Why Cost Per Lead Can Be a Bad Metric

Annuitas Blog Team

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A recent study by Ascend2 shows that 25% of respondents state that their cost per lead (CPL) is increasing. Interesting statistic. However, the real response to this is what does that really mean?

For years marketers have been keen to show cost per lead (or in the words of Jon Miller from Marketo – investment per lead) as a metric that has meaning. If that metric is shown in isolation, however, it does not mean anything. The value of the metric needs to be shown in comparison to average deal size as a result of marketing’s demand generation program to have context.

About 15 years ago I was leading a business unit marketing group for a software company. During one of our meetings with a prospective agency, they were thrilled to inform us that they could get us to an average of $175 cost per lead. This was a big selling point for them as they pitched our business. Trying to prove a point, I asked the following:

• “Is that a good cost per lead?” They were quick to respond with comparisons to other software companies and how this was a good CPL as compared with our competitors.
• I then asked “how do you know that?” Again, thinking I was quite ignorant I was given a primer in software CPL benchmarks for the software industry.
• After the explanation was finished I asked them, “do you know what my average deal size is?” They did not have an answer and therefore could not accurately tell me if my projected cost per lead was good or bad.

In that particular instance there was a segment of the market we sold at an average deal size of $5,000 and there was another solution set where the average deal size was $125,000. To be honest, I would have been more than happy to pay $175 (.14%) to get a lead that could drive a deal of $125,000. In fact, I would have been more that happy to pay 3x that to get a truly qualified lead that could gross $125K.

However, I was not keen on paying $175 (3.5%) for a deal that was going to gross only $5,000. It was time to go back to the drawing board and make sure there was context behind this measurement.

It is imperative that marketers begin to approach their metrics with some meaning and context behind them. If not, they just become isolated data points on a slide that as a whole, do not really enable us to optimize marketing.

Cost per lead can be a great statistic, as long as it is used in context to an average deal size. If the average deal size is climbing, then perhaps it is reasonable to expect the cost per lead to increase as well. However, measuring this metric in isolation means nothing for marketers or their marketing effectiveness.