How Much Should You Pay for a Lead? A Simple Formula for Contractors
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One of the most common questions business owners ask when considering a new source of leads is, “How much does each lead cost?”
It is an important question, but it is not necessarily the first question you should be asking.
A $25 lead can be expensive if almost none of those leads turn into paying customers. A $150 lead can be a bargain if the jobs you close from those leads routinely generate thousands of dollars in profit.
The better question is:
How much can my business afford to pay for a lead and still make money?
For a roofer, plumber, painter, cleaner, landscaper, restoration company, or other service area business, there is no universal number. Your acceptable cost per lead depends on what those leads are worth to your particular business.
Fortunately, you can calculate it.
Start With the Number That Really Matters: Customer Acquisition Cost
Cost per lead (CPL) tells you how much you spend to generate an inquiry.
Customer acquisition cost (CAC) tells you how much you spend to acquire an actual customer.
Those numbers are related, but they are not the same.
If you spend $2,000 on marketing and generate 20 leads, your cost per lead is:
$2,000 ÷ 20 = $100 per lead
If four of those leads become customers, your customer acquisition cost is:
$2,000 ÷ 4 = $500 per customer
That $500 number is much more useful when determining whether your marketing is profitable.
If the average customer produces $4,000 in gross profit, spending $500 to acquire that customer may be an excellent investment.
If the average customer produces only $400 in gross profit, you have a problem.
This is why comparing your CPL with another contractor's CPL does not tell you very much on its own. Two companies could pay exactly $100 per lead and have completely different results.
Your Close Rate Changes What a Lead Is Worth
Your close rate is one of the biggest factors in determining what you can afford to pay for a lead.
Consider two plumbing companies that each receive 20 leads.
Company A closes 20% of its leads:
- 20 leads
- 4 customers
- $100 cost per lead
- $2,000 total lead cost
- $500 customer acquisition cost
Company B closes 40% of its leads:
- 20 leads
- 8 customers
- $100 cost per lead
- $2,000 total lead cost
- $250 customer acquisition cost
The leads cost exactly the same.
Company B can potentially afford to pay considerably more per lead because it converts more of those opportunities into revenue.
This is an important distinction for contractors. When lead costs increase, the instinct is often to immediately blame the marketing source. Sometimes that is justified. But sometimes the larger opportunity is improving what happens after the lead arrives.
How quickly was the phone answered? Was the estimate scheduled? Did someone follow up on the estimate? Was the prospect contacted again if they did not respond?
Lead generation and lead conversion cannot be evaluated separately.
A Simple Formula for Determining Your Maximum Cost Per Lead
You can work backward from what a new customer is worth.
Start with these four numbers:
- Your average job revenue
- Your gross profit margin
- Your lead-to-customer close rate
- The percentage of gross profit you are willing to spend acquiring a customer
Then use this formula:
Maximum CPL = Average Job Revenue × Gross Profit Margin × Target Acquisition Percentage × Close Rate
Let's look at an example.
Suppose a painting contractor has:
- Average job revenue: $5,000
- Gross profit margin: 40%
- Close rate: 25%
- Maximum acquisition spend: 25% of gross profit
First calculate the gross profit from an average job:
$5,000 × 40% = $2,000
The contractor is willing to spend 25% of that gross profit to acquire the customer:
$2,000 × 25% = $500 maximum customer acquisition cost
The company closes one out of every four leads, so:
$500 × 25% = $125 maximum cost per lead
At those assumptions, the company could theoretically spend up to $125 per lead while staying within its target customer acquisition cost.
That does not mean the contractor should automatically be happy paying $125. Lower is obviously better when lead quality remains the same. It simply gives the business an economically meaningful benchmark instead of deciding that a lead “feels expensive.”
Don't Calculate It From Revenue Alone
One of the easiest mistakes to make is using revenue instead of profit.
Suppose you sell a $10,000 roofing job. That does not mean you have $10,000 available to pay for marketing.
Materials, labor, subcontractors, equipment, commissions, and other direct job expenses have to be paid first.
If that $10,000 job produces a 35% gross margin, gross profit is approximately $3,500.
