Many businesses struggle with how to measure the value of their advertising. This tool will help you show advertisers how to evaluate campaign effectiveness based on real dollars earned!
First, let’s define what is and isn’t a “lead.” Not every entrant is a lead. Some just enter to get a prize. We define them as “contacts.” They have value, as some may become interested prospects at some point, but they’re not as valuable as someone who is ready to buy now!
Some promotions generate more leads than others. For example, there will be more entrants interested in trying a new sandwich at a chain of delis than those interested in pursuing a career at a school specializing in nursing. But the value of a new student is far more valuable than someone who wants to buy a sandwich. So how can you figure out your campaign’s success?
The formula is: (TL x CR) X APP X PM / TL
Here’s what it means
Total Number of Qualified Leads generated (TL)
Multiply by Conversion Rate (a percentage) (CR)
This produces the total number of expected sales from this campaign.
Multiply by Average Purchase Price (APP)
This produces the gross revenue generated by the campaign. But now we need to figure out how much it’s worth:
Multiply by your company’s Profit Margin (PM)
Now you know the gross profit expected to be realized. Note: if you subtract your cost of the promotion from this number, you have your net profit for the promotion.
Divide by Total Number of Leads (TL).
Now you know the Lead Value (LV), how much each individual lead is worth.
How it works in the real world
A furniture company ran a four week sweepstakes to win a patio furniture set that attracted over 3,000 entries (contacts). Based on the embedded survey questions, the company found:
TL (Total Leads): 689 (homeowners interested in remodeling at least one room, and were interested in meeting with the company’s interior design team)
CR (Conversion Rate): 15% (689*.15=103 expected customers)
APP (Average Purchase Price): $10,000 (103*10,000=$1,033,500)
PM (Profit Margin): 46%
GP (Gross Profit): $475,410 ($1,033,500 * .46 = $475,410)
LV (Lead Value): GP / TL (475,410 / 689) = $690
After adjusting for leads that don’t pan out, they could afford to pay nearly $700 per lead based on immediate value, but there are other considerations.
Lifetime Value: What percentage of the leads become repeat customers? For some businesses (Dentists, for example) the majority of customers return again and again.
Referrals: If new customers refer others to your business, the lead is even more valuable, as one new customer brings in more.
Latent Value: Some leads will convert into customers later, and some contacts may become leads as their interests and situation changes.
If you want to get even more detailed, you can calculate contact value by simply dividing your expected profit by the total number of entries. In this example:
$476,410 / 3000 = $158.47 per entry!
Lead generation is one of the fastest growing areas of marketing and promotion, and once you understand how it works, it’s easy to see why.