What exactly is Lead Generation?

A clear introduction to the fuel that drives your sales pipeline

[Introduction]

I’ve been working in the lead generation industry for the past 12 years. I founded my company in 2007, and shortly thereafter we pivoted to launch our first lead generation service. Ever since, I’ve found it very difficult to explain to my friends, my family, our business partners (even some VCs) what exactly our business model is, why we invest so much in R&D and proprietary technology, and even more importantly: why some major corporations (leading consumer and B2B brands) have based 100% of their growth strategy on lead acquisition.

I will tell our story in another post. For now, this article is an attempt to explain the basics of a hardly known and often misunderstood, yet $22B arena in the US: the Lead Generation Industry.

Here’s what I’m going to cover in this article:

• What is a lead and what is lead nurturing?
• What are the 3 levels of quality for a lead?
• Which industries leverage online lead generation to feed their salesforces?
• How does the lead generation funnel work?
• Two simple formulas to compute Customer Acquisition Cost (CAC)
• The 2 ways to optimize CAC for lead generation

Ok, let’s do this.

1. What is a “lead”?

First things first. Searching online for some help, you may have come across various definitions for the term “lead”. Is an email address a lead? A meeting booked for your sales team? Someone who downloaded a White Paper?

Let’s be very clear: a lead is a PROSPECT, someone who explicitly showed interest in a product or a service. That’s right, explicitly. That is why this industry is all about the lead’s intent - the higher the better. Lead Generation is the process of connecting a consumer (usually online) expressing intent with a brand that is able to fill his/her need.

Because of that broad definition, leads can be found everywhere. Someone entering a retail store is a lead. A user visiting a brand website is a lead. My Grandma requesting a quote for her sunroom remodel project becomes a lead as soon as she hits the “Receive your Free Quote” button online... or calls the number she found in a magazine ad.

Yes, we all have been, likely are and surely will be leads.

Unfortunately, some leads are more equal than others (as Orwell would say). A consumer just beginning a buyer’s journey does not behave nor have the same value as another consumer willing to purchase a product or a service today. Leveraging sophisticated marketing techniques to qualify and grow that intent along the buyer journey is called Lead Nurturing.

You get the picture. A brand needs to precisely understand which stage of buyer’s journey that every lead is in to determine how, and more importantly when to interact with them with maximum efficiency (meaning impact, result, ROI).

2. The Gold in the River: High-Intent Leads

To put it simply, there are 3 levels of lead quality:

Cold leads (low-intent) are prospects passing by a store, glancing over momentarily, just before running away. Maybe they will give a second thought to the product they briefly gawked at, and come back to the store later. Another round of (re)marketing might help them remember, but not necessarily drive an action. The same goes with online website visitors - usually around 90% of all visitors leave a page without doing anything more than just reading the content… if you’re lucky.

Warm leads (mild-intent) are prospects who interact with the brand in some fashion: asking a question to a vendor in a retail store, subscribing to a newsletter, or starting a conversation with a chatbot. These leads are typically the one a brand will need to mature trough the process of lead nurturing. Still, not a lot of value here.

Hot leads (high-intent) are the prospects every sales-person is looking for - a real prospect, with a problem to solve, willing to buy within a reasonable timeframe (depending on each brands’ typical sales cycle duration). In online marketing, high intent leads are self qualified by the actions they make: inbound phone calls (also known as live transfers), requests through online forms (ex: quote requests) and “web call backs”, which are a mix of the previous (a user looking to get called backed enters his/her phone number into a simplified form).

Let’s keep in mind that even hot leads rapidly turn cold after a short period of time if the brand loses momentum. But, we’ll discuss this further in another post.

3. Which industries leverage online lead generation to feed their salesforce?

All businesses leverage marketing to increase their brand awareness, attract new customers and drive sales. Traditional offline marketing (Press, TV, Radio), and online marketing.

