Calculating the Value of a Click, Lead, and Customer

Why bother with improving conversion rates? How can companies bid $xx.xx per click on Adwords? And why do people get all hot and bothered about “viral” businesses? All these questions are related to the value of a sale – which I’ve created some calculators to help your company better estimate and understand.

One of the great things about marketing online is that you can often calculate an accurate cost per lead. A frequent problem however, is that companies have never thought about marketing in terms of cost per lead/sale/etc. And they have no idea how much they should pay.

These calculators should help provide a framework for thinking about what a sale is worth, and backing out the value of a lead/click/call. They’ll also let us answer the above questions.

Calculating the Value of a Sale

We’re going to start with the value of a sale, which is the first step. It is also more complicated – there are a number of choices you’ll have to make.

To start we will need four numbers:

• Revenue per sale: The total amount of money you receive from your customer for their purchase.
• Cost of servicing sale: The amount it costs you to provide the product or service purchased. This is a complicated number to calculate for a lot of businesses. You will definitely want to include direct costs – anything you spend specifically to service that sale. Indirect costs (very generally, what might be termed overhead) are more of a question. It is probably beneficial to know the value of a sale both including and excluding indirect costs. If, for instance, you have significant excess capacity, it might be worth considering the value of a sale including only incremental costs for a marketing campaign – but for longer term planning, you will need an all-in number.
• Recurring sales per customer – For some businesses (think of a dentist for instance), the majority of customers will come back again and again. If this sounds like your business, entering a number for recurring sales will be helpful. For the calculator, it is assumed you’re entering the number of sales beyond the first. It does not take into account any discounting for the fact that sales down the line are worth less than sales today. You can lower the number you enter to approximate this.
• Referrals per customer – If new customers frequently refer others to your business, you may be able to justify a higher marketing spend – as that one new customer you bring in may be responsible for another new customer next week. This assumes new referrals actually become customers and also refer additional customers at the same rate, iterating 10 times. Be careful – it’s great for demonstrating the amazing value of referrals, but can easily get out of hand. It’s very unlikely every customer you get actually brings in a new customer. Even an entry of 0.5 will double your new customer value.

The Calculator (edit the orange cells):

 

Calculating the Value of a Lead

The value of a lead is simpler to calculate, and less fraught with decisions that can complicate the answer.

• % that proceed from previous level – I’ve created this calculator with a 5 step conversion process. Customer sees ad, visits website, contacts business, schedules an estimate, and becomes a customer. If you lack any of these steps, enter 100% and it will effectively disappear. Otherwise, enter the percent that move from one level to the next.
  
• Value at this stage – Enter your new customer value in the orange cell (currently 533). The value at previous stages will be automatically backed out based on the %’s entered in the previous step.
• Number of people – Enter the number of people you expect to see your ad. This will calculate the amount of new customers you will receive, which should be easy to turn into a revenue or profit number.

The Calculator (edit the orange cells):
Interesting Things To Try

 

• Going viral – Ever heard the hype about “viral” businesses? Try entering a number higher than one in the “referrals per customer” blank. It’s easy to see what the hype is about.
• Conversion rates – Online marketers obsess over conversion rates. Try shifting all your rates up a bit. See how many more sales you get?
• Conversion rates #2 – Now look at the value of a click when conversion rates increase. By increasing the value a click, you can justify higher cost-per-click ad pricing, which means more people see your ad – leading to even higher volumes than the better conversion rate would suggest. This is what drives the obsession. If you have tried Adwords (or Boost) and think it is too expensive, this, combined, with good ads, is what makes it work.
• The other stuff – It’s also interesting to play around with different values for revenue per sale, costs, and recurring sales, but most of these provide more easily anticipated results.

Conclusion

Be humble with the numbers you created here – some are almost certainly estimates, so the answer should be used as a rough guide. But hopefully it provides some insight into how much you can reasonably pay to bring in more business, and to how those people outbidding you on Google’s front page are able to make it worthwhile.