Choose Your Advertising Metrics Wisely
Cost per Lead is Easy to Calculate, but Those Numbers May be Misleading
It’s baffling how many business owners are willing to spend thousands of dollars per month on advertising — from pay per click (PPC) ads to search engine optimization (SEO) to review sites to email marketing and social media — without knowing exactly how much revenue is attributable to each. If you don’t know how much revenue you’re getting from each of your advertising and marketing campaigns, and what your gross profit margin is, chances are you’re being left behind by analytical HVACR contractors who know their numbers.
The days of managing your marketing on gut intuition have gone the way of the typewriter and the phone booth. And yet, not accurately measuring and tracking advertising results continues to be one of the most common marketing mistakes business owners make.
With all that said, using data to make increasingly smarter marketing decisions goes beyond simply collecting a bunch of statistics and putting them into a pretty report. To turn numbers into a competitive advantage for your HVAC company, you have to develop a keen understanding for knowing which metrics to use and when. For example, I frequently see HVAC contractors get so laser-focused on reducing their cost per lead (CPL) below some arbitrary number, say $100 per lead, that they don’t even consider a much more important metric — return on marketing investment (ROMI). In doing this, one is likely to be missing the forest for the trees.
In this article, I’ll explain why so many marketers work to focus your attention on CPL, define ROMI, and explain why ROMI is a superior metric for business owners to use when evaluating the performance of various marketing strategies.
Why CPL Draws So Much Attention
There are three reasons marketers put so much emphasis on CPL. To start, marketing firms prefer CPL to ROMI because it’s not normally the marketers job to turn leads into sales; that’s your sales team’s responsibility. In a way, this is understandable. Unless your marketing firm also provides sales training, or they’re responsible for actually booking your jobs, they can’t really be faulted for good leads going unclosed; again, that’s typically your team’s job. Most reasonable business owners are okay with taking responsibility for closing the leads they receive, assuming the leads are quality leads — which is a big assumption.
The second reason marketing firms prefer CPL to ROMI is because the majority of advertising agencies and marketing firms I’m familiar with — and I’m familiar with hundreds — don’t have, understand, or put in place the analytical tools necessary to track ROMI. Of course, even if they were familiar with the necessary analytical tools, considering the poor performance of many advertising campaigns, it probably wouldn’t inure to their benefit to track ROMI.
The final reason many marketers prefer CPL is that it’s very easy to calculate. You simply divide the cost of the advertising campaign by the number of leads generated. Of course, I could fill another 10 articles with data and information about the bogus inquiries some marketers would categorize as a lead, but I will save that for another time.
Unfortunately, when it comes to marketing analytics, as is the case with many other things in life, the easy way is rarely the right way.
It’s not terribly difficult to calculate ROMI. You take the incremental revenue attributable to a marketing campaign, multiply by your gross margin, subtract the cost of the marketing campaign, and then divide the result by the cost of the marketing campaign. If you want this metric expressed as a percentage, you just multiple the answer by 100.
For example, let’s say you spend $10,000 on a direct-mail campaign, and it generates $50,000 in new business. If your gross profit margin is 40 percent, your ROMI would be 100 percent —$50,000 multiplied by your gross margin of 40 percent less the $10,000 you invested in marketing divided by the marketing investment $10,000 equals 1 (or 100 percent).
Why ROMI > CPL
There’s nothing wrong with keeping track of your cost per lead for various advertising campaigns; in fact, if you’re not already doing this, you should start — like, yesterday. However, in my experience, the cost-per-lead metric is better utilized by marketers than by the business owner. The typical HVAC contractor, or any business owner for that matter, is almost always better served when he bases his advertising decisions on the return on marketing investment generated by his campaigns, regardless of the cost of each lead. After all, you can’t make payroll with low-cost leads. You need cold, hard cash (actually, you need gross profit, but I digress).
