Measuring the effectiveness of sales and marketing is tricky and can be misleading if you measure the wrong the actions.

Take a moment to stop and reflect on your marketing and sales budgets. Now multiply that figure by the number of years you have been in business and expect to be in business. The number should seem frighteningly large.

What’s stopping you from tracking even a portion of the budget? How much do really know about the process and costs behind your sales and marketing programs?

Lead generation

How does one measure the cost of a referral versus the cost of a broad-based advertising campaign?

Lead generation programs are often established without first understanding the metrics by which they will be measured and graded against. In most cases with middle-market and small businesses, they are never measured. Surprising, but true.

Many companies are not prepared to measure and attribute leads. They may lack the understanding, time, resources, tools or event the political fortitude to hold the sales and marketing departments accountable.  And there are so many factors at play that it can be overwhelming to establish metrics at all.

As leaders, we want to make sure our people are held accountable but only if we are sure we have done our job to ensure they can be held accountable. It’s not an easy question to honestly answer.

Have you done your job as a leader to ensure these departments can be measured?

The opportunity cost of leads

We’ve seen statistics represented by sales organizations which state that upwards of 80 percent of all salespeople in small businesses fail to live up their hiring goals. How many sales agents have you experienced that meet this shortfall?

In your mental calculations from just a moment ago, did you add in the cost of failure and lost opportunities? Probably not. Yet, these are examples of the many variables used to calculate the true cost of leads.

Did the sales staff fail because they were bad at their jobs or because they didn’t have a reasonable chance in the first place? The Ephor Group says “putting a direct salesperson in front of a prospect with less than a 33% probability of buying is not cost-effective and will lead to failure.” While I may have misgivings about the exactitude of the number resulting from their research, I appreciate the underlying point that the cost of lead generation is more complicated than it might first appear.

Start small

Don’t despair; there is good news.  Lead generation and attribution does not need to be a frightening or hopeless matter. You can start small and work through the cost factors of your lead generation.

Start by framing the types of lead generation and sales vehicles in your organization. Here are a few of the traditional ones we see in most companies:

Since these efforts are often done in concert, you’ll find it more accurate to perform a combined analysis. Start by picking one item from each category which compliment one other.

A case in point

If you market and sell via your website, for example, you might choose Search Engine Marketing and Online Sales. In this case, begin by gathering the cost of your search engine optimization (SEO) and/or pay-per-click (PPC) initiatives.

For the cost of organic website optimization, you will need to factor the compounding effects of the program from its inception. Include the proportionate cost of time from the total compensation for employees if the program has been run from within the organization. If the work is done outside the organization, include the total external cost.

For the cost of paid placement, use the total cost of all media or ad works spent. If you need to start simple, use only the expenses and labor cost (design, writing, management, reporting, etc.) from the past 12 months. Add the hard cost and labor cost together.

Now divide by the revenue generated from online sales.

When calculating your cost per lead, it’s best to look at it at a cost per dollar invested. This allows you to factor for the human element as that cost is often factored on the time or hours spent in sales processes. The division of these two numbers will give you a cost per lead in gross margins.

If you spent $25,000 in SEO time with internal staff writing search-focused content, optimizing the site for organic keyword phrases, and/or testing online engagement forms plus you spent $25,000 in paid ad words or banner ads to drive traffic to your store or shopping cart, you can combine those two numbers and divide by the number of sales generated.

Lets say you generated $500,000 in sales, then $50,000 divided by $500,000 equals $10 per-dollar-invested in sales leads.

This is not a perfectly clean example as you should include the cost of the website development and fees associated with the site such as hosting or SSL certificates for the shopping cart, amortized over the life of the site and proportionally added to the cost of the lead before division.

You can substitute the cost of online sales (if you don’t have a shopping cart online) with the time spent fielding the leads coming through the website. This includes all time spent screening the leads, qualifying the lead, estimating the business and closing the business.  Plus any cost associated with materials (brochures video, etc) used in the closing process.

Monitor your investment

If all this seems too much and overly complicated, just remember what that sales and marketing budget total was when you started reading this post.

Sales and marketing are investments. And like all investments they should be monitored if you want to calculate your return on the investment. So, don’t be afraid to try. Ensure you’re measuring the right things, in the right manner.

What is your most effective sales and marketing channel?

(If you’re not sure how to accurately measure the effectiveness your organization’s marketing and sales programs, we may be able to help. Get in touch.)