There are 3 (and 3 only) forms of commerce: Retail, eCommerce and Telesales. Retail is usually too far removed to leverage online lead generation. eCommerce firms consider a lead an email address to be nurtured through email (and sometimes text) sequences, but eCommerce customers rarely get contacted by sales reps (apart from customer support purposes).

There are 3 forms (and 3 only) of commerce: Retail, eCommerce and Telesales.

On the other hand businesses selling complex products or services, need to drive sales through inside sales or telesales processes, whether the goal is to close sales remotely or set in-person appointments. Here are examples of industries that rely on high-intent leads to feed their sales organizations: Home Improvement, Insurance, Financial Services, Auto, B2B, Careers, Emergency Services, Energy, Health & Fitness, Hobbies & Interest, Medical Care, Non Profit, Online & On-Campus Education, Personal Finance, Personal Services, Real Estate, Telecom, and the Travel Industry, to some extent.

Think about it. Would you buy solar panels off an eCommerce website? A complex B2B software? A specific and tailor-made insurance plan that fits your needs? A bathroom renovation? I bet you would rather speak to an expert prior to making your decision.

Even for categories that can be sold online (like Telecom, some Insurance products, or Online Education), users and brands find it easier, quicker and more effective to finalize the sale over the phone, or during an in-person meeting. Beyond the initial intent, the sales process and the customer experience are just as if not more important.

For the purpose of clarity, the remainder of this article and the following, “lead generation” or “online lead generation” will systematically refer to the process of generating high intent business opportunities for telesales-based companies.

Now that we know what is a lead, and how important intent is to driving quality sales, let’s leave the consumer’s point of view and switch to the brand’s perspective of the buyer’s journey.

4. Peeking behind the Lead Generation Curtain: How does it all work?

The slide seen above describes the underlying process of the lead generation. Billions of users can be found online. They spend ridiculous amounts of time on various channels - search engines, social networks, online newspapers, video platforms etc. Hundreds of interactions a day, everyday. Google for instance receives over 63,000 searches per second on any given day. There have never been more buyers openly signaling their intent. Digital era in general and online marketing in particular stand for a land of promises for those who look for new customers.

Google receives over 63,000 searches per second on any given day.

With numbers like this in mind, online marketing (both paid and organic) should be the ultimate watering hole for marketing teams, enabling them to turn users into high quality “leads on tap”, right?

Well, unfortunately reality is much more complex than this. Converting interested users into sales requires the optimization of 4 major components on a daily basis:

a) Traffic Generation: Attract users’ attention, capture online intent and generate clicks, views (video) and inbound calls (like in Google Adwords call-only campaigns).

b) Lead Capture: This part of the process mostly concerns landing page and online conversion - turning the visitor into a phone call or a filled-form.

Read our article on Dolead’s Blog about the 10 Best Tools for Lead Capture here: https://www.dolead.com/growth-hub/top-10-lead-capture-tools-for-generating-quality-leads

c) Lead Processing: This includes lead scoring, lead enrichment (automated), and compliance (log GDPR / TCPA user consent). Then, you must sync both the lead’s personal data (name, email, phone number) and the lead’s detail data (in the home improvement industry: number of windows, size of the roof for example, in the EDU space degree level, year graduated etc.) into one or many databases (CRM / automated call systems). From there, you must trigger the right sales process (call automation, route the lead to the right store / team etc.).

d) Sale Closing: All of these steps lead to finally talking with the prospect and eventually converting him/her into a sale.

Now, brands have two ways of developing their lead generation funnel. One is building a custom in-house lead generation machine, requiring the deep involvement from all departments of the company, Marketing to IT to Sales. Another is partnering with external lead vendors who already generate leads through their own marketing efforts.

Keep in mind that most top performing brands usually take a hybrid approach for benchmarking, arbitrage, volume and risk mitigation purposes.

5. From High-Intent Leads to High-Quality Leads

Intent is good. Intent is a prerequisite, but intent in and of itself is not sufficient. Final transformation into a sale is what matters in this industry. Say what you want, at the end of the day quality is king and, for a brand, quality means CAC - the Customer Acquisition Cost.

