The true cost of lead generation services (No, it’s not going down anytime soon)
Growth Orbit Insights
by Steve Schilling
Table of contents
Every week I speak with at least one business owner who’s considering hiring a company for lead generation services. When I ask what they’re expecting to pay, they’ll often respond with a figure that falls in the range of $4,000 to $7,000 a month.
For that rate, they expect to receive 2-4 qualified leads per week (16 per month), which means one lead would cost anywhere from $250 and $430.
But is this realistic? As with most things in life, you usually get what you pay for. The truth is, the cost of qualified leads can vary wildly depending on your business. In most cases, lead cost is directly related to the value of a new customer. If your typical Lifetime Value (LTV) of a customer is $10,000 or less, then you simply can’t afford to pay much for leads.
On the other hand, if your Customer LTV is in the millions of dollars, it should be expected that the effort required to generate leads is more difficult and thus your lead cost will be significantly more expensive.
Start thinking of lead generation as a component of your Customer Acquisition Cost (CAC). CAC is a seemingly simple, often misunderstood, but nonetheless important metric. It’s calculated by taking the sum of all sales and marketing expenses and dividing it by the total number of new customers signed during the given period. Lead generation is one of those sales and marketing expenses.
It is not uncommon for large mature B2B software or service companies to spend millions of dollars annually on lead generation. So how do you know what is the right amount to spend on your Lead Generation Cost?
The short answer is that it depends on your industry, your LTV, and your gross margin. As a general rule, you want your CAC to be 25% of the lifetime gross margin of your customer or less. Your cost of lead generation may be as much as 1/3 of your CAC. To better understand the true cost of lead generation, let’s take a look at the typical cost to provide lead generation and the expected results you should achieve.
|Monthly cost for a fully-loaded sales development representative: $11,000
Average monthly lead production: 8 leads
$11,000/8 = $1,375
Part one: Breaking it down – Monthly costs for lead generation
A well-trained, experienced Sales Development Rep (SDR) or Business Development Rep (BDR) will typically bring in a base salary of $50,000. Factor in incentives and bonuses and you’re looking at closer to $75,000 a year. Add benefits and overhead and you’ve arrived at around $90,000 ($7,500/month) for the cost of a fully-loaded SDR or BDR.
|Incentives and Bonuses||$25,000|
|Benefits and Overhead||$15,000|
|Total Annual Cost of one SDR||$90,000|
Success in lead gen requires an efficient tech stack designed to support the sales development workflow. Because CRM systems are notoriously weak at this, you’re all but required to purchase Sales Enablement add-ons or upgrades such as SalesLoft, Outreach, or Salesforce’s own “Sales Engagement” tools (formally High Velocity Sales).
An enterprise Salesforce.com seat costs upwards of $150 per month, plus any sales enablement tools will double the cost to about $300 per month per rep. Add to that additional everyday software like Microsoft Office, Payroll, and Helpdesk support, all of which you can expect to cost another $165 a month. That brings your total for necessary technology to $465 a month.
|Sales Enablement Tools||$300|
|Every Day Software||$165|
|Total Monthly Cost of Tech Stack||$465|
List and target data
Successful sales development reps rely on well-organized, quality data. Long is the list of data providers: Zoom Info, Dun & Bradstreet, Seamless, and LinkedIn are just a few options. Just one seat on one of these tools costs between $65 and $125 per month.
Management and coaching
Even the most talented sales reps need management and coaching. Large organizations have a battalion of sales managers, trainers, and analysts, but smaller organizations often rely on a single general sales manager.
For the sake of this exercise, let’s assume you’re in the lowest-cost bracket and rely on a fraction of a single existing sales manager’s time. We will estimate 1/10 of a sales manager’s time or around $1,250 a month.
Like any other game of skill, success in lead gen depends hugely on proper training and coaching. An array of sales training approaches exist including SPIN selling, The Challenger Sale, and Sandler, to name a few.
These programs can be expensive, often running into the 10s of thousands of dollars annually, and prices are only going up. For the sake of this exercise, we’ll travel to the low end and bank on a basic online training platform for skills development and testing, which you can expect to cost roughly $250 per month.
As of November 2022, turnover among sales development reps is sitting at 39% with a full 80% leaving the role within 18 months. One and a half years may sound like enough time to get the most value out of a sales rep, but considering that the ramp to full productivity takes an average of 15 months and you discover that most SDRs and BRDs leave before they even achieve full productivity.
