How much to pay for marketing is a topic that comes up for us…a lot! It makes sense, people want to know whether they’ll get a return on the investment they’re making. Where we believe a lot of campaigns fail to consider the full lifecycle of a lead. Let’s take a look at the widely used sales funnel.
So what’s the problem with using this model? It walks you through the acquisition of the lead and lines up with many of the metrics we use for paid and organic marketing campaigns. The issue for us is that it’s often only focused on acquisition and fails to zoom out and understand the bigger operational picture.
Acquisition vs Customer Value
Our focus isn’t just on acquiring new customers, but also on whether it’s sustainable for a business to continue to pay what they’re paying to acquire them.
For example, a business pays $2000 a month for marketing and averages 10 new customers a month, making their cost of acquisition $200 for each new customer. However, they make an average of $50/ transaction. Some quick math tells us that a customer would need to make at least 4 transactions before the company breaks even.
At this point a lot of people would be focused on the cost of acquisition, leading to the question we get all the time - “How much can I expect to pay for a lead?”, or “How can I get cheaper leads”. A lot of marketing companies would respond by talking about the cost per click and conversion rates. We, however, would rather ask “How much can you afford to pay for a lead?” Why? Because we want to know what the lifecycle of a lead looks like.
Let’s take the example above. If the average customer makes 5 transactions, then $200/acquisition might be acceptable for that company. But if the average customer makes 2 transactions, then we need to either lower the cost of acquisition or work with them to increase the number of transactions per customer.
- Increase Sales. Too many times we see clients focused on the top ¾ of the funnel, and not enough on optimizing their sales process. There are often also lots of things you can do at the sales level with an already qualified lead. This coupled with optimizing the cost per conversion can exponentially improve your sales. See our previous article about Why Leads Won’t Help Part 1
- Increase Customer Value: Because you already have an interested audience that has made a purchase. This group is much more likely to make another purchase than a new lead. What if you sell a product that doesn’t require repurchasing, or does not require repurchasing very often? Well then focus on referrals for immediate value, and long-term touchpoints to make sure they remember to come back. The goal should be to maximize the value of each customer.
Sales vs Profitability
The other big consideration that often gets overlooked? The timing and the subsequent impact on cash flow. A company that is paying $200 for a lead, but gets $500 from that lead might be feeling pretty good. But what if that $500 is made over the course of a year and it takes two months to recoup that original $200? Some companies don’t have the ability to manage and sustain that type of delay in incoming cash. In that case, we would choose not to focus on acquisition, but on decreasing the time between sales, or on referrals to increase the initial customer value.
Summary
As you can see, determining how much to pay for marketing should be a much bigger conversation than how much to pay for leads. It should also examine the long-term value of the customer as well as your cash flow needs. If possible, marketing funds should be allotted not only to the initial acquisition (paid ads, SEO etc), but also to long term engagement, retention and referrals. We propose that we update the sales funnel to a lifecycle.
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