you have a free trial period. They’re still leads until they subscribe to one of your paid plans.
If you assume 7% will convert each month, you’d be accounting for 70 new customers from Facebook Ads per month. But what if it actually takes 1-3 months for that 7% to convert? The conversions need to be spread across that time period or you’ll end up over-estimating the number of customers (and revenue) you’ll get each month from Facebook Ads.
Here’s a graph to help you visualize it.
The purple line shows our revenue growth if we assume 100% lead conversion rate in the first month. The blue line shows revenue growth if you distribute the leads over three months, which is more realistic.
Notice the purple line is predicting faster and higher growth, which is misleading. The blue trend line is a more accurate representation of how this startup’s revenue would grow.
This graph and model was made with Finmark by the way. Check it out here!
What’s a Good Lead Conversion Rate?
Just as no two startups are the same, no two SaaS marketing programs are the same.
Many times, you’ll need to use your own data to determine the optimal lead conversion rate for your business. If you don’t yet have historical data to calculate these numbers, then you can use your target Customer Acquisition Cost (CAC) and customer LTV.
With this calculation, the goal is to figure out how much money you’ll make from your marketing campaign spend. If it ultimately costs you more money to acquire a customer than they will pay over their lifetime, then you’ll eventually run out of money.
Going back to our PPC campaign mentioned above, let’s say our budget for the campaign is $1,000 and our customer LTV is $600. Using these numbers, the below chart can help to estimate an optimal lead conversion rate to keep our CAC below our LTV.
|Lead Conversion Rate||# of Converted Leads||CAC|
Based on these numbers, our lead conversion rate benchmark would be 3% or better.
If you want to avoid the calculations, MarketingSherpa says average SaaS conversion rates are about seven percent.
However, having your own estimates based on your lead activity will ultimately benefit you in the long run.
How to Improve Your Lead Conversion Rate
So you’ve calculated your lead conversion rate and have found it may be a bit higher than you expected. Don’t worry! There are plenty of strategies you can take to help improve your lead conversion rate.
The old adage, “the customer is always right,” also applies to leads in the sense that the customer (or lead) should always come first.
You can’t just assume that people will come to your website, fill out a form and knock down your doorstep to purchase your product. You also have to take the time to ensure they know exactly what you’re offering and why you are the best choice for them!
Consider the following strategies to help improve your lead conversion rate:
1. Nurture Your Leads Over Time
Seven — that’s the average amount of touchpoints it takes before a prospect considers buying your product or service. The “marketing rule of 7” has long been used as a baseline to help guide sales and marketing efforts to determine the number of times you should be connecting with a lead.
This means you should be taking the time to nurture your leads over time with relevant content, product offers, demo videos and more. Depending on the price of your product, it may also take some flexing of the sales muscle to get the lead over the finish line.
2. Align Sales & Marketing
Marketing can’t happen in a vacuum. Sales and marketing efforts should be in lockstep to ensure that the moment that a website visitor fills out a form to download a whitepaper, webinar, eBook or otherwise, the sales team is ready to act.
This may be in the form of a phone call from a sales or business development representative, an automated email from your marketing automation platform, or a personalized email from an account executive offering to schedule a demo.
3. Create Engaging Content
Finally, your leads won’t convert if you don’t show off your product! Your website should be chock full of engaging content that shows prospective customers that your product or service is the right choice for them.
Having a consistent blog and social media presence, alongside stellar landing pages with clear CTAs (calls to action), will not only get your leads in the door, but will give you ample opportunities to send the relevant content to the leads at the right sales stage.
Start Converting & Measuring Growth With Finmark
Once you have a healthy lead pipeline, you’ll need a partner to help measure and predict growth.
That’s where Finmark comes in. Our financial modeling software puts you in control — where you can create and share financial plans, manage burn rate, and forecast revenue — without complicated and pesky spreadsheets that are difficult to manage.
This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Please consult your advisor with any questions.