When you calculate the cost of turnover, recruiting replacements, training new hires, and unproductive ramp-up time, the total cost can exceed $24,000 a year for even a small SDR team.
And that’s being generous – a study from LinkedIn found that the true cost may be closer to $100,000.
|List and Target Data||$125|
|Management and Coaching||$1250|
|Total Monthly Costs of Management and Support||$3625|
All of the expenses above are before we factor in office space, parking, and other general corporate expenses. These costs will depend on the size of your organization, among other factors.
|Breakdown of Monthly Costs|
|Management and Support||$3625|
|Total Monthly Cost of a Well-trained, Experienced SDR||$11,590|
Bottom line: The true cost of a lead
Based on the numbers above, a fair estimate for fully-loaded sales development representative costs is around $11,000 a month. At full productivity, that SDR will produce about 8 leads per month.
|$11,000 divided by 8 = $1,375 per lead.|
*It’s important to point out what we mean by a “lead.” We’re talking about well-qualified sales opportunities with identified needs and a willingness to change what they’re doing today in pursuit of solving their problems.
**We also haven’t factored in the cost of guiding the program strategy, outreach messaging, performance analysis, and a laundry list of other activities that are typically necessary to ensure success. (See: How to run lead generation like a pro and Why lead generation programs fail)
Part two: Using these figures to your advantage
Get the most value by setting realistic expectations
Looking at expected outcomes can be challenging. Actual results will vary greatly depending on the nature of the product, the target market, the size of a typical transaction, the complexity of the sale, and a dozen other factors.
For instance, an SDR who generates leads for highly competitive cybersecurity solutions produces much fewer qualified opportunities than a SaaS solution that has a lower sales price and starts with a free trial. But we must start somewhere so let’s look at typical B2B expectations.
A dedicated B2B sales rep typically makes between 80 and 100 calls per day, sends about 40 to 50 emails, and leaves roughly 40 voicemails. The yield of all that activity usually breaks down to just 6 to 10 productive calls per day or 30-50 per week. A highly skilled SDR/BDR should convert about 4-6% of those quality engagements to leads, 2 qualified leads per week per rep is a reasonable expectation (8 per month).
Again, we are talking about a fully ramped, well-trained, and properly equipped SDR or BDR.
Beware of companies who guarantee low costs
Some companies tout lead generation services for $7,000, $5,000, or even $4,000 per month. But how is that possible given that’s a fraction of just the labor cost for a single sales development rep? How do these providers do it? The simple answer is via offshore labor, or you are actually getting just a fraction of a person’s time and effort.
Let’s take a closer look at some of the tactics other companies use to keep their costs (and quality) low.
Some services are run strictly by email. Others are supported with part-time fractional sales resources.
These are low-cost solutions, but they may not produce significant results. The leads provided have typically not been qualified by a Sales Development Representative to determine what they are looking for and the extent of their interest in what the business is selling.
Thin fractured lead services
To reduce the high costs of SDRs, many lead gen providers hire and train a limited number of SDRs and split the time and effort across four or five clients.
As a result, each client may receive three to five hours of attention per month. Lead generation results will be significantly lower than a dedicated SDR could provide.
Hybrid lead services
A consistent email lead generation campaign, combined with follow-up by a sales development rep, is a better approach than either of the above.
However, a hybrid approach can still produce inconsistent results due to the pitfalls of each approach in a low-cost arrangement.
Offshore lead generation services
Like many U.S. telecoms, computer, and cable companies that have outsourced support services to foreign countries, some lead gen services have done the same.
While this can substantially reduce costs, most offshore service employees are not trained to engage in sophisticated business discussions and properly qualified sales opportunities. This is critical when the client’s product requires targeting senior personnel within the prospective customer’s company.
On a positive note
We’ve spoken a lot about how low-cost solutions can (and likely will) fall short of your expectations and potentially waste significant dollars, but we’re not here to simmer in the doom and gloom of lead generation.
The truth is, quality B2B lead generation is hard work, and there are a lot of components that go into making a successful program. But with some foresight and planning, it’s absolutely possible to achieve success and drive a positive ROI. At the end of the day, the old saying rings true: you get what you pay for.
When you work with Growth Orbit, you receive masterful lead generation techniques that accelerate revenue growth, keep employees motivated, and help you overcome all kinds of challenges that the world throws at you. Call (770) 881-8408 today.