Disclaimer: I love math.
If you’re a B2B marketer, you’re probably in one of two groups – you either hate anything to do with numbers or you love it. I love it. It’s also the reason why I became a marketer; the combination between art and science, left brain and right brain, creativity and data-driven decisions. B2B marketing tends to be heavily skewed towards the analytics side, and the success of any business comes with figuring out the mathematical model that makes it a profitable organization. So is the case with marketing teams. If you want to be successful in generating demand for your business and delivering high quality leads to your sales team, you need to understand the mechanics of your business.
How much is a lead worth?
I recently visited a friend who works for an event center. He manages the marketing and sales and has one junior employee and one contractor. It’s a B2C business but since the price of an event is on average $10K, it operates more like a B2B organization – leads, long sales cycle, multiple decision makers, etc.
He asked me to look into his marketing and help him understand why they are not seeing an increase in leads even though they are spending much more on PPC. They rank organically on the first SERP for a few of the more competitive terms in his market (industry and location) and spend more than $1,500 every month on PPC. So after I went over the basic discovery process and gathered the information on the basic mechanics of his business, I asked him – “How much is a lead worth to you?”
I ask this question whenever I get a chance and the answers always fascinate me. I find it to be extremely revealing – it tells me how knowledgeable the person is, how they approach marketing, how they treat leads and if they have a sense of the basic elements of their funnel.
The next hour of my friendly session was all about math – the math of marketing.
The basic math of B2B marketing
“Let’s outline your sales process,” I said. His sales process is fairly simple and since the price point is high but the business is small, the volume is relatively low and he deals with the entire process. He gets about 150 leads per month, which he calls ‘inquiries’. The next level in his sales funnel is a qualification call to set up a meeting. If a lead is qualified and willing to meet, he sets up a meeting during which he shows the venue and talks about the service (the lead is now an opportunity). From the 150 leads, he gets about 60 meetings (opportunities) — a 40% conversion rate. After the meeting, he follows up with an email and calls again 3-4 days later. He also sends some recommendations about the place and if he feels like the opportunity needs a “push,” he also offers a discount (nurturing). If the person is interested, they meet again to close the details of the deal. From 60 meetings a month, he closes, on average 18 deals — a 30% win rate (!).
“Now you can calculate how much a lead is worth.” I continued, “Let’s start from the end. Your revenue from each deal is $10K and your win rate is 30%, so a meeting is worth $3K. In other words, you need 3.3 meetings in order to close a $10K deal. Since your conversion rate from a lead to a meeting is 40% – you need 2.5 leads to get an opportunity – then a lead is worth $1,200!” He looked surprised and said, “You want to tell me that every lead I get is worth $1,200? That sounds unrealistic. I also don’t intend to spend that much on getting leads.”
I replied: “Good, because if you do, you will lose money. The $1,200 is only the revenue you get from each lead based on the numbers you gave and based on the assumptions in this model. To calculate your breakeven point, you need to use profit, and in order to calculate the marketing budget for leads, you will need to exclude from your current expenses all the variable costs you spend on marketing – PPC, display, etc.”
We ran a quick analysis of the company’s costs and determined a profit margin of 12%. This meant a profit of $1,200 per deal. We plugged it into the model and came up with $144 per lead.
I explained: “With the numbers in your model, to break even, you can spend $144 on every lead you generate; this is the value of your leads. Now, let’s go back to your PPC initiative. You told me that you spend $1,500 per month on PPC. Using your lead value of $144 per lead, you need to ask yourself a simple question – are you getting more than 11 leads per month from this channel? If you do, assuming all the other assumptions in the model are true for this channel (conversion rates, revenue and profit-per-deal), then this is a positive ROI channel. But if you are generating 10 or less leads a month, then you are spending more money than you earn and you should reconsider this channel.”
I left him with a lot of homework, but a better understanding of his business mechanics and the math behind his marketing and sales. A few days later I met another friend who sells heavy machinery equipment to companies. We met for lunch to talk about lead generation. “How much is a lead worth to you?” I asked.
Marketing-Sales Funnel Spreadsheet Example
Download my “Marketing-Sales Funnel: Calculating Your Funnel Values” spreadsheet to make your own calculations.