How To Calculate Your Cost Per Lead… And 5 Ways to Lower It

So you just wrapped up another marketing campaign and you’re feeling pretty good. 

You think the campaign was a success, but how do you know if it was worth the expense?

After all, marketers report that they waste approximately 26% of their marketing budget on unproductive campaigns and poor strategies. 

But that doesn’t have to be the case.

By measuring your cost per lead, you can gather invaluable data to determine the effectiveness of your ad campaigns. 

Cost per lead, or CPL, is a metric that can tell you how cost-effective your marketing campaign is at generating leads. 

A campaign that generates a high number of quality leads with a low cost per lead is a good indicator that your marketing dollars are well spent. 

Meanwhile, a high cost per lead means you may be overspending on your existing campaigns to generate the number of leads your company gets from advertising. 

In case you were wondering, this is not a good marketing strategy.

In this article, we'll show you how you can calculate cost per lead, teach you the cost per lead formula, and explain how you can lower your cost per lead.

Let’s get to calculating!

What Is Cost Per Lead?

To put it simply, cost per lead is the amount you spend per lead that you generate with your marketing dollars. 

These leads, or potential customers, have clicked on one of your ads and provided their personal information in exchange for more details about the product or service you’re offering. 

Cost per lead is just one of many key performance indicators marketing teams use to analyze the effectiveness of advertising dollars. Other metrics include:

• Cost per thousand (CPM), or the price you pay for 1,000 advertisement impressions 
• Cost per click (CPC), the price you pay when when one of your ads is clicked
• Cost per action (CPA), which is a calculation of the cost per sales conversion

Cost per thousand, otherwise known as cost per mille, is a useful figure for calculating how much a set of  impressions costs. 

Meanwhile, pay per click is an advertising model used on many popular social media sites (Facebook ads) and search engines (Google ads) to generate ad revenue.

By measuring your average cost per click that you pay on your ads, you can determine how much you’ll need to spend on your ads.

Here at Knowmad, we can help you to plan, develop, launch and monitor a specialized pay per click ad campaign just for you, so make sure to check out our services if you think pay per click is right for your business. 

Finally, cost per action is focused on calculating the cost of each individual conversion, rather than the cost per lead. While important, it’s not the focus of this particular article. 

Did you get all that? If not, don’t worry, we’ve included a handy chart here:

This information is important across a number of industries, whether you’re in specialty manufacturing or logistics, as it’s essential to have reliable data to measure the effectiveness of your advertising campaign.

How To Calculate Cost Per Lead

We know what you’re thinking...

Oh no, this next part is all about math. Please, anything but that!

Let us just stop you right there, because honestly, calculating cost per lead is easy as pie. And no, not this 𝛑, the kind you can eat. 

To calculate your cost per lead, all you have to do is follow these three easy steps:

1. Add up your advertising spending
2. Add up your total leads
3. Divide your advertising spending by total leads

For you visual learners out there, here’s an illustration:

Simple, right?

Just remember, if you run different ad campaigns you’ll need to calculate your cost per lead per each individual campaign. That way you can compare your different campaigns to each other to determine the effectiveness of your advertising spending. 

It’s also worth noting that while the average cost per lead is close to $200, this figure can fluctuate widely depending on your industry.

Any good marketing team worth their salt will be able to determine what is a good cost per lead for your industry. 

This is where the team at Knowmad can step in to help you figure out how you can improve your marketing strategy. 

By helping you analyze your cost per lead and other key performance indicators, Knowmad can position your company to make necessary adjustments to your ad campaigns. 

Now that we’ve taught you how to calculate your cost per lead, it’s time to discuss the ways you can use this data to improve the effectiveness of your ad campaigns and save your company money.

5 Ways To Reduce Your Cost Per Lead

1. Segment Your Audience By Behavior

The most successful companies are also the best students of human behavior. 

By analyzing the behavior of their clients, these companies build targeted ad campaigns aimed at groups of prospects that have similar interests. 

For instance, if you’re an automotive retailer, you can create a list of prospects that look for vehicles often and position your ads appropriately to maximize your impressions by this group. 

These people are more likely to click your ad and generate into a lead than people who rarely look at cars.

Additionally, you can retarget prospects who have previously visited your website and then try to convert them into a sale. 

Instead of targeting every potential customer that visits your website with the same ad, group them into separate audiences based on how they behave:

• Audiences that visited your high-intent pages such as the landing or pricing pages
• Audiences that visited your high-traffic pages like blog articles and your homepage
• Audiences that visited your high-negative intent pages such as your email unsubscription pages

Creating ad campaigns based on how people reacted to your site is a good way to attract high-intent prospects that are more likely to convert. 

This is a common strategy amongst SEO and social media platforms that aggregate and compartmentalize user data across a number of metrics. 

By reverse-engineering this data, you can build targeted ad campaigns that match your prospects behavior. 

If you want to reduce your cost per lead, come up with ideal customer profiles and then target your ads to those prospects, taking their demographics and psychographics into account. Though this itself isn’t a guarantee of high quality leads at a low cost, the implementation of these things really is where the gold is.

