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The Business Of Marketing: Knowing Your Allowable Cost Per Lead

Welcome to my first article in a series I'll be writing exclusively on ForConstructionPros.com. In this series, I'll be sharing some unique angles on marketing your construction business that typically aren't discussed. Real "insider" stuff.

We all know there are tons of "marketing guru's" out there, and an equal number of advertising options for you to throw your marketing budget at. Instead of rehashing what others are saying, I'll share info with you that will help you make the best possible decisions with your marketing money.

These tips will help you generate the most possible revenue from the results you receive. Thus, we'll call it "the business of marketing".

So let's get to it!

Your Allowable Cost Per Lead Is Important

Here's the scenario.

You're deciding on spending money to advertise your construction business. The ad rep is promising you the world (imagine that one).

Your gut is telling you "This has got to work. I need it to work. How do I know if it will work?

Sound familiar?

There is a way to make this stress much easier to handle. That's where your allowable Cost Per Lead comes into play.

Your Cost Per Lead (CPL) is one of the four Key Performance Indicators to track in your marketing (more on that topic in a future article). Once you're tracking and using these indicators in your marketing machine, you'll be amazed at how much easier it is to invest your marketing dollars and know what you'll get in return.

What You Can Do With This Info

There are two extremely valuable benefits to tracking your Cost Per Lead.

  1. Gauging a marketing source's performance. Let's say that you have an allowable Cost Per Lead of $100. If a marketing source is costing you $400 per lead, you logically know that it isn't "up to snuff" with your requirements in marketing.
  2. The second reason is even more valuable. Anytime you invest money into advertising, you can quickly determine what the results you need from the marketing efforts, and gauge if the advertising has the potential to hit your numbers.

Here's what I mean.

Let's say that advertising rep wants $5,000 for a billboard ad. If you know your allowable Cost Per Lead is $100, you will have to generate 50 leads ($5,000 divided by $100) for the marketing source to be a good investment.

How To Calculate Your Cost Per Lead

Here is an outline of the exact process to determine what your company's allowable Cost Per Lead is.

Step 1
First, you need to know what your marketing percentage goal is. Your marketing percentage is the amount of your total revenue that is dedicated to marketing your business.

For our example, let's say you dedicate 10% of your revenue to market your business.

Step 2
Multiply your average sale by your marketing percentage goal. This will tell you the amount of money you can invest from your marketing budget to get an average sale and meet your goals.

For our example, let's say your average sale is $5,000.

$5,000 average sale multiplied by your 10% marketing percentage goal – tells us that you can invest $500 in marketing to generate an average sale.

Step 3
Next, you'll need to know what your closing percentage is on the estimates you give. For our example, let's say you close 25% of the estimates you give.

If you multiply your marketing budget per sale by your closing percentage, you'll know how much you can invest to give an estimate on a job.

$500 marketing budget per sale multiplied by your closing percentage of 25%, tells you that you can invest $125 of your marketing budget to generate an estimate.

Step 4
Step 4 is a key factor that many people do not consider. Realize this important fact:

Not every lead you generate will convert into an estimate.

There are many reasons why this happens. Some leads never schedule an appointment. Some appointments cancel. Some leads are not the work you do, etc.

Thus, a key piece of data to track is the percentage of your leads that convert into an estimate. For our example, let's say your conversion rate is 50%.

Finally, we can now determine your allowable Cost Per Lead.

$125 marketing budget to generate an estimate, multiplied by 50% lead-to-estimate conversion rate, tells us that your allowable cost per lead is $62.50.

Verifying Your Cost Per Lead

So let's work the numbers backwards to verify that the CPL number from our example truly is accurate.

Let's say we have a marketing budget of $6,250. We are able to buy leads at an average of $62.50 (our allowable CPL from above).

Based on this, we would generate $6,250 / $62.50, or 100 leads.

Of these 100 leads, 50% will receive an estimate (again, from our number above). That means 50 of the leads will convert into an estimate.

Of these 50 estimates, 25% will close into a sale, or 12.5 sales.

The average sale from our example was $5,000. Multiplying the average sale by the number of sales generated ($5,000 x 12.5) gives us $62,500 in revenue.

If we take our $6,250 marketing budget, and divide it by the $62,500 in revenue generated, we would have a marketing percentage of 10%.

Ten percent marketing was the goal - thus the allowable Cost Per Lead of $62.50 is accurate.

Wrapping Up & What's Next

Hopefully, you've found this first article an intriguing look into "The Business of Marketing".

Next article, I'll share with you the three remaining Key Performance Indicators in your business's marketing machine, and the impact that tracking them can have on your company's revenue and profitability.

Damion Rutherford is an 11 year vet in the construction marketing industry. He's personally generated over 150,000 leads and millions in revenue for home improvement contractors across the country. Learn more of his insider secrets to construction marketing at www.Contractor-Marketing-Tips.com.

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