Every brand has a rationale behind their target Customer Acquisition Cost. Quite obviously, no one wants to be generating sales at loss. This rationale is usually fairly simple:

If a brand sells a product at an average Value of $1,000 (price for the product or service or lifetime value) and has an estimated average $700 Cost of goods sold (COGS: costs directly tied to the production of the product, including the cost of labor, materials, and manufacturing overhead), it basically makes $300 of Gross Margin per sale.

This is the maximum amount of money the brand can spend on marketing to acquire a sale. And to make a profit, Customer Acquisition Cost must be lower than the average Gross Margin per sale.

In lead generation CAC is King.

This is why marketing, finance and sales teams follow the numbers so closely when it comes to Customer Acquisition Cost. The CAC value is what makes the difference between being profitable and losing money, scaling a business or firing workforce, leading M&A rounds or being acquired and absorbed.

So, you may be asking yourself “How do I compute my CAC in real life?” There is a very simple formula to compute a brand’s Customer Acquisition Cost.

CAC = Total Marketing Cost / Number of sales.

You can compute this for the whole company or more granularly on a subset of your campaigns (some keywords, a specific audience, network, ad creative etc.). This is the beauty of it - a very powerful tool that can be used to deep dive into data sets to understand where quality comes from - and make business optimization decisions.

Another formula for computing CAC in the lead generation industry, using Price Per Lead ($PPL) and Sales Rate (%SR) is as follows:

CAC = Total Marketing Cost / Number of sales

<=> CAC = (#leads x $Price Per Lead) / (#leads x % Sales Rate)

<=> CAC = $PPL / %SR

In this brief demonstration, we start from what we already know, the formula to compute CAC. We replace Total marketing Cost by a second formula (number of high intent leads bought times the average price per each lead bought) and then we replace the Number of sales by a third formula (number of high intent leads bought times the average sales rate of the sales team). That way, we can easily get rid of #leads both to the numerator and the denominator, and we get another very simple, elegant way to compute CAC.

I need to tell you here that most brand’s marketing teams use Cost Per Lead ($CPL) as an equivalent of Price Per Lead. Cost and Price are the same concept, it just depends on how you look at things.

6. The 2 Levers to Optimize (i.e. Decrease) CAC

Every brand must optimize its Customer Acquisition Cost - or at least keep it under control while scaling the business. Marketers, Sales managers and lead buyers are all obsessed with this. And and rightfully so!

But when talking with these professionals, I’m often really surprised they don’t see it as clearly as they should that they have 2 (and only 2) levers to improve their CAC: Price Per Lead and Sales Rate.

CAC = $PPL / %SR

Lowering the PPL. When it comes to external lead buying, lowering the price a brand pays for a lead is very easy; it is just a matter of business negotiation. If you pay $10 a lead, and you could get a 20% rebate on the Price you pay, then you will decrease your CAC by 20% (assuming that the Sales Rate remains consistent over time).

But the problem here is that your lead vendor could either decide to sell its leads to another buyer, lower lead volumes or pause its marketing campaigns all together if they cannot lower their own Cost of Goods Sold (i.e. its own $PPL, the Price it pays to generate the leads).

The problem gets even bigger for internal lead buying. If the brand’s marketing team could lower their own PPL by 20%, why wouldn’t it have done so already?

Increasing the Sales Rate is the second option to decrease the CAC. Sales people will tell you how complex it is to generate and maintain high sales rates over time. It takes a lot of smart people, intensive testing, continuous salesforce training, processes, technology and luck!

Conclusion

Lead generation is a huge industry in the US with thousands of brands generating and/or buying leads to fuel their sales teams. All leads are not equal, and improving lead quality means measuring and optimizing your Customer Acquisition Cost. Such a process requires a lot of different skill sets, from online marketing to copy writing, data crunching to sales efficiency.

In my next post I will be introducing the key metrics of the lead generation funnel, how to monitor and use them as smart assets to improve quality, decrease CAC and drive better brand awareness. Stay tuned!