How Leads Affect Your Financial Model
In Sales & Marketing lingo, a lead is a person or business who is interested in a product or service you sell. Businesses can label prospective customers as leads based on many different criteria, the most familiar examples being when you click on an social media ad or provide your email to sign up for a free trial. Leads are important because they tell you if your marketing efforts are working and give you reliable data on who you should focus on selling to. If you define a lead as someone who signed up for your newsletter, you'll know if your marketing is working if you're getting newsletter signups, and your sales dollars are almost certainly better spent on trying to a acquire someone who has signed up for your newsletter versus someone who has not.
You can see why your definition of a lead is extremely important - if your definition of a lead does not adequately describe a potential customer, then you are focused on the wrong people.
Many business have multiple types of leads to further segment potential customers and prioritize who they should spend time and money acquiring. B2B companies with large contracts and long sales cycles (the avg. length of time between first contact and closed sale), generally have more types of leads, which we'll discuss in a moment. But first, here are the most common types of leads:
I hope you're starting to see why lead segmentation is so important, especially in B2B. Salespeople are expensive and it is of utmost importance that they spend their time selling to people who are most likely to buy. If you have a sales cycle that requires multiple sales meetings and large, consequential sales, misunderstanding a prospective customer's willingness to buy can be a very serious issue. You don't want to spend the time and money selling to someone only for the sale to fall apart.
Leads affect your financial model because they usually cost money to generate. Unless you've built a viral product that acquires tons of customers through word of mouth, you're going to have to spend money to market and promote your product. One way to calculate the effectiveness of your lead generation strategy is to use the metric, Cost-per-Lead (CPL). The formula for CPL is as follows:
Total Marketing Spend/Total Number of Leads generated
Your CPL can be a big driver of your overall customer acquisition cost (CAC), and is a metric many companies track closely. However, it has to be remembered that a high-CPL business can still be very profitable if they are able to make large and/or recurring sales off their expensive leads. This is why, while very important, CPL is not a "catch-all" metric - it must be weighed against the profitability of the prospective customer over the course of their relationship with your business.