Are you considering implementing a digital marketing channel like AdWords or Facebook for the first time, or are you concerned your business might be spending too much or too little in your current campaigns?
As a service company, your digital spending is not as straightforward as e-commerce because your customers are usually completing a request for service form or contacting you via a phone call instead of completing a purchase in the moment.
If these questions sound familiar, you should spend the time calculating your Maximum Cost per Digital Lead. This number will help you test new or current campaigns against the essential question – Is my digital marketing profitable?
Let’s start with getting to know your service company – Here are some basic inputs to use in our equation for you to determine you maximum cost per digital marketing lead.
Average Revenue Per Service: _________
Service Frequency (years): _________
Total Services over Lifetime: _________
Total Lifetime Service Revenue: _________
To get this number, just multiply the first three inputs together (Average Revenue per Service * Service Frequency (years) * Total Services over Lifetime.
Here are some additional inputs I’ll explain further.
Cost of Marketing: _________
This percentage varies by industry but is typically 10%. An example of how this differs is the construction industry standard is 5% because of lower margins.
Close Rate: _________
This percentage considers how often your sales team can close a high-quality lead.
High-Quality Lead Rate: _________
This percentage acknowledges the fact that we’re not dealing with referrals, here – This is digital advertising so not every person who fills out a form or calls you will be a high-quality lead. In determining this number, consider how effective you think this digital channel will be in engaging the right type of lead (e.g. how strong is the targeting capability, where in the funnel this lead will be, etc.).
Now that we have all of our inputs, we are ready to calculate our Max. Cost per Digital Lead in three simple steps.
- The first step is calculating your Max. Cost per Acquisition (Max. CPA). To calculate how much you can spend getting each sale, just multiply your Total Lifetime Service Revenue * Cost of Marketing.
Example: $265,000 * 5% = $13,250.00. Now I know I can spend $13,250.00 per acquisition to maintain a 5% cost of marketing and remain profitable.
- The second step is calculating your Max. Cost per Quality Lead. (Max. CPQL let’s call it). To calculate how much you can spend getting a quality lead, just multiply your Max. CPA (calculated above) by your close rate.
Example: $13,250.00 * 50% = $6,625.00. Now I know I can spend $6,625.00 getting a quality lead in front of my sales team and still remain profitable.
- The third step is calculating your Max. Cost per Digital Lead (Max. CPDL let’s call it). To calculate how much you can spend getting any old lead from the internet that matches the parameters of your digital targeting, multiply your Max. CPQL (calculated above) by your High-Quality Lead Rate.
$6,625.00 * 15% = $993.75. Now I know I can spend $993.75 getting what AdWords or Facebook will tell me is my Cost per Conversion, which for a service company is really a Cost per Digital Lead (someone who fills out my form or dials my phone number). Because my High-Quality Lead rate is 15%, I am playing it safe by assuming that only 3 of 20 leads I pay to attract will turn out to be of high quality.
How do I use this number?
This is the best part – Now you have done the work to calculate your Max. Cost per Digital Lead, all you need to do to determine if your digital campaign is profitable is to watch your Cost per Conversion on AdWords or Facebook. Anything below the number you’ve calculated means that your account is profitable. Anything above the number you’ve calculated means your digital marketing could actually be losing your money.
