Generating significant numbers of new qualified leads is something upon which every marketer is focused. But are you really driving growth in sales pipeline and revenues if these leads are not being converted into new customers? Find out why your Lead to Customer Rate is so important, how to calculate it, how to interpret the results and how to benchmark your performance.
What is Lead to Customer Rate?
Lead to Customer Rate is a measure of the number of leads that result in a new customer. It reveals your ability to convert leads into a subscriber or a paying customer (i.e., your lead to conversion rate) and is a key indicator of the quality of the leads that you are generating, how well sales is aligned with marketing and your ability to nurture leads and generate sales velocity.
How you calculate your Lead to Customer rate depends upon what you consider to be a “conversion” and what you consider to be a qualified lead; two things that are largely driven by your business model. Publishers that need to increase their circulation or readership to grow advertising revenues may consider a lead converted if they subscribe (either free or paid) to their site or newsletter. Other companies may regard a lead as converted only when they get a credit card number or a signed contract.
Agreeing what constitutes a converted lead in your organisation’s vocabulary is important if everyone involved in the customer lifecycle is to understand what this metric signifies and how to interpret it in your context. Do note that Lead to Customer Rate is different from Lead Conversion Rate, which is the number of leads that result in a sale to either a new or existing customer.
Why is Lead to Customer Rate important?
Lead to Customer Rate is a metric that applies as equally to B2B as it does to B2C companies, regardless of their business or sales model and it’s one that should be on every marketing leader’s dashboard.
Lead to Customer Rate reveals several important data points that indicate the success of your business. For example, it indicates how good you are at pushing deals through the funnel, how well you are closing them, which channels produce the most revenues and which salespeople need more support.
Most importantly though, it allows you to work upwards through your sales funnel to understand how many new demos or free trials or subscribers or visitors or display ads are needed to increase revenue. You can then decide where to invest your marketing budget.
How to measure Lead to Customer Rate
You need to start with defining what constitutes a lead for your company. For some organisations it’s a new contact who signs up for a webinar or to download a white paper. In others, usually those with complex sales cycles, it is based on an account exhibiting qualified interest. However, the Lead to Customer Rate should be calculated based on qualified leads.
This is because the next decision you should make is the period over which you are measuring. Most companies take a monthly view – for example, leads marked as qualified that existed in the CRM at the end of January and new customers created in January.
There are three problems with this approach. First it assumes that a lead generated on the last day of January is as likely to convert as one generated on the 1st January. Secondly, it does not even out seasonality and it assumes each month has an equal number of trading days. And finally, it does not reflect the length of your typical sales cycle and so cannot help you to create forecasts that extend beyond your current pipeline.
It is therefore much more accurate to measure against your average sales cycle, but to carry out the calculations at least once a month. For even greater accuracy you should carry out the calculation for all the qualified leads in your funnel and sliced according to which marketing channel generated the lead.
Where do I get the data to calculate my Lead to Customer Rate?
Your CRM, if it is kept up to date, should be the source of data for where each lead is in its lifecycle. You’ll have noticed the caveat. However, many companies use different tools depending on who is measuring. Consequently, it’s not uncommon to see tools like Sherlock or Mixpanel being used to identify Product Qualified Leads without taking advantage of their integration into a CRM.
If this is the case in your company, you’ll need to build a way to normalise the data between the data sources into your reporting process.
You will need a report from your finance system that shows you all the new customer accounts created during the period for which you are calculating. I suggest this because customers need invoices, so it’s likely that your finance system will be up to date.
Use this report to update your CRM. What you want to end up with is a report that lists the leads with the status of “qualified” or that changed to “won” in the period you are analysing. This report should also list the channel that generated the lead.
How do I calculate my Lead to Customer Rate?
The simplest way to calculate your Lead to Customer Rate is to take all the leads in your CRM that are marked as “qualified” at the end of the month, add on the customers or customer accounts that were created during your average sales cycle and divide that number by the number of new customers or customer accounts that were generated.
