Running a successful team doesn’t require you to lead generate… but it helps if you do.
Fast Value: CPL / CVR = CAC. The formula that lead generation companies don’t want you to know. Generating an ROI from a lead source is more about math than it is about sales skills. If the math doesn’t make sense, it will never generate a return for you.
In 2021, I almost went bankrupt for several different reasons…
… but the straw that nearly broke the camel’s back (my back) was a math problem I forgot to do.
I’m going to ask you to make me a promise…
You are going to use this math equation every time you think about spending money on leads. If the math doesn’t make sense, put the amex away.
I’m going to break down exactly how to do this.
To show you how important this is, I wanted to share a quick story…
I was talking to a team leader who invested $50k a month without doing this. After we did this equation, we realized if nothing changed, she was going to lose money. A lot of it. Yikes.
Okay… Let’s go through some definitions.
CPL = Cost per lead
- Depending on the source, this should be clear. But if it’s not, take the total spend for the month and divide that by the leads you get.
- Total Spend / Leads Generated = Cost per lead
CVR = Conversion Rate
- Total leads generated / Closed sales = Conversion Rate
- Pro-Tip: The CVR will change depending on how long of a time horizon you look at.
CAC = Customer Acquisition Cost
- This is the cost that it takes for you to do a deal (acquire a customer)
Here is the formula that may save you from going bankrupt.
CPL / CVR = CAC
Here is an example:
You’re buying Realtor.com leads for $250 per lead.
The conversion rate is 5%
Customer Acquisition Cost = $250 / 5% = $5,000
But that doesn’t tell you the whole story…
You’re running a team, which means your agent will need to convert the lead and get paid for doing their job.
Let’s say your average commission is $15,000 and your agent is on a 50% split.
That means you’re paying your agent $7,500 and you’re left with $7,500 in Gross Profit.
But you need to account for your CAC of $5,000.
So you make $2,500 on this deal. And this assumes you have no other costs associated with converting that lead. But for easy math, we’ll leave it as this.
So you invested $5,000 to make $2,500 in “profit”
This takes what could look like a 3X ROI and brings it to the reality that it’s 1.5X ROI.
Do math. Don’t lose money.