Kratos
Hey there, business builder!
Ready to take your lead generation campaigns to the next level?
Well, be prepared, because we’re about to dive into some important metrics that can make or break your business’s success.
One of them made me lose my business called Hamla…
So be ready, because I am going to help you not fall into the same traps I fell into.
Now, you might think that cost per lead (CPL) is the holy grail of lead generation campaigns…
But I’m here to tell you that it’s not the most important factor for determining profitability.
In fact, there’s a better metric that you should be focusing on instead…
Like customer acquisition cost (CAC), return on investment (ROI), and most importantly, campaign profit.
In this blog, I’ll break down everything you need to know about the traps of CPL, CAC, ROI, and profit…
And why they’re crucial for your business’s success.
Plus, I’ll introduce you to the CLTV/CAC formula and show you how it can help you make strategic decisions about your marketing and sales efforts.
So, get ready to take some notes, and let’s get started!
CPL and Its Trap
Let’s talk about the big guns of measuring the success of your marketing campaigns, starting with Cost per Lead (CPL).
To calculate cost per lead (CPL), you simply divide the total cost of your lead generation campaign by the number of leads generated.
For example, if you spent $10,000 on a campaign that generated 500 leads, your CPL would be $20.
The formula to calculate CPL is:
CPL = Total cost of lead generation campaign / Number of leads generated.
It’s like the party starter metric that gets everyone hyped up…
But is it the end-all, be-all?
Not exactly.
Sure, CPL is an important metric, but it’s not the most crucial factor to consider when it comes to determining the profitability of your campaigns.
I mean, you wouldn’t want to spend all your money on generating leads that never convert into paying customers, right?
That’s where the customer acquisition cost comes in.
You want to make sure that your marketing efforts are bringing in not just leads, but high-quality leads that are more likely to turn into paying clients.
So, while a lower CPL may sound sweet, it’s not necessarily the key to a successful and profitable campaign.
And that’s how I lost my first business.
I launched two campaigns.
The first one with a $3.45 cost per lead and a 3% closing rate.
And the second one with a $9.23 cost per lead and a 10.2% closing rate.
Now, do you see how things are clearer?
I told myself-since I didn’t take the customer acquisition cost into consideration-”Okay, then let’s stop the second campaign and keep the first one.”
Because the first campaign gave me around one-third of what the lead was costing me in the second campaign.
The result? I started hiring people, and because of my low closing rate, I reached a level where I was not able to close enough deals, generate revenue, and pay my employees.
Months later, I closed the business.
Sad story… but you know it’s not the end. We learn from mistakes.
ROI and CAC, and Their Traps
Let’s talk about CAC, the superhero of marketing metrics!
It stands for “customer acquisition cost,” which is the total amount of money you spend to bring in a new customer.
This includes all your marketing and sales expenses.
Unlike CPL, which only measures the cost of generating a lead, CAC gives you the full picture of how much it takes to convert that lead into a paying customer.
So, if you’re spending a lot on marketing and sales to get leads, but few of them are turning into customers, your CAC could be higher than you’d like.
But why does CAC matter so much?
Well, it’s like having a superhero on your team that helps you determine the profitability of your campaigns.
Knowing your CAC means you can make smarter decisions about how to allocate your marketing budget and resources…
So you can acquire more customers without breaking the bank.
When it comes to determining the profitability of your marketing campaigns… it’s also important to consider the Return on Investment (ROI) and Customer Lifetime Value (CLTV).
ROI is a metric that measures the return on your investment-
Which is the revenue generated from the campaign divided by the cost of the campaign.
The formula for ROI is:
ROI = (revenue - campaign cost) / campaign cost
For example, if you spend $1,000 on a campaign and generate $2,000 in revenue, your ROI would be 100% (($2000 - $1000)/$1000).
CLTV is the total amount of revenue that a customer is expected to generate for your business over their lifetime.
The formula for CLTV is:
CLTV = (average value of sale) x (number of repeat purchases) x (average retention time).
For example, if the average value of sale is $50, the number of repeat purchases is 4, and the average retention time is 6 months, then the CLTV would be $1,200 ($50 x 4 x 6).
But a lazy way that gives you a similar number is by dividing the revenue by the number of customers you have.
For example, if your sales in the last 12 months are $100,000 and you have 500 customers, the CLTV may be $200.
A third and easy way if you sell services is by multiplying how much you are getting from a customer per month by the duration a client stays with you.
For example, if you sell SEO services and you take $1,000 per month and the client stays with you for 6 months, then your CLTV is $6,000.
Now, the CLTV/CAC ratio is a metric that helps you determine whether your customer acquisition cost is too high or too low.
A healthy CLTV/CAC ratio should be between 2 and 5.
If it’s below 2, it means you’re investing more in acquiring customers than you should be… and you should focus on decreasing your CAC and increasing your CLTV.
If it’s over 5, it means you’re not investing enough in acquiring customers… and you may be missing out on potential business opportunities.
It’s important to remember that focusing on CAC alone is a trap too.
You also need to consider the campaign profit-
Which is the revenue generated by the campaign minus the cost of the campaign.
For example…
Let’s say you launch a lead generation campaign on Google Keyword Ads with a total cost of $10,000.
From this campaign, you generate 100 leads, making your CPL $100.
Out of those 100 leads, 20 become paying customers with total revenue of $30,000.
Using the formulas we discussed earlier, we can calculate that your CAC is $500 ((10,000/20) = 500), your ROI is 200% ((30,000 - 10,000)/10,000), and your CLTV is $1,500 ($30,000/20).
Now, let’s say you launch a similar campaign on Facebook/Instagram with a total cost of $40,000.
This time, you generate 600 leads, making your CPL $67.
Out of those 600 leads, 60 become paying customers with total revenue of $90,000.
Using the same formulas, we can calculate that your CAC is $667 ((40,000/60) = 667), your ROI is 125% ((90,000 - 40,000)/40,000), and your CLTV is $1,500 ($90,000/60).
In this scenario, the Google campaign has a lower CAC and higher ROI.
Does this mean that we should focus on it? NO.
Why? Because it has limited scalability, and that’s why it’s giving us a lower number of clients.
While the Facebook/Instagram campaign has a higher CAC with lower ROI… it has greater profit potential due to the higher number of potential customers.
This example shows that focusing solely on CAC or ROI can be a trap too.
Because at the end, you want to check how much money you have in your bank account every month.
Conclusion
In conclusion, while cost per lead is an essential metric for measuring the effectiveness of your marketing campaigns…
It’s not the most important factor to consider when determining campaign profitability.
Instead, take the other metrics into consideration, like CAC, ROI, CLTV, and profit.
Keep in mind that lower CAC isn’t always better, and it’s essential to track campaign profit to make informed decisions about where to focus your marketing and sales efforts.
By following the checklist I’ve provided and using the CLTV/CAC formula, you can make strategic decisions that will help you scale your business successfully in a predictable, profitable, and guaranteed way.