2. Target Long-Tail Keywords With Specific User Intent

Key phrases and keywords that are longer and more specific have a special name in the marketing industry…

Long tailed keywords. 

If you haven’t used long-tailed keywords before now, pay attention, because they are a great way to lower your cost per lead.

When selecting a keyword for your ad campaign, choose long-tail, highly-targeted keywords that reflect what your prospects are looking for. 

By targeting one long-tail keyword per ad, this will increase that ad’s performance and improve your quality score. 

Um, hold on, what’s a quality score?

Smart of you for asking. 

A quality score is a measure of how well your ad performs compared to similar ads. 

It rates the relevance and quality of your keywords and pay per click ads, and is commonly used by some of the biggest search engines in the game, such as Google, Yahoo!, and Bing. 

Therefore, if you can increase your quality score, search engines will reward you with reduced cost-per-clicks, meaning it costs less to get that visitor onto your site. 

However, keep in mind that not all keywords are created equally. Some are more valuable than others.

And, on the flip side of that, just because a keyword only gets a few clicks doesn’t mean that those clicks aren’t extremely valuable.

This is an area that an expert marketing team can really help you to drive leads and sales. 

If you really want to lower your cost per lead, then ensuring you’re getting the most out of your keywords is vital to your success. 

3. Run Remarketing Campaigns

Remarketing is when you connect with prospects that have already interacted with your ads or website before. 

Therefore, remarketing campaigns involve placing ads in front of audiences that have previously expressed interest in your product or services. 

Examples of commonly used remarketing content include:

• Image carousels that include tips and tricks
• Video testimonials from existing and previous clients
• Quotes from satisfied customers 

Let’s face it, most potential customers won’t convert the first time they interact with your ad or visit your website. But studies show that website visitors who are retargeted are 43% more likely to convert.

Remarketing costs cents per click while other forms of advertising can be several dollars per click.  If a previous website visitor is 43% more likely to convert, then it makes sense to spend the extra dollar (roughly) to get them to convert. The unproportionate increase in leads compared to low increase of spend will yield a reduced CPL.

In a nutshell, converting a previous website visitor costs less than converting a brand new prospect.

This is what makes remarketing so valuable.

4. Run A/B Tests

Don’t beat yourself up for not getting your ad campaign just right the first time around. 

Digital marketing is all about analysis and tweaking.

With a bit of educated guessing and a willingness to get down and dirty with your data, you can optimize your campaigns to start driving real success. 

The best way to analyze the effectiveness of your pay per click ads is by having two ads run simultaneously with differing criteria. This is called A/B testing. 

An A/B test is a user experience research methodology that consists of a randomized experiment with two variants, A and B, running simultaneously to test for a statistical hypothesis. 

In other words, an A/B test is a way for you to see how two different ads compare to each other in generating high-quality leads. 

It’s essential to have two ads running simultaneously to do this sort of test properly. 

Running both ads simultaneously will allow you to use one ad as the test variable while the other functions as the control variable.

It’ll be harder for you to analyze which elements of your ads were most effective if you introduce too many variables at once. After all, it’s not called A/B/C testing.

To run an effective A/B test, simply do the following:

1. Pick one variable to test in your ad
2. Identify the goal of your test
3. Create your control to measure your test variable against
4. Randomize your sample groups 
5. Determine your sample size
6. Choose a threshold to determine the significance of your findings
7. Run your A/B test

It’s crucial that you give your test enough time to run to make sure you get enough data to justify your findings. 

To take your test to another level, try asking for feedback from real users through surveys.

Once your test is finished, measure your results and see if they met your significance threshold.

If the test was inconclusive, you can try changing a variable or your hypothesis, but make sure to only adjust one thing at a time.  

Remember, the ads that convert into leads more efficiently are the ones that’ll help reduce your cost per lead. 

By running A/B tests, you can determine what works best for your target audience, allowing you to make future campaigns more successful.

5. Personalize Your Ad Campaigns 

Now that people are seeing upwards of 4,000 ads per day, we’ve begun to tune them out, so it’s getting tough to stand out.

But there’s a way you rise above the noise.

About 88% of customers prefer personalized shopping experiences, where products, offers, and content are geared toward their specific needs and desires. 

Simple changes include changing the language of your ad by geofencing IP addresses and using more “you” language in your ads.

Prospects want to feel like you’re speaking directly “to them”, not generically “at them.” Believe it or not, personalized greetings and humanized language can go a long way to turn a hesitant lead into a long-term customer. 

For those with more time and the money to spend, advanced automation systems can be leveraged to predict how your prospects will behave. 

These deep learning programs can help you accurately predict how your prospect is going to behave and then you can use this data to drive up conversion rates in real time. 

Conclusion

Today, you’ve learned about key performance indicators including cost per lead, how it's calculated, and ways to reduce your advertising spending by maximizing your cost per lead. 

The ideas are simple, but can be a bit complex to implement. If it seems overwhelming, we can help. 

Everything mentioned in this article are services we provide our clients, and they’re seeing some really great results with us.

Are you already seeing success in this area? Tell us about your wins in the comments below!