A Complete Guide to Lead Value And Can CRO Improve It?

There’s no denying it: Conversion rate improvements are great, but at the end of the day, data is nothing more than a bunch of numbers, while cash is something you can take to the bank!

More importantly, if you're in the Marketing Department, dollars are something you can take to the CEO and other decision-makers at your company to maintain buy-in for your conversion rate optimization (CRO) efforts and spending requests. That’s why it’s important to always tie your CR improvements to an estimated increase in revenue.

eCommerce sites always have the “average order value” metric on hand. Analytics tools like Google Analytics track and report Average Order Value, Transactions, and Revenue directly (caveat: extra coding/tagging is involved), saving you the effort of having to do any number crunching to arrive at it. This makes estimating a revenue increase a matter of multiplying average order value by the increase in the number of transactions.

If you are a lead generation site, you probably already know that Google doesn’t calculate an average lead value metric. But, calculating an Average Lead Value from the data in Analytics is easier than you may realize, making it possible for lead generation sites to tie improvements to revenue, and demonstrate ROI on optimization efforts.

Let’s take a look at steps you can take to get to the bottom line.

Define a lead & understand what lead value is

First, it is important to understand that any key performance indicator (KPI) represents a tangible action your visitors take that overlaps with a particular goal for your business, and to understand how that action relates to your bottom line.

For Lead Generation sites, the primary KPI is a lead acquisition, but that is not a guarantee of revenue, since it is only the first step of a two-part sale (the second step is to close the sale). Further complicating the matter is the fact that becoming a lead can be the result of a variety of actions, even within the scope of one website: signing up for a newsletter; submitting a request for more information; filing an application, etc.

With that in mind, firstly, you should define the variety of ways that someone could become a lead, and to make sure you are tracking those actions properly. Then, discuss how that action was related to the goals of the company. Average Lead Value represents the average monetary value you derive each time a visitor takes the desired action(s) on your website and becomes a lead. It already accounts for the percentage of leads who then go on to purchase from you. What you are aiming to estimate is the average lead value to plug into your analytics program and for calculating the ROI of any optimization efforts.

Collect the data you'll need

Next, gather the data you would need to do the calculation. If you are not already collecting this information, you will need to start tracking the items for a period of time, and then make the calculation. The numbers you need are:

• Average number of leads per time frame – e.g. 500 leads per month
• Average amount of sales revenue during time frame – e.g. $3,125,000 per month
• Average profit margin on a sale (If you want to be as accurate as possible, you should also account for your profit margins.) – e.g. Approximately 4% of each sale is profit

Make sure you measure each value over the same time frame. The period you use to calculate can vary – 1 month, 1 quarter, 1 year – as long as it’s the same for each metric you use in your calculation. It’s best to average the longest period of data possible to avoid seasonal fluctuations, good/bad months, etc.

Plug-and-chug your way to lead value

To calculate the “Average Lead Value,” divide the value of sales that occurred within a particular time frame by the number of leads generated during that same time frame. Finally, multiply the result by the average percentage of profit you make each time you make a sale.

For example, the numbers look like this: $3,125,000 dollars per month/500 leads per month) x 4% profit = $250 dollars profit per lead.

Why lead value matters

As a marketer, there are a multitude of reasons why determining Average Lead Value is important. Here are a few of the valuable ways you can use Average Lead Value:

Signals fluctuations in lead quality

A decrease in Average Lead Value suggests less qualified leads are coming in through your efforts. Let’s say you decide to invest a greater amount of money into your PPC, and subsequently see a decrease in your Avg. Lead Value. You investigate further and find that although you had an increase in leads, the amount of sales revenue generated that month remained the same. When you dig even deeper, you are surprised to find that even though your total number of sales increased slightly, the average order value went down.

Helps determine ROI for marketing efforts

Lead value is a critical part of revenue acceleration. How? Lead value helps identify changes in the number of qualified leads you get from your marketing investments. This change is tied to ROI (return on investment), or the amount of revenue you generate from the money you invest in your marketing. By plugging your average lead value into your ROI calculations, you can determine if the money you are spending on PPC, SEO, email, and other efforts intended to drive traffic to your site is paying off, or if you need to rethink your approach. You can also use the number to calculate ROI on any CRO (conversion rate optimization) efforts you may be doing to improve the number and quality of leads.

