Simple metrics: LTV, CPA, CPL

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ccontractor dynamicsJoseph Hughes has written in contractordynamics.com perhaps one of the simplest and easiest-to-understand explanation of basic metrics for architectural, engineering and construction marketing.

He says, at the foundation, you need to be able to know three things: The lifetime value of each client (LTV), your cost per acquisition (CPA) of each client and, finally, your cost per lead (CPL). With this information, you can make informed decisions and set realistic marketing budgets.

The LTV represents the overall net profit you can reasonably expect from your new client, over time, on average, representing the profit for individual transactions multiplied by the number of transactions.

The CPA reflects how much you would be willing to invest to obtain this life-time value. Obviously, if the LTV is high, you should be prepared to invest more. (Say, you can expect $100,000 in profit from each new client, $20,000 might be a reasonable amount to budget.)

Finally, CPL infers your lead conversion rate, so you know how much each individual lead is worth. Assuming, for example, you convert one in five leads, you might find it quite reasonable to spend $4,000 per lead.

These numbers may help you reduce your sticker shock when spending marketing dollars and allow you to set realistic expectations.

Consider, for example, our magazine Ottawa Renovates, which has a page rate of about $2,000. Renovations can be $50,000, $150,000 or more, and a well-run renovation company would expect at least a minimum of 10 to 15 per cent net profit (after all expenses, including management salaries) for the work. So a $100,000 renovation project might generate $15,000 (and you may have repeat business as well, which would add to the LTV).

Assuming you convert one in five leads, you would then have a cost per lead of $3,000. This means, if you pay $2,000 for the ad, and one person calls — but doesn’t buy anything, you are still within your norms. (I realize you might want set a lower cost per lead, but even at a 50 per cent level, you would still be within range with just one or two calls.)

These numbers explain why our magazine is viable and successful. Enough contractors know their cost per lead, conversion rates and the like to know that over time they will sell enough renovation projects to pay for their advertising. They repeat. Larger contractors purchase four or five pages of advertising because the specialized media makes sense for their business.

But if you didn’t have this information available, you might see things from a different perspective. “I blew $2,000 on an ad, and got just one call, and they were tire-kickers,” you might say. Worse, you might get no calls. You might need to spend $5,000 to $10,000 for a single converting lead — but if you could scale these numbers reliably, you would have a consistently profitable business, regardless of the marketing cost.

The trouble with these concepts is (a) the patience you need for success and (b) the small sample size, making conventional statistical analysis difficult if not impossible. How do you know you are throwing your money away, or simply need to give the marketing some more time to achieve results?  I wish I had a simple answer to these questions.

Obviously, there are examples of lower-hanging fruit. Systematized referral and relevant association,speaking and community service opportunities can provide measurable pay-back quite quickly, and rather inexpensively. If your business/practice operates in the RFP/bidding space, you can set out reasonable go/no go criteria, and when it is a go, spend the time, money and resources to produce truly impressive and well-thought presentations (often with a preparation cost of $10,000 or more.)

Nevertheless, a metrics-focused look at your LTV (lifetime value), CPA (cost per acquisition) and CPL (cost per lead) can provide you with worthy benchmarks for your marketing budgets and allow you to set realistic and attainable goals.

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