CPL (Cost-Per-Lead): The Definitive Guide to Cost-Per-Lead Marketing

What does CPL stand for?

CPL stands for cost per lead. Cost per lead is defined as the average amount a marketer spends to attain one lead.

What is a lead?

In order to understand the definition of CPL, how to calculate it, and how marketers use the metric, we must first review the concept of a “lead”. Leads are broadly defined as a formal or informal expression of interest in a product or service by a customer. A lead is typically the name of a customer (and potentially other information) that could be interested in buying a specific product or service.

Lead-based businesses

Lead-based marketing and sales approaches are typically utilized when customers are making high-involvement purchase decisions. These are buying decisions that are more complex and require greater evaluation. Business-to-business (B2B) and service businesses generally employ a lead-based marketing and sales process.

Let’s look at an example of how a lead-based marketing approach works.

A new software company has developed a CRM system for small businesses. The CRM system costs $25,000 per year for a small business to use the software. For most small businesses, this is a substantial amount of money. Therefore, small business owners looking for a CRM system will take their time and evaluate other options. This is an example of a high-involvement purchase process.

Like other B2B enterprises, our software company employs a team of salespeople to guide potential customers through their purchase process. The sales team will answer questions about and set up demos for the CRM system. Over the course of several weeks, the goal is to convince a small business to purchase the $25,000 license.

So where does a lead come in? A lead, in this example, is the small business that is just beginning its journey to find the right CRM system. A representative from the small business heard about the new software company and reached to ask questions—this makes that small business a lead for our CRM company. Once a lead is captured, the sales team can begin communicating with the potential customer.

Other examples of businesses that may utilize a lead-based approach are:

• Franchise sales teams

• Home services such as carpet cleaning and HVAC installation

• IT and software solutions

• Automotive sales

• Real estate

• Doctor, lawyer and other professional services

How are leads captured?

As we mentioned earlier, leads are an expression of interest in a product of service. Leads can be captured in a variety of ways.

Here are the most common methods of lead collection:

• An online form (which customers typically complete on a company’s website)

• Direct phone call inquiries from a customer

• Third-party brokers (these are commissioned agents who utilize their network to find leads and bring them to a sales team)

Once a lead is identified, marketing and sales teams will document the lead’s information. These teams typically utilize CRM software to help track the status of each potential customer.

How does is the lead purchase process managed between marketing and sales teams?

Marketing teams are typically responsible for generating leads. They will launch an assortment of marketing tactics with the goal of driving a significant quantity of customer interest. Once the leads are captured, the sales team begins their sales process.

What does CPL mean?

Now that we’ve reviewed the definition of a lead and how businesses utilize leads in their sales process, let’s explore how marketers generate leads. As we discuss frequently on FreeMarketingMetrics.com, marketers want to sell things. In order to sell products and services in lead-based businesses, marketers must generate a volume of leads for a sales team to begin its sales process. Many different marketing tactics can be used.

Cost per lead is a critical metric for marketers because it helps them understand how to effectively deploy advertising budgets. Cost per lead is the average marketing investment required to generate one lead.

What is the CPL formula and how is CPL calculated?

Cost per lead is calculated by dividing the total amount of marketing investment by the number of leads generated from that marketing investment. Here is the cost per lead (CPL) formula:

Let’s look at an example. Marie’s Carpet Cleaning spends $2,000 an ad campaign promoting a special holiday cleaning sale. The Company attains 250 leads over the course of the campaign. Let’s apply our CPL formula:

We divide our marketing investment ($2,000) by the leads generated from that marketing investment (250). Thus, Marie’s Carpet Cleaning spent $8 in marketing to attain each lead.

How do marketers use cost per lead (CPL)?

Cost per lead can play a critical role in evaluating a marketing tactic’s effectiveness. Let’s take a look at two examples.

Using CPL to evaluate different marketing tactics

Marketers can use CPL as a way of improving the efficiency of their marketing tactics. Suppose Marie’s Carpet Cleaning, launches a new campaign that includes three different marketing tactics—online display ads, paid search ads and paid social ads. After the first week of the campaign, Marie outlines the performance from each tactic. See below for her summary:

In Marie’s table above, we see that paid search delivered leads at the lowest cost—$6.67 per lead. Assuming leads from each of these three tactics are of equal quality, Marie knows she can attain a larger quantity of leads by investing her marketing budget into paid search. Thus, going forward, she would shift money away from online display and paid social, and into paid search.

Note that lead quality may vary, and this trend warrants a more comprehensive evaluation of marketing efficiency. Suppose leads from paid social convert to actual customers at a much higher rate than online display and paid search. This conversion rate difference can impact Marie’ acquisition cost significantly. Thus, it’s always important to understand the limitations and benefits of each marketing metric. Click here to learn more about acquisition cost.

Using CPL to project acquisition cost

Sometimes it takes customers a long time to progress through their purchase process. This is more common in certain industries and business categories. Franchise sales, for example, is typically a very long sales process. Leads can take up to 1 year to purchase a franchise.

These extended purchase timeframes raise a difficult challenge for marketers. How can a marketer quickly know which marketing tactic yields the lowest acquisition cost when customers take so long to make their purchase? As a marketer, you’d want to quickly know which ad investment is driving the highest return because it allows for speedy adjustments and reallocation of your investment dollars. And when every dollar of marketing investment is precious, continuing to invest blindly on marketing tactics for long periods of time is a tough sell for most business owners and marketers. This is where CPL can help—it can act as a lead indicator of performance.

Let’s look at an example from the franchise sales industry. Franchise businesses such as Subway and McDonald’s expand their footprint by selling new units to franchisees. When you see a new Subway open, it’s typically owned and operated by an independent franchisee. A franchisee manages the store location using the guidelines required by the franchisor. In return for operational and marketing support, the franchisee pays a portion his or her revenue to the franchisor in perpetuity.

Selling franchises is often a very long process, as we mentioned earlier. It’s common for franchise salespeople to take a full year to finalize a sale with a new franchisee. Because this process takes so long, marketers aren’t able to calculate their acquisition cost for each marketing tactic for at least a year! Imagine spending $200,000 in various marketing tactics over an entire year before being able to calculate the acquisition cost for each marketing tactic. This raises an issue for marketers obsessed with maximizing the effectiveness of their ad investments—how do they improve marketing efficiency quickly?

Since leads are the first step in this long sales process, cost per lead metrics allow marketers to get a directional assessment of their ad investment effectiveness. In other words, marketers can compare CPLs for several tactics to understand which tactics are showing higher efficiency at the beginning of the sales process.