Builds company support for your marketing efforts

By attaching a monetary value to each lead, data is transformed from a mere metric to tangible financials. Tying your efforts to discrete revenue increases is a particularly compelling way to develop your credibility among Management, keep them on board with your current efforts, and gain leverage for future budgets and projects. Those same dollars can be used to incentivize as well. If your efforts require cooperation with other departments at your company, showing your colleagues the dollars and cents can help secure a higher priority to the work that you do together, making it possible to generate money more quickly.

Knowledge is power. Knowing your Average Lead Value facilitates evaluating the effort (or money) you’ve invested in a specific task and calculating if this is an effort you want to continue with. Comparing Lead Value month over month or year over year can give you a benchmark of health to work off of and see the progress that you’ve made (or the potential for progress), or even ground you may have lost. I can think of nothing more important than understanding your own metrics, especially when working with other specialists.

Can conversion rate optimization improve lead quality?

If your efforts at conversion rate optimization decrease the quality of leads, your sales force will let you know about it!  They’ll be in your office/cubicle/face very quickly pointing out how they’ve got less qualified leads to work with, and increasing quotas to hit. In B2B marketing, the main goal is to feed good leads that are far along in their buying process.

Let’s look at some reasons why conversion rate optimization tactics (when applied haphazardly) might decrease lead quality:

1) Shortening lead forms. It’s common sense that removing fields from your lead forms will likely increase conversion rate, but could easily decrease lead quality by not “qualifying” prospects.  For example, many lead forms ask a question about whether the prospect has a “budget” in place.  Those that don’t have an approved budget are considered low-quality and are disqualified or deprioritized.  Removing fields like that from your lead forms should always be tested, and the test data should always be compared against any changes in lead quality.

2) Pushing traffic into the funnel too soon. Sometimes improving your calls to action, headlines, copy, and navigation can combine to funnel more traffic into your lead form, raising your conversion rate.  But if the prospects who convert didn’t do as much up-front research, they may end up as lower quality leads.

3) Not being transparent about your pricing. Some B2B marketers don’t disclose pricing on the website (occasionally at the request of Sales).  This tactic could affect conversion rate, but you’ll find that many leads are simply filling out a form so they can find out pricing.  Many of them don’t have the budget and aren’t high-quality leads.

4) Over-promoting with gifts and incentives. I once worked in B2B marketing for a not-very-smart software company that offered the incentive of a free flash drive in addition to a white paper if they filled out a lengthy lead form.  Can you guess what that did to the quality of leads?  The worst part was all the low-quality, early-stage leads calling to complain when they didn’t get their free flash drive within 6-8 weeks

So, yes, Conversion Rate Optimization could potentially decrease lead quality if not done carefully.  Now, let’s look at some reasons why CRO, properly executed by a data-driven marketing team, can actually increase lead quality at the same time as increasing conversion rate:

1) Marrying conversion data with lead scoring. Since the ultimate goal is more high-quality leads, you have to carefully test and tweak every pixel and every letter of your lead form, THEN go back and analyze lead quality data to make sure you haven’t altered the quality.  There aren’t any elegant, automated ways to do it, so you have to be willing to sit down with different data sources and compare, or sit down with Sales and hear their feedback on a regular basis.

2) Letting prospects nurture and qualify themselves throughout your site. Instead of putting a lead form on a landing page, try educating the prospect first, giving them more information that’s relevant, nurturing them, THEN asking for some contact info.  It’s hard work making sure every prospect can get the content/answers they need to graduate to the next stage of their buying process, but it’s one way to move the needle on both conversion rate and lead quality.

3) “Opening the kimono” in regards to pricing. While this is somewhat controversial among old-school B2B marketers and salespeople, being transparent about your pricing can increase your lead quality.  This doesn’t mean you have to have your pricing in 57-point font on your homepage.  But, if your prospects are looking for pricing and don’t find it, you may end up with no leads at all.  Figure out what kind of website behavior indicates lead qualification, and use that data to decide where to reveal pricing.