In my last article, I discussed why B2B marketing and sales professionals need to have a clear and accurate understanding of lead value. I also described the first two steps of a four-step process for determining the value of sales leads – estimating the lifetime value of a new customer and calculating the maximum amount that you should invest to acquire a new customer. In this article, I’ll cover the final two steps of the valuation process and describe how to use this data to determine the value of sales leads at any desired stage of the demand generation pipeline.
To illustrate how this process works, I’m using an example of a company that provides marketing asset management (MAM) solutions to corporate customers. In the last article, we calculated the customer lifetime value of a new MAM customer ($135,000) and the maximum amount the company should invest to acquire a new MAM customer ($117,000).
Identify Lead Stages and Conversion Rates
The next step in the process is to decide what lead stages you want to use in your lead value model and identify the rates at which leads convert from one stage to the next. To be absolutely clear, the “lead value” we are calculating is equal to the maximum amount that a business should spend to acquire or develop a sales lead at a given lead stage. With this approach, the value of a lead is a function of two factors – the maximum amount you should spend to acquire a new customer and the rate at which leads at a given stage convert to become customers.
To illustrate this process, lets add some facts to the example we used in the last post. Companies define lead stages in a variety of ways, but one of the most widely-used frameworks is the demand waterfall developed by marketing and sales research firm SiriusDecisions. We’ll assume that our hypothetical MAM company uses this framework to describe its lead stages. The table below shows the major stages that are included in the SiriusDecisions framework.
Calculate Lead Value
To calculate lead value, you first need to determine how many leads are required at each of your lead stages to produce one new customer. These amounts will depend on your lead conversion rates. For example, the above table shows that the conversion rate for sales qualified leads to new customers is 20%. Therefore, it takes 5 sales qualified leads to result in the acquisition of one new customer (1/.20). Likewise, the table shows that the conversion rate for sales accepted leads to sales qualified leads is 49%. So, it takes 10.2 sales accepted leads to produce 5 sales qualified leads (5/.49). This also means that it takes 10.2 sales accepted leads to produce one new customer.
Once you’ve determined now many leads are required at each lead stage to produce one new customer, calculating the lead value is easy. You simply divide your maximum allowable investment for one new customer by the number of leads required to produce one new customer. As the above table shows, the value of sales leads for our example MAM company are as follows:
- Sales Qualified Leads = $23,400 ($117,000/5)
- Sales Accepted Leads = $11,466 ($117,000/10.2)
- Marketing Qualified Leads = $7,568 ($117,000/15.5)
- Inquiries = $333 ($117,000/351.4)
This model clearly demonstrates that leads increase significantly in value as they move through the demand generation pipeline. In our example, a late-stage Sales Qualified Lead is about 70 times more valuable than an early-stage Inquiry. This dramatic increase in value provides strong justification for investing in effective lead nurturing programs that will move prospects through the pipeline.
I’ve recently published a white paper that explains the process for calculating lead value. If you’d like a copy of this paper, send an e-mail to ddodd(at)pointbalance(dot)com.