For most business Sales, not Leads, are most important; however, there are often both Lead and Sales goals. If Sales are having a good month, but Leads are off, it would be foolish to cut back on Spend or attempt to switch tactics to try to fix the Lead shortfall, as you would be giving up Revenue. But what if Sales happen over time? That is, what if a Lead today might not make a purchase until days / weeks / months later. In that case, you may want to make some adjustments, as there is an opportunity cost in the Lead shortfall.
In this article and in the attached Excel spreadsheet, Max CPL Worksheet, I’ll attempt to show you how to account for a shortfall in Leads or in the Revenue per Sale (RPS) as you optimize your campaigns during the month.
If you’re managing against a Cost per Sales (CPS) Goal, then the maximum Cost per Lead (CPL) you can have and still meet the CPS Goal is:
CPL = CPS * Lead to Sales (LTS) Rate
If Leads are short (your Cost per Lead is above your CPL Goal), you’re missing potential Sales from these missing Leads. By applying the current LTS rate against the Lead shortfall, you can estimate the Sales that you’re giving up by being short in Leads. Subtracting these “missing Sales” from the actual Sales allows you to calculate an Adjusted CPS and LTS. Using this Adjusted LTS, you can calculate a new Max CPL target.
As long as the Actual CPL is less than the Adjusted Max CPL, you’re doing better than goal – you’re bringing in more Sales, even accounting for the missing Sales due to the Lead shortfall, at a better CPS and hence a better ROI. As a result, you should not attempt to improve the CPL (reduce the Lead shortfall) at the expense of the LTS and you should keep spending, if possible.
Revenue per Sale is the other factor. For some it may be hard to determine the RPS of current Sales as Revenue accrues over time; however, there are often indicators (percentage of full price purchases, product mix, customer demographics) that will allow you to estimate what the RPS of current Sales will be.
If the Actual RPS is less than the RPS Goal, we need to account for these “missing Sales”.
((Actual Sales * RPS Goal) – (Actual Sales * Actual RPS)) / Actual RPS
I take the negative of this number and add it to the Adjusted Sales number calculated previously. Note, if the Actual RPS is above the RPS Goal the Adjusted Sales will increase as will the Adjusted Max CPL.
In the attached spreadsheet, the cells in Orange are input fields. Enter your goals, the number of days in the month, the number of days completed and your month to date performance and the sheet will calculate the Maximum CPL you can afford.
With the Adjusted Max CPL you can then determine the CPC you can afford, Adjusted Max CPL * Click to Lead (CTL) Rate.