Knowing your cost per lead is important because it helps set your sales goals and advertising budget. As I’ve talked about many times, you need goals, and ideally, company goals and projections for the coming year are established between November 15 and December 31.

You need to know how many leads come in. First, set the parameters on what constitutes a lead. Some consider a lead any sales call that you go on. They call in, an appointment is set, and you go see the nice folks. Presto, you have a lead.

But what about the leads that you burn off? The guy who calls in and says he wants to know what a room addition costs per square foot. You give him a ballpark figure, he hangs up. The lady who calls and says she’s looking for the lowest price on a job, she’s getting five bids. You tell her you won’t be the sixth.

Others might say those were good leads, you simply didn’t handle them right. I wouldn’t call them a lead because they don’t stand a chance of selling, but whatever parameters you set on what to call a lead is okay. As long as you don’t change those parameters. Once the definition of a lead is set, that’s it, no more changes. Keep track of all the calls in that you decide are leads over a minimum of six months time, preferably a year.

Now you need to know the total cost of your advertising. Advertising is everything you do that puts your name in front of the buying public. There are a myriad of ways contractors advertise their services. Often I hear contractors say, “We don’t advertise, we work by referrals.” Then I see signs on their trucks, they hand out business cards, the crews wear company T-shirts, their company name is painted on all their tools and equipment. They have letterhead and envelopes with their company name and logo. Yup, they don’t advertise.

Divide the total advertising dollars spent by the number of leads that came in and you have your cost per lead.

Example: You have a company that did 31 jobs for a total of $389,529 in sales over the last 12 months. You had 124 calls in for estimates, or leads. You spent $13,750 on advertising. Dividing $13,640 by 124 we get a cost of $110 per lead.

How does that info help us? Try this. If we want to increase our sales this year to $500,000, how can we do it?

We know that we sold 31 jobs for a total of $389,529 in sales, resulting in an average job size of $12,565. Assuming our job size will remain unchanged, to reach $500,000 next year we need to sell 40 jobs ($500,000 / $12,565).

We know that we sold 31 jobs out of 124 leads last year, for a sales ratio of 1 in 4. To sell 40 jobs this year, we’ll need 160 leads, an increase of 36 leads.

160 leads x $110 = our new advertising budget of $17,600.

If we spend that amount of money, based on our company statistics, and we continue to sell 1 in 4 leads, we will hit our sales goal of $500,000.

Can we break this down farther, like for kitchens, bathrooms and such. Yes, it simply means that you must figure out how many leads you get for each type of work that you do, then do the same math as above.

There are any number of ways to figure or refigure this math, but the bottom line is to do it. If you don’t know what a lead is costing, then you will never know how much you need to spend to get the total sales in the door you need.

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