What Costs Less, Costs More

Which is more important?

  • Cost per impression?
  • Cost per click?
  • Cost per inquiry?
  • Cost per hour?
  • Cost per lead?

Actually, it's none of the above. The only metric that really matters is Cost per New Customer Acquired.I will explain. But let’s start by asking who’s doing the measuring?

Typically, you'll find marketing folks most interested in the cost per impression, click, hour, etc. If they are funding the lead generation program, then cost per inquiry may be a relevant factor as well.

Sales folks are quite happy, for the most part, to measure their performance on closed sales. All they are concerned about is getting qualified leads they can sell.In other words – from their perspective – the more sales-ready the opportunity, the better. Now if they are funding the lead generation effort, then obviously the ultimate cost of customer acquisition is vital to them as well.Financial and procurement managers focus their attention on costs (overhead, advertising, lead generation, pre-sales qualification costs, etc.). I’ve yet to encounter a procurement manager who reviews RFP responses by adding a column for the expected revenues to be generated from the company’s demand generation investment.Finance is largely concerned with the line items in the expense schedule. Cost reduction is ingrained in their psyche.Another factor driving companies to focus on COST issues in isolation is that most can't distinguish which lead sources are best at generating sales.

Regardless of sophistication and size, we encounter few companies that can utilize their CRM systems effectively to track and manage inquiry and leads to sales effectiveness. This is exacerbated when the sale is complex and the sales cycle is lengthy.Of course, there are exceptions. And there are companies that do a great job at this. However, they are few and far between.In typical situations – when the sales force is largely unaccountable and revenues are rarely tracked back to the lead source (effectively and timely) – then the seemingly easiest place to find savings is to reduce investment in lead generation and pre-sales lead qualification.

So, why is the cost of acquiring a new customer the sole important factor?

Let's look at some simple examples.

Example 1:

Cost per Opportunity: $1,000
25% (1 in 4) leads are closed and the cost per sale is: $4,000
Average first year annual sales revenue: $40,000
Ratio of cost to first year revenues 10%

Simple enough. Cost of sales is 10%. Let's now use the same numbers but lower the cost per lead.

Example 2:

Cost per Opportunity: $750
25% (1 in 4) leads are closed and the cost per sale is: $3,000
Average first year annual sales revenue: $40,000
Ratio of cost to first year revenues 7.5%

Decreasing the cost per lead (by 25%) shows a saving of 2.5% in the ratio of the average annual cost per sale. In fact, if all other elements remain constant, the following formula will hold:"For every 10% in cost saving at the top of the funnel you will lower your customer acquisition cost by only 1%."In the real world however, things are never that simple. The quality of the lead is a major variable affecting the ultimate result. Using example 1, what happens if the average sale is a little higher because the quality of the lead is better?

Example 3:

Cost per Opportunity: $1,000
25% (1 in 4) leads are closed and the cost per sale is: $4,000
Average first year annual sales revenue: $50,000
Ratio of cost to first year revenues 8%

So generating a better qualified lead with a higher sales conversion potential – even if generated at higher cost – nets you almost the same ratio of cost per sale as in example 2 (with the lower cost per lead).Here's another way of looking at it.

Example 4:

Cost per Opportunity: $1,000
33% (1 in 3) leads are closed and the cost per sale is: $3,000
Average first year annual sales revenue: $40,000
Ratio of cost to first year revenues 7.5%

In the above example, the level of required sales effort is less because of the nature of the better qualified opportunity (i.e. there is a significant sales productivity gain). Moreover, the cost per new customer ratio is equivalent to the lower cost per lead in example 2.What happens then if you generate more new customers, with more overall revenue, at a higher cost per lead?

Example 5:

Cost per Opportunity: $1,100
33% (1 in 3) leads are closed and the cost per sale is: $3,300
Average first year annual sales revenue: $50,000
Ratio of cost to first year revenues 6.6%

Here we see that even when the cost per lead is 40% higher compared to $750 in example no. 2, the actual cost to sales ratio is almost 1% lower (6.6%). And this saving is before we factor in the substantial gain in sales force productivity.OK. So what? What’s wrong if it costs $750 per lead or $3,000 per sale at a ratio of 7.5%? That’s just fine by me!

Not quite.

To generate an opportunity at 25% lower cost inevitably means a lower cost of production somewhere in the lead generation process.In the lead generation and lead qualification business, this inevitably translates into the employment of lower paid, script-reading business development staff, reduced caliber management and less effective quality controls, systems, reporting, database resources, etc.At the end of the day, what costs less, costs more.

In other words, "you get what you pay for".

Risk to the Brand

This aspect raises a whole range of issues not the least of which is your brand. If you are selling a commodity and your market place is limitless, you may not be so concerned with brand, so the lower cost is a viable option.However, if your brand is important, your target market is limited in size and you sell complex solutions, then every opportunity lost is lost revenue and, more importantly, lost market share.You would certainly need to question whether it is worth the risk – especially when the more expensive sales lead generation lead qualification option is in fact - more cost effective.

Value of Repeat Sales

Remember as well that repeat sales translate to increased profits over the lifetime of every new client. So not every new customer lost can be brushed aside as affordable. You need a winning strategy in terms of the ultimate game of building the business.

The importance of Top Notch Staff

Next, consider the quality of the people who are going to engage in complex consultative discussions on your behalf with decision makers who hold the keys to success.It will always be more costly to employ professional B2B experts to represent your company in its business conversations with your future customers than using non-professionals.Cheap labor is abundant, but smart highly trained BD’s who can engage with decision makers on an executive level – consultatively – and with a clear ability to navigate larger, more complex enterprises are not so easily found.Can you afford to be unprofessional? If yes – save the money. If not – then invest a little more to gain a great deal more value.

The value of the Prospect Pipeline

Lastly, what is rarely taken into account is the ultimate value gathered in developing and building a sales opportunity pipeline. For example, for every lead that is generated, we estimate some four prospects that will, over time, develop into good sales-ready opportunities.It's quite difficult to monetize this future value and, indeed, few companies have an infrastructure to nurture prospects cost effectively over time.That being said, at ETI we estimate that for every 100 prospects in the prospect pipeline, you will net at some point in the future about 20-40 extra sales-ready opportunities.If you now add this in to the cost per new customer acquired, you will note that you’re real cost overall will be substantially lower than the 25% saving you would make in example 2.And this does not factor in (or value) the rich business intelligence, the system functionality, calendar management and a host of other values added services that are part and parcel of the deliverables from a world class business development company such as ETI Sales Support.

In Summary

To return to our starting point:

  • It's never about the cost per hour, inquiry or lead.
  • It's always about cost per new customer acquired.
  • It's always about your brand.
  • It's always about how you treat your prospects and customers.
  • It's always about optimizing sales force productivity

 

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