Let me walk you through an example that should illustrate the superiority of ROMI over CPL:
Service Versus Replacement Leads — One reason focusing on cost per lead can result in terrible marketing decisions has to do with whether the leads generated by a campaign are for service jobs or replacement jobs. I once met with a residential HVACR contractor who had invested in two different Google PPC campaigns advertising the same services. They were running concurrently — something you’re really not supposed to do per Google’s rules. One of the campaigns had generated 100 leads at $50 per lead. The owner was thrilled at the low cost per lead. The second campaign had only generated 35 leads at a cost per lead of $142 — something the owner thought was way too high.
I asked the owner of this company to show me the specific leads and sales from each campaign, something he hadn’t been monitoring. Upon further inspection, he realized that the first campaign — the one with the $50 cost per lead — was generating almost all repair leads and only a little over 10 percent converted into booked jobs. As a result, the ROMI for this campaign was a dismal minus 28 percent.
Compare this to the campaign with the higher cost per lead. While this campaign only generated 35 leads, 84 percent of them were for replacement jobs and the lead-to-sale conversion rate on these replacement leads was 44 percent. As a result, this campaign generated $78,000. This contractor’s gross margin on residential replacement jobs was 40 percent, and the cost of the campaign was $5,000, so the ROMI from the second campaign was a whopping 524 percent.
Which would you rather have? Campaign A, generating 100 leads with a cost per lead of $50 and a ROMI of minus 28 percent; or campaign B, generating 35 leads with a cost per lead of $142 and a ROMI of 524 percent? I’ll take the latter all day long and, if you’re smart, so would you.
High-Quality Versus Low-Quality Leads — CPL can be misleading when the lead quality differs between campaigns, something that can easily happen if you’re using online lead-generation services where each lead you buy is also sent to multiple other HVACR companies. Your lead close rate might be 50 percent or more for leads generated directly through your own website and 10 percent or less for leads generated through a third-party website. This is why you must look past the cost-per-lead metric and instead base your decisions on metrics such as cost per sale and ROMI.
Final Thoughts and Takeaways
Believe it or not, I’ve had HVACR contractors terminate advertising campaigns because of a high cost per lead — even when the return on investment from the strategy in question was exceptional. I don’t know another way to say this, so I’ll just be blunt: That’s absolutely insane. If you’re flush with investment options that allow you to triple your money, you should be working on Wall Street, not in the HVACR industry.
The scenarios above use fictitious data, but they’re based very closely on two real-world campaigns. HVAC dealers who have invested in a variety of advertising programs, and those who accurately track their results, know all too well how scenario A can happen. There are plenty of lead-generation companies that are able to generate much better visit-to-lead conversion rates than the typical HVAC dealer, resulting in a higher volume of leads and a lower cost per lead. But, oftentimes, these companies are much less discriminating than you might be about what constitutes a viable lead.
Lead-to-sale conversion rates plummet when lead quality is poor.
Now, there are probably at least a couple of marketers out there right now foaming at the mouth. They’re thinking, “I’d take campaign A and work my magic formula to increase the lead-to-sale conversion rate, revenue, and margin.” Most business owners reading this are probably laughing because they know that all marketers are wishful thinkers. You wish you could wave a magic wand and make those numbers go up. The reality is, if those marketers were forced to spend their own money on one of the campaigns above, they’d choose option B every single time.
Good marketers know if they’re not personally involved with a client’s selling, they can’t be faulted for good leads that go unclosed. Good marketers also understand that whether something is their responsibility or not, it affects them. If revenue data are available from a particular marketing campaign, it would be insane not to track and use those statistics, in conjunction with metrics like cost per lead, cost per qualified lead, etc. Good marketers will provide you with cost-per-lead metrics in their reports, but they’ll continually encourage you to focus on the actual return generated by each of your marketing investments. Bad marketers, on the other hand, track nothing. They use emotion, glitz, and glitter in their sales pitches. Good marketers think like the business owner. Bad ones probably have a difficult time running their own businesses intelligently.
Don’t get me wrong — CPL is an important marketing metric. But it’s a metric more applicable to marketers than business owners. Again, when is the last time you paid your monthly bills in leads?
Publication date: 6/23/2014