Lead generation sounds attractive. You pay someone a fixed monthly fee and in return, the leads come pouring into your business. Before you know it, your revenue growth problems have disappeared. At least that’s the fantasy.
Reality can be quite different. The truth is, most outsourced lead generation programs focus your attention on the wrong metric – the activity of the outbound sales team as opposed to the quality of the sales meetings that result from it. This puts you at risk of paying too much for each meeting, sometimes to the point that each sale costs you more than you can hope to recover.
Fortunately, it’s pretty easy to see if your CAC (customer acquisition cost) is viable.
How Do I Know If I’m At Risk
Don’t panic, there is some math involved. But it’s not hard math. And to make it super easy, here’s a downloadable calculator that you can use. You just need to plug in a few key numbers.
First, grab a blank sheet of paper and make a note of:
- The monthly investment for your lead generation program
- The number of contacts to be engaged each month (or the number of meetings you have been promised each month)
- How much does an average new client spend with you on their first purchase? (You can also use their average spend over their first year as a client, or if you sign multi-year contracts, use the value of an average contract.)
- What is your expected operating margin on that spend? (This is the money left for business operations after you’ve paid the direct cost of providing the product or service.)
How much does your typical client spend with you in year one?
Not your best client. Not your perfect client. Your typical client in the vertical that your lead gen program is targeting. I like to have my clients do this calculation on the average spend of this client in their first year of doing business with them. If your contracts tend to run for multiple years, then base it on the average value of that first contract.
Next, work out your gross margin on that business. That’s the amount of money left over for operating expenses and profit after you have paid the hard cost of providing your actual product or service to the client. Don’t forget to account for the cost of any sales commissions payable to your in-house team.
What Results Do You Expect from Your Lead Gen?
Now, ask your lead gen provider how many actual sales calls with your reps will this program deliver each month. Expect to hear a number somewhere between 4 and 12. (This is the actual range most vendors have promised my clients from their entry level lead gen programs, usually with a minimum 6 month contract.)
To figure out how much money you will add to your bottom line every month, pop these figures into the appropriate spots on the downloadable Lead Generation ROI Calculator.
Our client wanted to drive leads for his SaaS platform, targeting small businesses. They’d been relying almost exclusively on search ads but costs were rising and they wanted to diversify by integrating social and email focused lead gen. They reached out to me for help evaluating a proposal from a reputable service provider.
Here’s what they told us:
- Their typical new customer spent $1,500 for a license in year 1 ($125 per month on an annual contract).
- It cost the company only about $360 per client to host and maintain the platform, giving them gross profit of $1140 a year.
- They also paid a 10% commission on each license, which reduced their gross profit to $990 a year, or about 65% of their total sales.
- The vendor was offering to reach out to at least 600 prospects a month using automation. They estimated they could book a dozen sales calls each month from that effort. The proposal was for a 6 month trial at $3,750 a month.
- Based on the companies prior experience, they knew that only 1 in 4 of calls with an outbound lead would result in a qualified opportunity. And they were winning these deals approximately 25% of the time.
Based on these numbers, this company would have invested $22,500 to generate $4,387.50 in gross profit. A net loss of $18,112.50. They decided not to proceed, and focused instead on investing that money into programs that would increase their visibility in the market, improving both their win rates and their average deal size before revisiting outsourced lead generation.
Is Outsourcing Lead Generation Always a Bad Idea?
In a word, no. Outsourcing some or all of your lead generation programs can be a very successful approach. The key is to make sure that all the other systems in your business are structured to support closing the leads that come in through the program before making the commitment.
And, of course, to make sure that the investment needed makes sense for your particular business. These numbers would look quite different for a company selling an annual contract worth $50,000. Or a longer contract term with a higher win ratio. There are a lot of different factors to consider before deciding whether your lead generation investment makes business sense.