Genuine lead generation takes time and costs money simply because a qualified lead often requires that the prospect express a desire to take action (e.g. talk to you). Going from a list of names (which may have cost something to acquire in the first place,) to a list of qualified sales leads, can be expensive and time consuming. At the very least, in order to find out if each person on the list has a need you have to call each of them and ask them, even if it only takes a few minutes apiece (although it could take hours.) And getting them to want to talk with a salesperson takes some persuasion, which requires some skill, and certainly a bit more time.
But it also has an opportunity cost, because if you ask your salespeople to do it, then they can’t do other things. What other things? The rest of the sales process, for example; as the more time the salesperson spends looking for new business, the less time he has for covering his bases and closing.
A study done at JV/M, LeadGen.com’s sister company and partner, examined five strategies that most companies in the B2B market employ to generate qualified sales leads, including advertising (which includes digital marketing,) direct mail, public relations, trade shows and telemarketing. Since all these strategies are employed to take the burden of lead generation off the salesperson (who would otherwise have to make cold calls, knock on doors, write letters, or go to networking events himself) we also studied what it cost when salespeople make their own appointments.
By the way, many of these strategies can work. And, in fact, there are entire industries dedicated to doing these jobs. The advertising business alone is a $60 billion industry, (although the B2B segment is a small fraction of that.) Likewise, direct mail, PR, trade shows and electronic marketing are also multi-billion dollar businesses – all designed to open the door for a sale. But the bottom line is that they almost all exist simply because the company can’t find enough salespeople who can generate their own leads.
And it’s truly startling how much money companies spend to generate leads. But let’s take an anecdotal view. As one of its core businesses, JV/M, provides B2B telemarketing, lead generation and executive appointment-setting services. So, several years ago we were asked by an advertising agency – an advertising agency! – to set up meetings with senior marketing executives at some of the top pharmaceutical companies in the country. (The exclamation point is intended to suggest that it is remarkable that an advertising agency would outsource their lead generation. After all, what do they do for a living? Isn’t advertising a form of marketing? Aren’t they supposed to be experts in creating awareness and interest? You would think that people who are experts at advertising would be able to get a couple of appointments, wouldn’t you? You would, however, be wrong.)
It seems that they had previously designed and implemented a direct mail program that didn’t quite work out. It had included an elaborate, complex CD-ROM with demos, presentations, and all sorts of collateral material on it; a multi-page, origami-type die cut brochure printed on expensive coated paper; a custom translucent envelope; a professionally written cover letter and a four-color response card. They bought a pre-scrubbed mailing list. And they put the piece together and mailed it out to get some appointments. After spending $38,000 they had a response rate of precisely zero.
Nothing. Nada. No leads. No appointments. Zip.
Why did they spend $38,000? They did it, of course, because they didn’t have anyone who knew how to make a simple phone call to get an appointment. Now, admittedly, getting an appointment with a senior marketing executive at one of the country’s leading pharmaceutical companies is no trivial task. But they simply didn’t have anyone who could do it. So, they spent $38,000 on direct mail. And failed. (They subsequently spent $5,000 with us, and got three great appointments, and a significant new piece of business.)
Another example: A law firm came to us to get appointments for a new service they were introducing. They initially decided to do telemarketing, but because they considered our $40/hour rate to be too expensive they decided to do it in-house. So, they hired someone (a relative, I believe,) to make the calls. They paid her $10 per hour. Cheap at twice the price, right? Well, they spent $7,000 over four months, and had but one lead, and that went nowhere. Now, no one would expect lawyers to know what they’re doing when it comes to sales and marketing, although they did have a consultant involved (to whom they paid another slug of money). But you would think that they’d figure out how to stop the program when it wasn’t working, and before it started eating into their margins.
The list of examples could go on forever. The IT companies that exhibit at trade shows, for upwards of $5,000 per show, and get no good leads. The printing companies that send out direct mail because they can and pray that they get one big job a year to pay for it. Or the manufacturers that give up 35% of their revenue to their distributors because they can’t get salespeople to make the calls. The point is, that companies in the B2B market spend an enormous amount of money generating leads because their salespeople can’t.
So, we did a study with about 20 companies to examine what they did to generate leads, how much they spent, and what their ultimate cost-per-appointment was. We focused on cost-per-appointment (for the initial appointment,) rather than cost-per lead for two reasons. First, the definition of a qualified lead differed between companies, and this provided a common result. Second, the salespeople and owners universally only cared about appointments, because to them that’s the only valid measure of the beginning of the sell-cycle.
Admittedly, we had to throw some of the data out (like the pharmaceutical example above,) because it made the results come out spectacularly bad (that is, if you spend $38,000 and get no appointments, your cost-per-lead is infinite). And we had to eliminate PR from the analysis because we couldn’t find any appointments that anyone could attribute to a PR effort. But what we found is shown in Figure 1.
