A year ago, I attended a conference that was all about lead generation. I met all kinds of vendors that sell leads for as little as pennies per lead. My initial reaction was skepticism. Our advertisers pay us dollars, often over $10, for a click. And only a small percentage of clicks turn into actual software leads. How could these vendors be charging so little for actual leads?
Then I learned what they were calling leads (often just the name of someone who happens to be in your target industry) was very different from what I typically think of as a lead – someone who raises their hand, expresses interest in your software and actually wants to hear from you.
The challenge for any advertiser is that every different component of a lead changes its inherent value based on the likelihood that it will eventually turn into a paying customer. My goal is to give you a framework for determining the value of the different types of leads and what you should be willing to pay for each one.
As with so many things, the right way to begin to answer the question is to begin with the end in mind. What referral fee would you pay for a lead that you knew would convert to a paying customer? The answer is found in the many referral and affiliate programs run by software companies where they pay a commission for leads that result in a sale. While these commissions are wide ranging, 10% of total contract value or two months for a SaaS deal seem to be the norm.
That gives us a starting point. The next step requires knowing the average close rate on sales-ready leads, which is short hand for qualified opportunities that are ready to engage with a salesperson. This will differ across software companies and largely depends on the strength of their salespeople, their product and their value proposition. Once close rate is determined, that can be multiplied by the referral fee to determine the value of a sales-ready lead.
For example, if a SaaS company offered a $400/month solution and closed 10% of their sales-ready leads, then they would value them at $80 ($400 x 2 months x 10%).
This gets us a bit closer. Once we have determined the value of a sales-ready lead, how do we then calculate the value of a “lead”? This is where it gets tricky. How does one define a lead? Unfortunately, a thousand ways. Every single one has a different value based on the likelihood that it will convert to a sales-ready lead. Here are but a few examples of “leads”:
- A name with contact details
- Contact details for someone in your target industry at the right size company in the right position within that company
- Details for someone who has performed online research that indicates they may be in need of your kind of software
- Details for someone who has researched software and has requested to be contacted by vendors who can meet their requirements
- Details for someone who has downloaded your free trial
The first couple examples are likely valued for pennies while the last two may be extremely close to your calculated value of sales-ready leads. If you take any combination of these data points then a lead could be worth anywhere between the two. The only way to know is to track your success rates with each of the different lead types to know which data points correlate with success.
So what is a lead worth? The value of a lead can be calculated by multiplying your success rate – the probability (based on historical data) that you can convert a certain lead type into a sales-ready lead – by your determined value of a sales-ready lead. Example: success rate for a lead that contacts you (#4 above) is 40% and the value of our sales-ready lead from above is $80. For this lead type, the value is $32.
It really is as simple as that. The difficult part is collecting enough data about different lead types in order to be able to make the calculations. That usually takes quite a bit of trial and error – and of course money. Consider this to be an investment in the future growth of your company. Once you determine what different kinds of leads are worth to your business, you will be well positioned to properly evaluate different marketing channels based on the volume and value of leads you can expect. And grow your software business!