To illustrate how this process works, I'm using an example of a company that provides marketing asset management (MAM) solutions to corporate customers. So far, we have calculated the customer lifetime value of a new MAM customer ($135,000) and the maximum amount the company should invest to acquire a new MAM customer ($117,000).
Identify Lead Stages and Conversion Rates
The next step in the process is to decide what lead stages you want to use in your lead value model and identify the rates at which leads convert from one stage to the next. To be absolutely clear, the "lead value" we are calculating is equal to the maximum amount that a business should spend to acquire or develop a sales lead at a given lead stage. With this approach, the value of a lead is a function of two factors - the maximum amount you should spend to acquire a new customer and the rate at which leads at a given stage convert to become customers.
To illustrate this process, lets add some facts to the example we used in the last post. Companies define lead stages in a variety of ways, but one of the most widely-used frameworks is the demand waterfall developed by marketing and sales research firm SiriusDecisions. We'll assume that our hypothetical MAM company uses this framework to describe its lead stages. The table below shows the major stages that are included in the SiriusDecisions framework.
This table also shows the rates at which leads "convert" from one lead stage to the next. These conversion rates were developed by SiriusDecisions, and they describe the conversion rates of an average-performing B2B company. The table shows that 4.4% of inquires will become marketing qualified leads, 66% of marketing qualified leads will become sales accepted leads, 49% of sales accepted leads will become sales qualified leads, and 20% of sales qualified leads will become new customers. Your conversion rates will differ those shown in the table, and it's critical to use your rates for calculating the value of your sales leads.
Calculate Lead Value
To calculate lead value, you first need to determine how many leads are required at each of your lead stages to produce one new customer. These amounts will depend on your lead conversion rates. For example, the above table shows that the conversion rate for sales qualified leads to new customers is 20%. Therefore, it takes 5 sales qualified leads to result in the acquisition of one new customer (1/.20). Likewise, the table shows that the conversion rate for sales accepted leads to sales qualified leads is 49%. So, it takes 10.2 sales accepted leads to produce 5 sales qualified leads (5/.49). This also means that it takes 10.2 sales accepted leads to produce one new customer.
Once you've determined now many leads are required at each lead stage to produce one new customer, calculating the lead value is easy. You simply divide your maximum allowable investment for one new customer by the number of leads required to produce one new customer. As the above table shows, the value of sales leads for our example MAM company are as follows:
- Sales Qualified Leads = $23,400 ($117,000/5)
- Sales Accepted Leads = $11,466 ($117,000/10.2)
- Marketing Qualified Leads = $7,568 ($117,000/15.5)
- Inquiries = $333 ($117,000/351.4)
I've recently published a white paper that explains the process for calculating lead value. If you'd like a copy of this paper, send an e-mail to ddodd(at)pointbalance(dot)com.