If you can’t profitably generate leads for your service business, then you don’t really have a business.
People don’t know how much a new customer is worth to them.
How much does it cost you to get a new client? How much will a single client generate in new revenue dollars? Can you improve your return on investment (ROI)?
Second, let’s consider predictability.
Can you say, “if I invest $X.XX then I can reliably expect Y-number of leads”?
A good marketing strategy should utilize all the tools at your disposal (including your website) and produce predictable results. The problem is that those results are often not as profitable as they could be.
Because many service businesses haven’t taken the time t0 look at their metrics and make the needed calculations for a better ROI.
You need to gather some basic sales information to get started.
- The amount it cost to acquire new leads over the past year.
- How many leads you received and what percentage turned into paying clients.
- Amount of revenue generated by those customers.
- Retention rates for the past few years.
Once you have those numbers, you can use them to calculate your cost per customer.
How much are you willing to pay for a new lead?
You need to have a good idea how many leads it takes to generate one paying client. This can be done by tracking web form submissions, phone calls, or Pay Per Click results. Compare these numbers to the number of new clients acquired and you can figure out your conversion rate. Dividing the amount you spent on advertising dollars by the number of inquiries you received will give you the average cost of leads for your service business.
In order to really know how much you might be willing to pay for a new lead, you first need to calculate how much a new client is worth.
Cost of Getting Clients for Your Service Business
Let’s take a look at a simplified example. Company XYZ operates a carpet cleaning service. Over the course of a year, they take on 100 customers. Each customer generates a gross dollar amount of $200 per year. Each new customer cost the company $10 to acquire (their share of the advertising expense). This means that each new client will make the company $190.
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Customer Lifetime Value
The great thing is that most clients are worth even more if you have high retention rates. Let’s go back to the previous example.
Company XYZ has an average retention rate of 20% over the past five years. They can predict, based on data, that 20 of their 100 new clients will be repeat clients in the future. If that is the case, then the total revenue generated by those 100 new clients by the end of Year 2 is $23,000.
- $19,000 for Year 1 (100 clients x $190 profit after marketing costs)
- $200 x 20 clients for Year 2 (20% retention, no additional marketing costs)
We could (and should) incorporate average retention rates for 3 years, 4 years, etc. and extrapolate how much each client is worth over their lifetime, but we will keep this simple.
If we take the $23000 generated by Year 2 and divide it by the original number of clients (100), then we see that each new client is worth an average of $230. (Remember, we only took this out 2 years. In reality, they would be worth much more.)
For those of you who don’t want to do the math, you can plug the numbers into this CLV calculator.
Balancing Lead Costs Against Customer Value
We said earlier that each client cost Company XYZ $10 to acquire. How did we know that?
Based on past data, we determined that the company requires an average of 10 leads for every paying client. It cost them $1 per lead. Therefore, they can predict that they will spend $10 to receive one paying client.
Where is the break-even point?
That depends on their operating costs. By looking at their Income Statement, Company XYZ can calculate how much they must generate in revenue to reach an acceptable profit margin.
Then they must determine how many clients they would like to procure and how much they are willing to spend to get them.
Finding the Best Marketing Tools to Profitably Generate Leads
Most online marketing strategies involve a number of channels.
- Pay Per Click
- Content Marketing
- Search Engine Optimization
AdWords will cost more but often generate immediate results. SEO and content marketing require a smaller monetary investment but results can take months. Retargeting helps retain clients (think of that lifetime value we discussed earlier).
Knowing which channel will profitably generate leads for your service business may require the services of an online marketing professional. They can help you create a strategic marketing plan that fulfills your goals and gives you the best ROI.
Thomas Digital Design builds high-converting websites that profitably generate leads for your service business. We can also guide you on the most lucrative marketing channels for increasing your marketing ROI. Contact us for either a Free Mockup of your new website or a free marketing consultation.