What a lead should actually cost your business

Most business owners can tell you what they pay for a lead. Far fewer can tell you what a lead is worth to them, which means they have no way of knowing whether the first number is good, bad or catastrophic.

This is the single most useful piece of arithmetic a local business can do, and it takes about ten minutes. Once you have the number, every conversation with an agency gets shorter and a lot of bad decisions become obvious before you make them.

The four figures you need

You already have all of these. You may never have written them down together.

What a customer pays you, on average. Not your biggest job, not the one you tell people about. The typical one. If your jobs range from $400 to $9,000, you want the middle of where the work actually sits, not the middle of the range.

How many times they buy. This is the figure people skip, and skipping it is why so many businesses think advertising cannot work for them. A roofer might see a customer once in fifteen years. A salon might see the same person ten times a year for six years. A pool company might be monthly for a decade. If you only count the first transaction, you will badly undervalue every customer you have.

Your gross margin. What is left after the cost of actually delivering the work. Materials, subcontractors, the crew, the van, the product. Not your net profit after rent and insurance, and definitely not revenue. This is the money acquisition comes out of.

Your close rate on qualified leads. Out of ten genuine inquiries from people who wanted what you sell and could afford it, how many became customers? Be honest. Most people guess two or three points high, and the error compounds through everything below.

Working it through

Take a business with a $3,000 average job, three jobs per customer over the years they stay with you, a 22 percent gross margin, and a close rate of two in ten.

Revenue per customer is $3,000 times three, so $9,000.

Gross profit is 22 percent of that, so $1,980. That is the real money, and it is the only money that can pay for marketing.

Closing two in ten means every customer costs you five qualified leads.

So $1,980 divided by five is $396 per lead at breakeven.

That is the number at which you make nothing. Every dollar above it is a dollar lost. Most businesses have never calculated it and are therefore guessing in both directions, either refusing a $150 lead that would have been profitable or happily buying $500 leads because the agency sounded confident.

Breakeven is a ceiling, not a target

Nobody wants to operate at breakeven. The common convention is to spend about a third of the gross profit acquiring the customer, leaving the other two thirds for delivering the work and actually making money.

On the example above, that puts a healthy target at roughly $132 a lead.

Be clear that the third is a rule of thumb rather than arithmetic. It is not derived from anything you entered. A business with spare capacity and idle crews can afford to push closer to breakeven, because the alternative is people standing around. A business already running flat out should stay well under it, because every new customer has a real delivery cost attached.

Pick your own fraction if you have a reason to. Just pick it deliberately rather than inheriting it from a blog post, including this one.

Why this changes agency conversations

Two agencies quote you. One says they can get leads at $40. The other says $150.

Without your own number, you pick the first one. You will be wrong roughly half the time.

A $40 lead that never answers the phone is worth exactly nothing. A $150 lead that closes at one in three, against a $132 target, is close to the line but the close rate changes the sum entirely: one in three means three leads per customer, so $450 of spend against $1,980 of gross profit. That is a good deal.

The price of a lead is meaningless on its own. It only means something next to what a customer is worth and how often you convert.

This is also why the cheapest quote is so often the worst one. Driving cost per lead down is easy. You broaden the targeting, you loosen the qualification, you stop filtering. The number on the report improves and the business gets worse.

What to do when the number comes out small

Sometimes you run the sum and the answer is eleven dollars.

That is genuinely useful. It tells you that paid advertising is probably not your next move, and it tells you why. One of three things is true: the margin is too thin, the close rate is too low, or customers do not come back often enough.

None of those are fixed by hiring a better agency. A twelve dollar target means you need leads so cheap that only the least qualified channels can produce them, and those leads will not close, which drops your close rate, which lowers the target further. It is a spiral and plenty of businesses are in it.

The useful response is to fix whichever figure is weakest. Raise prices. Improve the close rate by answering faster or qualifying better. Build a reason for customers to come back. Any of those move the target more than switching agencies will.

What to do when the number comes out large

The opposite case is more common than people expect, particularly in trades with high job values and good retention.

If your target is $300 a lead, you can afford channels that most of your competitors have written off as too expensive. Google ads in a competitive category. Higher intent keywords that everyone else avoids. You are not bidding against the whole market, you are bidding against the part of it that has not done this sum.

That is a real advantage and it comes from ten minutes of arithmetic.

The number to check monthly

Once you are running, the figure to watch is not cost per lead. It is cost per acquired customer.

Cost per lead tells you what the advertising did. Cost per acquired customer tells you what the business did with it, and it is the one that includes your own answering, qualifying and closing. If your cost per lead is flat but your cost per customer is climbing, the advertising is fine and something on your side has slipped.

That distinction catches more problems than any dashboard.

Do the sum before the call

We built a lead cost calculator that runs this in about thirty seconds. It asks for the four figures above and gives you breakeven and a target.

It will sometimes tell you that nobody should be selling you advertising right now, including us. That is the point of it. A number you worked out yourself is worth more than any quote somebody gives you, because it is the only one in the conversation that is actually about your business.