So, let’s say that your typical sales cycle is six-weeks. If at the end of January, you have 1,200 open qualified leads in your CRM, and you have generated 100 new customers since the 14th of December, then your Lead to Customer Rate is (100 / (100+1200))*100 or 7.7%
Why are we adding back in the customers that were created? Because they were converted from qualified leads that existed during the period for which you are calculating. Leaving them out would show a higher Lead to Conversion Rate than you are getting.
The best way to do this, if you don’t have a dedicated metric reporting tool or an analytics application, is to use a Pivot table in Microsoft Excel or Google Sheets. This will make it easier to also calculate your Lead to Customer Rate based on the based on the marketing channel that generated the leads.
You should calculate your Lead to Customer rate at the end of each month for the preceding sales cycle (e.g. mid-January to end February, mid-February to end March etc.). This will allow you to create month-on-month – and eventually same month – comparisons.
How do I interpret Lead to Customer Rate?
Let’s stay with a sales cycle of six-weeks. What the calculation is showing you is that in a six-week period to the end of January your Lead to Customer Rate was x%. In the example above that’s 16.6%
Calculating your conversion rate each month allows you to spot trends both by marketing channel and at the macro level. If you see a decline in the convertibility of leads from a given channel, you’ll know to investigate what has changed. Equally, an increase in conversions could signal an opportunity to increase investment in that channel.
The Lead to Customer Rate is also a good indicator of how well you are generating sales-ready leads. A strong, or better still, growing overall Lead to Customer Rate shows that sales are engaged with your campaigns and accepting and following up leads. If you are operating a self-service sales model, it shows that you are optimising your conversion rate through your funnel.
You can slice and dice the data even further to achieve more granularity, for example, to show Lead to Customer Rates for sales territories or salespeople or industry verticals. Declines in the rate could indicate a need to provide extra support. Increases in the conversion rate may reveal best-practices that can be used to educate the rest of the sales group or inform other marketing tactics.
If the product marketing team is responsible for new business, common in high-volume businesses, then changes in the Lead To Customer Rate help to reveal changes in the Product : Market fit. It may also show up challenges that exist in converting trial registrations into Product Qualified Leads or in upgrading customers in Freemium models.
What Lead to Customer Rate benchmarks should I use?
You may be able to find industry data online, such as this anecdotal report from Marketing Sherpa or by purchasing reports from market analysts, but you should bear in mind that there are no accurate universal benchmarks for Lead to Customer Rates.
This is because of the variances that can exist between companies even in the same industry. Some of the variances are due to different business models. This means that disruptor business moving into an established market or industry with a new model really can’t expect to draw much insight from what their established competitors are achieving. Also, as stated above, definitions of a qualified lead vary from company to company, as do lengths of sales cycles.
If you can find data from similar competitors in your market, your best approach is to regard this as nothing more than a range of rates. If your performance puts you in the middle to top of the range, you can be sure that you are doing well. Also, you could look the growth rate in your market and try to align improvements in your lead to conversion rate so that you are at least growing as fast as your market.
What other metrics should I look at when evaluating Lead to Customer Rate?
When you are evaluating your Lead to Customer Rate you should also look at your Sales Velocity number since the two are closely related. You also want to be looking closely at changes in your sales pipeline and your marketing funnel (volumes and values especially) since declines at the top of these here will materialise as reduced conversions further down.
If you are running a SaaS business, then Activation Rate should form part of your analysis. You’ll often find that changes here are reflected a few weeks later in your conversion metrics. Finally, I’d recommend that you look at Product Qualified Leads and Trial and Demo to Customer conversion rates.
Lead to Customer Rate is one of the most informative metrics that a marketer should monitor. It’s certainly one of the key metrics to present to your board or your C-suite since it directly tells a tale of growth.
For a marketer it provides insight into the effectiveness of marketing campaigns, sales alignment and product : market fit and can help to guide investment decisions. Month-on-month changes can also provide insights into sales performance and opportunities to support where things are not going well, or to create best practices where they are.
Comparisons with competitor Lead to Conversion Rates are tenuous at best but they, and market growth figures, can give you a range of numbers to beat.