An insurance agent asked this question several weeks ago and I thought you might benefit from my response.

This is what he asked.

A. Only direct lead-generation associated costs

B. Direct lead-generation associated costs + a burdened rate on the marketing side

C. Total marketing budget

Here was my response.

Hi John,

This may not handle your entire question, but any CPI (Cost Per Inquiry or CPL for Cost Per Lead) must first begin with an allowable CPS (Cost Per Sale).

The basic question you and the CFO must agree to is how much the average sale is worth to you and how much the company is willing to pay for a new contract or sale.

Ask this question: "Dear CFO. If I had 1000 new contracts I could sale to you, how much would you be willing to buy them for? Give me a good price. Because the more you can afford to pay for them, the greater number of contracts I will be able to sell to you beyond this initial 1000."

The ultimate number you need is exclusive of overhead, proposals, bad debt, commissions etc. So you need to take the CFOs answer and calculate your available budget for promotion only. That's the number marketers are looking for and is commonly referred to as the CPS.

Remember that paying commissions without the support of lead generation and advertising is the coward's way out for many companies.

What I mean by that is that many insurance companies let the distributors or straight commission sales people take all of the marketing risk and pay the agent after the sale is made. With lead generation, the company must now learn how to invest in the marketing piece by spending money before making the sale.

Some companies never manage to get beyond straight commission and end up with lower profits. They also abdicate their futures to sales people or distributors and loose control of their destiny.

Frankly, any company worth its salt should know what their allowable Cost Per Customer (CPC) is. That's an even more important number to agree upon than the CPS because the each customer represents the potential for multiple contracts or sales. But sadly, that is rarely the case. That's why marketing gets cut when times are rough. Company leaders sometimes do not see the marketing budget as a critical, long term investment.

The key to all of this is that you are quantifying success BEFORE you embark on any new business venture.

Now to the CPL. The CPL relies upon the allowable CPS and the projected conversion rate. For example, if you have an allowable CPS of $100 and your projected conversion rate is 10%, then your allowable CPL is $10 per lead. And so the formula goes. The trick is the balance the lead quality with the conversion rate.

If you get better quality leads that you can convert at 50%, then your allowable CPL increases to $50 per lead. But beware. It is possible to over qualify your leads by reducing your overall sales volume to come in below plan.

You would use a different allowable CPL for ALL media including the online, direct mail, Direct Response TV, outbound telemarketing and so forth. Why? Because the conversion rates vary dramatically from one medium to the next. The constant is the CPS and the CPC.

Bear in mind that you may not be able to convert a large number of your leads on the first pass. So plan repeat contact to maximize your conversion rate over a 12 month period (or longer/shorter depending upon the sales cycle for your product). You have paid $10 or more for each lead, so you need to get back your investment with a longer term contact strategy.

In BtoB, I have seen allowable CPL's of $1,500 or more. So instituting an effective CRM software program with ongoing training in its use will make a big difference in your program's success over the long term.

When you think about it, marketers should start all new business opportunities with this type of financial pro forma.

Once you know the CPL, CPS and or the CPC, then you can develop your marketing budget BEFORE even considering your offers or media strategy. If you need 5000 new contracts over the next 12 months, then your marketing budget should be 5000 X $100 CPS or $500,000. 

Hope this helps you.