“How should I value K-12Leads?” is a question clients in market research ask your editor when their license comes up for renewal. The real question is how they should cost and value any lead-generating activity – from doing it themselves, to outsourcing the funtion to some other firm. Accepting oversimplification for the purpose of illustration (and recognizing that the phrase “other things being equal” accompanies the assertions below), a simple financial model can help answer both questions.

Consider a hypothetical school improvement provider that trains teachers in the use of a proprietary curriculum and provides associated materials and services. Although bid and proposal support is supplied by the organization’s headquarters, the sales staff of five generates its own leads. The sales representatives and their associated travel expenses cost $500,000 annually. Their effort typically yields 30 new customers and $5 million dollars of new revenue each year. In the first year, the net profit of these contracts after sales, implementation and overhead cost, but before taxes, is $500,000. Annual revenues from these clients will average $5 million for another four years with the same net profit.

Our provider’s goal is to increase new sales by $1 million next year. Sticking with the current strategy, the firm would add another sales rep for $100,000. ($500,000 sales costs/$5 million in new revenues). Our marketing manager wants to see if market research can increase revenues at a lower cost.

The function of market research is to identify “qualified leads” - new ready, willing and able buyers - to hand off to sales reps or pursue directly from headquarters. The basic measures of market research performance are 1) the cost of a qualified lead and 2) the number generated. The number of qualified leads a firm requires depends on a) the sales goal and b) the probability that a qualified lead will result in a sale.

Our provider's sales goal is to add $1 million in new business. Most sales staffs’ develop “rules of thumb” on how many and what kinds of qualified leads in what funding stream will yield one sale. For example, when this writer ran a small investment fund focused on Comprehensive School Reform providers in the late 1990s, competing in the federal CSR Demonstration Program, the rule of thumb was between 8 and 12. The first amounts to a 12% probability that any one qualified lead will result in a sale (1 sale/8 qualified leads), the latter 8%.

Assume that a review of prior sales cycles and discussion with our provider's sales team suggests that on average 10 qualified leads result in one sale - a 10% probability (1 sale/10 leads). $5 million of new business requires 300 qualified leads, so $1 million of new client revenues will require 60 additional qualified leads.

To get the current cost of new qualified leads, assume our provider's review of the sales cycle indicates that the sales staff divides its time and budget roughly equally between finding/qualifying buyers, initial sales activities, and closing individual sales. The current cost of simply finding 300 qualified leads is roughly $170,000 per year or $650 per lead. Thought of in terms of a 210 day work year, each sales rep spends a little less than a day to find and qualify a lead. And every day spent looking for a lead is one not spent trying to close a sale.

Next : Valuing the Qualified Lead

More on K-12Leads here.