Setrics Tracker How Much Should I Spend Per Lead? | Savavo

How Much Should I Spend Per Lead?

Oct 27, 2016

No Comments

Posted In : Marketing Tips

In the previous post on how to calculate the Lifetime Value of an average customer we used an example and calculated an LTV of $8,840. In this post we’ll explore how to reverse engineer the LTV to find exactly how much you should spend to acquire each lead for your business. This will ensure you run and grow your business profitably. If LTV = $8,840, I’m going to choose a marketing multiple of four to calculate Cost of Customer Acquisition (CAC). Choosing a multiple of four will help your business run profitably. In other words it’s like giving someone $1 and them giving you back $4. You paid $1 for $4.

Divide LTV by the marketing multiple:

$8,840 / 4 = $2, 210

$2, 210 = Target CAC

  Customer Acquisition is general comprised of two ideas:

1) Marketing Expenses (ME)

2) Sales Expenses (SE)

  Most service based businesses split those expenses about 50/50 and for the sake of this example so will we. However, other businesses vary so it is important to figure out whether your business depends more heavily on marketing or sales.

Let’s figure out our Target Marketing Expenses per CAC…If 50% of CAC is ME and the other 50% is SE, then CAC / 2 = Target ME:

$2,210 / 2 = $1,105

$1,105 = Target ME

  Now, let’s go a little deeper and figure out how much to spend on Traffic Costs. Most mature businesses spend about half of the Target ME solely on acquiring traffic.

So, half of Target ME = Target Traffic Costs (TTC):

$1,105 / 2 = $552.5

$552.5 = TTC

Now that we know how much to spend on traffic, we can figure out the Cost Per Lead (CPL)! To do so, you need to know how many leads it takes before you close a deal. For the sake of this example let’s say 1 in 5 leads closes. So, 20% of the people we get in front of as a qualified lead actually buys our service.

TTC x percentage of leads closed = CPL

$552.5 x .2 = $110.5

$110.5 = CPL

We’ve gotten all the way down to how much to spend to acquire each lead based on the customer lifetime value. This example shows that if you can acquire leads for $110.5 or less, and if 1 in 5 of them closes, then you will run your business profitably!

Trackback URI  |  Comments RSS

Leave a Reply