Google Ads
What's a lead worth? Working out the cost per lead you can afford
Most service businesses set their target cost per lead far too low, then wonder why marketing never scales. Here's how to work out the real number.
Ask a business owner what they'd pay for a lead and you'll usually get a number pulled from the air. "Fifty bucks, maybe." Then a Google Ads campaign comes back at $120 a lead and gets switched off, even though it was making money.
The fix is to work the number out from the business, not from gut feel or an industry average.
The formula
You need three numbers:
- What a new client is worth. Use gross profit if you know it, revenue if you don't. For repeat or ongoing work, use what a typical client is worth over the first year or two, not just the first invoice.
- Your close rate. Out of every ten real enquiries, how many become paying clients?
- What share of that value you're happy to spend acquiring it. Somewhere between 10% and 30% is common. Higher if the client has strong repeat value.
Multiply them and you get your affordable cost per lead.
| Example | |
|---|---|
| Average client value | $8,000 |
| Close rate | 20% (1 in 5) |
| Revenue per enquiry | $1,600 |
| Spend 20% to acquire | $320 per lead |
That business could pay $320 per enquiry and still be spending only a fifth of the revenue it brings in. If it's been treating $80 as the ceiling, it's been switching off campaigns that work.
Why most businesses get this wrong
They don't know their close rate. Most owners have a feel for it but haven't counted. Even a rough tally over a month, enquiries in a spreadsheet and a tick next to the ones that signed, is far better than a guess.
They compare against the wrong leads. A referral costs nothing and closes at 60%. A search lead from a stranger closes lower. That doesn't make the search lead bad. It just has to be judged on its own close rate.
They chase cheap leads. It's easy to drive cost per lead down by loosening targeting and accepting worse enquiries. A $60 lead that closes at 5% costs $1,200 per client. A $200 lead that closes at 30% costs $667. The second campaign looks worse in a dashboard and makes more money.
What to do with the number
Once you know your affordable cost per lead, a few things get easier.
Budgeting. If you want ten more clients a month, close at 20% and can afford $320 a lead, you need 50 leads and about $16,000 a month. If search demand in your market can't produce 50 qualified leads, you know before you spend anything.
Choosing channels. Some searches are too expensive to buy at your number. Those become SEO targets. Others are affordable on Google Ads today. This is how we decide what goes into Google Ads and what goes into SEO.
Judging results. A campaign at $250 a lead isn't "expensive" if your number is $320. It's working. One at $90 isn't "cheap" if the leads never close.
Track it properly or none of this works
All of this depends on knowing what a lead is. If your tracking counts newsletter signups, duplicate form fires or ten-second phone calls as leads, your cost per lead is fiction and so is every decision built on it. We wrote about the most common problems in why your Google Ads conversions are probably wrong.
If you'd like a second pair of eyes on your numbers, that's exactly what the first strategy call is for.