Why a Low Cost Per Lead Can Still Be Bad for Your Business

The phrase “low cost” has a seductive quality for many business owners. For startups, small businesses, and franchisees, low cost is often a primary goal in order to ensure positive cashflow and enhance business growth. However, savvy entrepreneurs know that “low cost” often means “deferred hidden costs” that show up later to undermine the bottom line. All of this applies to digital marketing, where a low cost per lead can actually be bad for your business. By understanding how that happens and what it means, business owners can make the most out of their marketing budget by investing in high quality leads that deliver ROI rather than lower cost leads that don’t pay out in the long run.

How “Cost Per Lead” Actually Works

The idea behind the cost-per-lead metric is simple: how much does it cost to get a potential client into the top of your funnel. While that can be an important metric, as it shows how much it takes to get the process of client conversion started, it is a limited one in that it stops early in the process. Essentially, cost per lead tells us how well various lead and marketing channels are working, and not much else. It doesn’t show us the value of each lead, or how successfully leads are converting to clients. Most importantly, it doesn’t show us the ROI on each lead or the average ROI per lead. These are all vitally important metrics because that’s where the profitability comes in.

So with all that said, let’s return to the central question: what are the potential pitfalls of a low cost per lead? We’ll take a closer look now.

“Cost Per Lead” vs “Cost Per Appointment” vs “Cost Per Sale”

Key Performance Indicators (KPIs) are often discussed in business publications but are less often enumerated. As we seek to understand why a low cost per lead isn’t always good for business, it’s helpful to list the different metrics we may way to use instead and look at what they might reveal that a low cost per lead might leave hidden.

• Cost Per Lead: We’ve already touched on this but we’ll put it on the list for easy comparison. Cost per lead measure show much it costs to turn a content—the “audience member” of your marketing campaign—into a lead by getting them into the beginning of your sales funnel. That’s where it stops measuring both costs and ROI. Cost per lead is useful in establishing how well different facets of your marketing and branding plants are working.
• Cost Per Appointment: This sounds self-explanatory—what does it cost to get a meeting with a lead—and in many ways it is. However, there are some niceties here when we stack this metric alongside cost per lead and view it as a transition towards a lead conversion. How much does it cost to get that first meeting or appointment, taking into account both time and financial investment? We’re now measuring the middle portion of the funnel, and by comparing this KPI with cost per lead we’ve learned a lot more about how well our marketing and our funnel are working.
• Cost Per Sale (or “Cost Per Deal”): For many business owners, this is where the rubber meets the road. Cost per sale, also styled cost per deal, measures the cost of moving a client/customer through the funnel from first contact through inking the deal or making the sale. This is lead quality in a nutshell; it’s a complex metric that balances the costs and returns at every stage in order to determine ROI on both the initial leads and the final deal.

Balancing all three of these metrics can seem tricky. Understanding them individually is complex, understanding their dynamics and interactions even more so. So which takes priority? Let’s dig a little deeper.

Which KPIs Matter Most?

The short answer is, they all do. Every KPI is important as each one gives us a different data set that reveals how well different parts of the process are working. It’s worth knowing how much each lead is costing us, just as it’s worth knowing how much we’re investing to get each first meeting/appointment. And it’s absolutely worthwhile to know the cost and investment that go into finalizing a deal or sale as this is the bedrock of our bottom line.

However, none of these is “more important”; they all matter in measuring the efficacy of our process and how well our overall marketing and sales funnels are working. Lead quality is best measured via multiple independent KPIs, rather than reducing it down to “cost per click” or something similarly reductive. So let’s return to our central question: what’s wrong with a low cost per lead?

How Low Cost Per Lead Can Be Misleading

Low cost per lead isn’t an innately bad thing; saving money at any point in the process can be beneficial if it actually results in savings. The danger behind low cost per lead is focusing on the savings on each lead while losing track of the ROI on each lead. Put another way: flooding the funnel with low cost, low value leads that don’t pay out isn’t the same as ensuring that we’ve optimized the funnel in order to ensure that our leads convert to clients or customers and the profitability they bring.

The goal of our funnel is the convert contacts into leads and eventually a sale that creates profit and helps us build or business. Low cost per lead is nice, but it doesn’t tell us if our leads are making us money. By effectively tracking a number of metrics and KPIs and synthesizing the results into actual insights into our ROI we can better understand not just what leads cost, but what we gain from them over time.

So how can you ensure that your business’s marketing plan is netting high-quality leads that enhance your ROI? We have a solution for that, too.

Wahha Design: Digital Marketing That Builds Your ROI

Digital marketing can be a significant investment for any business. Whether you’re running a dynamic startup or building a franchise business, you deserve cutting edge digital marketing services that can enhance your success and evolve with your business and brand. From social media marketing to fractional CMO services, Wahha Design has the solutions and insights that help businesses succeed. If it’s time to expand, grow, or build, get in touch with us and we’ll discuss what a collaboration with Wahha Design can do for you.