The study, done way back in 2004, showed that trade advertising was the most expensive way to generate qualified leads (at $2,300 per-appointment,) followed, in order, by direct mail ($1,700,) trade shows ($1,500,) direct mail with a telemarketing follow-up ($1,200,) making salespeople generate their own leads ($870,) and then, finally, by telemarketing; with in-house ($345,) being more than twice the cost of outsourcing ($150).
The first conclusion, of course, was that there is an enormous difference in the cost-per-appointment depending on how it’s generated (holding quality equal.) The second conclusion was that telemarketing (i.e., cold calling) is, by far, the least expensive method available, whether it’s done in-house or outsourced. The third conclusion, which gets back to the previous footnote, is that cost-per-lead is a meaningless number; and that the only things should that matter are cost-per-appointment, cost-of-sales, revenues, and profit.
In reviewing the results, you may be surprised to see that inhouse telemarketing was not the least expensive option. Not only was it counterintuitive that paying employees $8-10/hour was more expensive than outsourcing at $40/hour (our billing rate at the time), but it turns out that even the almost $350/appointment result understated the true cost rather substantially. All the companies that contributed to this result have been unable to expand their in-house telemarketing operations beyond one or two people, even years later, because of difficulties with turnover and recruiting.
Another common situation was one described by an information services company that calculated that their cost-per-appointment using their in-house telemarketing operation was $470 per appointment, not counting their investment in capital equipment of over $200,000. That’s an enormous premium to pay to do it in-house, especially if it never gets amortized. It was also surprising that asking salespeople to make their own appointments was as expensive as it was, although most companies are accustomed to burying the cost in the salesperson’s salary. But if
you break out the time and the cost of generating new leads, and measure qualified appointments, it turns out to be an awfully expensive proposition. This holds even if you don’t include the opportunity cost (which we didn’t include.)
But the simple conclusion from the study was that, overall, lead generation costs a lot of money for virtually every company we examined. We also learned that cold calling is, by far, the least expensive option. (Remember that because we are measuring actual appointments that result from the effort, and not exposures, page views, clicks, pieces, events, or booth visits, we are comparing marketing mix methods on an apples-to-apples basis.) Some of the other data that came out of the study was also illustrative of the problem:
- A typical ad in a trade magazine costs about $5,000 to run two or three times. It might generate 50 inquiries, but almost all (>95%,) of them will be for information gathering purposes only (i.e., tire-kickers). Adding in the initial $20,000 cost to develop the ad, the cost per qualified lead tends to be about $1,500 for trade advertising, and often much more, if you can get an appointment at all. And, as a friend of ours has noted, you’re telling your competitor your sales pitch.
- Direct mail costs ran anywhere from one to ten dollars per piece, with an average of about $5. Response rates average about 0.5%, for a cost per lead of around $1,000. We found many small companies that regularly spend over $20,000 per year on direct mail and collateral material and get no appointments from it at all.
- Asking your salespeople to make cold calls is expensive, too. If you pay him a base of $50,000 and he spends 25% of his time prospecting, meeting with 20 good, new prospects per year, that comes out to $625 per lead. For most companies, the cost-per- lead from their field sales force is well over $1,000 if you use loaded salary and add in T&E and eliminate initial meetings where there was no interest.
- Trade shows are also expensive. Ignoring the initial cost of the booth, a trade show that costs minimally $2,500 to exhibit generates about five good leads, if they’re followed up at all; although studies show that over 95% actually aren’t followed up. (And shows costing $25,000 are not uncommon.) The qualified appointment rate will be a fraction of the five leads, for a cost-per-appointment well more than $1,000.
- Even in-house telemarketing is expensive. At the best company we know it costs $250 per appointment, and one company we know spent over $2,500 in-house to get one appointment. Inhouse telemarketing typically requires roughly $1,000 to recruit each qualified telemarketer, if not more, plus 10-15% of the manager’s time to train them. Turnover averages 300% in most small-to-mid-sized companies, making a $10/hour (plus benefits,) cost closer to $30/hour, plus the cost of data, scripting, marketing support and systems.
Overall, lead generation is enormously expensive. Industry statistics (from a 1995 study,) cite an average cost-per-lead of about $300 in the commercial market, and $250 in the industrial market. However, this doesn’t quite address the issue of the cost-per-appointment, which is quite a bit more expensive, usually by a factor of at least two or three. Nor does it account for inflation since 1995. Most smaller companies simply can’t afford to do it, so it is left to the owner to network himself or pay for promotion out of investment capital. Larger companies may be able to afford to pay for it out of revenues, but it is nonetheless terribly expensive.