If you're running lead generation ads, the ultimate goal is to ensure they're bringing in more revenue than they cost to run. But how can you tell if your ads are actually profitable?
The key lies in understanding the relationship between a few crucial metrics: Cost Per Lead (CPL), Sales Call Close Rate, and Average Customer Lifetime Value (CLV). Together, these factors provide a clear picture of how much you can afford to spend on acquiring leads and whether your ad campaigns are on track.
In this guide, we’ll break down how each metric contributes to your ad performance and offer some best practices to make this process easier and more efficient.
1. Cost Per Lead (CPL)
CPL is the amount you spend to acquire a single lead through your ad campaign. Knowing your CPL is foundational, as it helps determine if you’re spending the right amount to get each lead in the door. For instance, if your cost per lead is consistently higher than what you can afford, it's a clear sign your ad strategy may need adjusting.
For a deeper dive into how to calculate your ideal CPL, check out our free benchmark calculator.
2. Sales Call Close Rate
After acquiring leads, the next critical step is to convert those leads into paying customers. This is where your Sales Call Close Rate comes in. Essentially, this is the percentage of leads who go through the sales process and become customers. For example, if you convert 20 out of 100 leads, your close rate is 20%.
Understanding your close rate is essential, as it affects how many leads you actually need to generate from your ads. If you have a low close rate, you'll need more leads to meet your revenue goals, impacting how much you should budget for ads.
3. Average Customer Lifetime Value (CLV)
Finally, Average Customer Lifetime Value measures how much revenue you can expect from a single customer over the entire relationship.
CLV is crucial for determining if your lead generation ads are profitable in the long run. A high CLV indicates that each customer provides significant value, allowing you to spend more to acquire each lead.
To calculate CLV, consider not only the initial purchase value but also the likelihood of repeat purchases, cross-sells, and upsells over time. This metric gives a complete view of a customer’s worth, allowing you to set a target CPL that aligns with the total revenue they’re likely to generate.
Bringing It All Together: Determining Your Ideal Ad Spend
To evaluate if your ads are profitable, you’ll need to consider these three metrics together.
Here’s a quick example:
Suppose your average CPL is $50.
Your Sales Call Close Rate is 10% (so 1 in every 10 leads becomes a customer).
Your Average Customer Lifetime Value is $1,000.
Here’s how to calculate your profitability:
Calculate the Cost to Acquire a Customer (CAC): Divide your CPL by your close rate. In this example: $50 ÷ 10% = $500.
Compare CAC to CLV: If your CAC ($500) is lower than your CLV ($1,000), your ads are profitable! You’re making $500 in profit for every customer you acquire through ads.
Knowing these values helps you set your ideal CPL target. If, for instance, your actual CAC exceeds your CLV, you’ll need to either lower your CPL, improve your close rate, or boost CLV by offering more products or services.
The Importance of Conversion Tracking and Offline Conversions
For these calculations to work accurately, it’s essential to track conversions meticulously. Conversion tracking provides real-time feedback on how your ads are performing, showing which campaigns generate the most leads and sales. To get the full picture, you should also upload offline conversions — these are actions that take place outside of your online ad platform, like phone calls, in-store visits, or contract signings.
By uploading offline conversions, you can map the entire customer journey, even if the final sale happens offline. Without this, you might be undervaluing or even overestimating the effectiveness of your ads, potentially missing opportunities to refine your ad strategy.
Why Work with Experts?
All of these steps—from calculating your ideal CPL to tracking offline conversions—require precision and consistency.
Business owners and marketing directors are often too busy managing day-to-day operations to handle these data-heavy processes.
That’s where we come in. Our team has the expertise to set up comprehensive conversion tracking, calculate the right metrics, and provide insights that help you maximize your ad budget effectively.
For more guidance on determining your ideal cost per lead, visit our article on ad performance benchmarking and our free calculator.
To Wrap This Up...
By understanding and tracking your CPL, Sales Call Close Rate, and Customer Lifetime Value, you can set realistic ad spend limits and determine if your lead generation ads are profitable. When combined with accurate conversion tracking and offline data, these insights ensure your ad strategy is driving growth without draining resources.
Want to learn more about Good Growth?
We help implement marketing systems that generate more leads at a better cost. We're a lead generation PPC advertising agency specializing in Google Ads, LinkedIn Ads, and Meta Ads, and we fill pipelines with highly qualified leads, lower your cost per acquisition, and drive real business outcomes.
Book a discovery call below and find out if we're a good fit for your tiny home business.