Obviously, in a perfect world, you'd love to be able to just name your lead price and sit back as leads fill your inbox every day, but that's not the reality.
This is because there is a finite number of clicks to be had for a given search query or demographic and unless you're in a niche where you have zero competitors, you're going to need to compete with other companies for these clicks.
If you're just trying to generate leads at as low of a cost as possible, you'll likely see barely any clicks or conversions, which means you're going to be leaving money on the table.
You see, your competition will have likely crunched the numbers and know what a lead is worth to their business and they'll be willing to bid higher than you, therefore taking the bulk of the clicks available.
However, If you know the maximum amount you can spend per lead and remain highly profitable, then this gives you more leeway to increase bids for certain keywords to compete more effectively with your competition and take a fair share of the clicks, thereby increasing conversions and sales.
So what's the formula for determining the maximum amount you can spend per lead and remain highly profitable?
First off, it's important to state that my goal is to always generate a 5-to-1 return on ad spend for a client with an ad campaign. This means that for every dollar they spend they make $5.
To determine how much you can pay per lead and still achieve a 5-to-1 ROAS, you need take your average customer lifetime value and sales conversion rate and work backwards.
Here's how it works
Let's say your average customer lifetime value is $7,000.
Now let's say your sales conversion rate is 20%, which means you need to speak with 5 leads before closing a sale on average.
So taking $7,000 and dividing it by 5 gives us $1,400 per lead, which would be our break-even point. If we spend more than that per lead then we're losing money on the campaign.
We want to do a lot better than break even, we want at least a 5 to 1 return on investment like I explained above.
So to get our target cost per lead for generating a 5 to 1 return on investment, we divide $1,400 by 5.
$1,400 / 5 = $280
If we want to make a 5 to 1 ROI with our campaign we can't spend more than $280 per lead in this example.