Your acquisition budget should be based on the economics of the job, not simply the size of the customer's invoice.
Otherwise, a marketing campaign can look successful because it generates a lot of revenue while quietly producing very little profit.
Different Jobs Can Support Very Different Lead Costs
There is another reason a single company-wide CPL target can be misleading.
Not every lead is worth the same amount.
A plumber might receive inquiries for a small faucet repair, water heater replacement, sewer line replacement, and whole-home repiping. A landscaper might receive requests for lawn mowing, cleanup, hardscaping, and complete landscape installations.
The revenue and profit potential of those jobs can be dramatically different.
For example, suppose your company closes 25% of qualified leads and wants acquisition costs to remain below 20% of gross profit.
| Job Type | Avg. Revenue | Gross Margin | Gross Profit | Max. CAC | Approx. Max. CPL |
|---|---|---|---|---|---|
| Small repair | $500 | 40% | $200 | $40 | $10 |
| Mid-size project | $3,000 | 40% | $1,200 | $240 | $60 |
| Large project | $10,000 | 40% | $4,000 | $800 | $200 |
Suddenly, asking “What should a lead cost?” becomes much harder to answer.
For the same contractor, a $100 lead might be completely unacceptable for one service and highly profitable for another.
This is why lead quality and job type matter just as much as CPL.
Think About Lifetime Value, Too
For some home service businesses, the first job is only part of what a new customer is worth.
A homeowner who hires an HVAC company for the first time may later call for maintenance, repairs, or system replacement. A commercial cleaning customer might remain with the company for years. A plumber who does good work may become the homeowner's first call whenever another plumbing problem occurs.
They may also refer neighbors, friends, or family.
That is customer lifetime value.
You should be careful not to exaggerate lifetime value to justify poor marketing performance. Future revenue is never guaranteed. But if your records show that customers routinely hire you more than once, looking only at the value of the first transaction can undervalue your marketing.
A company that earns $800 in gross profit from the first job and another $2,000 in gross profit from repeat work has very different acquisition economics from a company where nearly every customer is a one-time transaction.
Lead Quality Has to Be Part of the Equation
A low CPL is not automatically good.
Suppose Marketing Source A produces 50 leads at $40 each. Marketing Source B produces 25 leads at $80 each.
At first glance, Source A looks much better.
But now look at what happens next.
If Source A produces five customers, the customer acquisition cost is $400.
If Source B produces ten customers, the customer acquisition cost is $200.
The supposedly expensive leads are actually producing customers for half the acquisition cost.
This is why contractors should evaluate marketing beyond the initial lead count.
For each source, track:
- Total marketing spend
- Number of leads
- Qualified leads
- Estimates or appointments
- Jobs sold
- Revenue from sold jobs
- Gross profit from sold jobs
- Cost per acquired customer
When possible, go one step further and track these numbers by service or job type.
You may discover that one channel produces fewer leads but substantially better customers.
Your Sales Process Can Increase What You Can Afford to Pay
There is another side to this calculation that often gets overlooked.
You do not have to lower your CPL to improve your marketing economics.
You can improve your close rate.
Go back to our painting contractor who can spend $500 to acquire a customer.
At a 20% close rate:
$500 × 20% = $100 maximum CPL
At a 30% close rate:
$500 × 30% = $150 maximum CPL
At a 40% close rate:
$500 × 40% = $200 maximum CPL
Nothing about the average job or profit margin changed. The company simply became better at converting opportunities into customers.
That is why seemingly small operational improvements can have such a large effect on marketing performance.
Answering calls quickly, returning missed calls, following up on estimates, improving reviews, training whoever answers the phone, and making it easier to schedule an appointment can all help you get more value from the leads you already have.
Before deciding you need cheaper leads, make sure you are doing everything possible with the leads you are already paying for.
What About Leads That Don't Turn Into Jobs Immediately?
Lead attribution is rarely perfect for a service business.
Someone might request an estimate today and hire you three weeks later. A homeowner may save your number and call again six months from now. A customer might refer a neighbor who becomes a much larger job.
This is another reason not to judge a campaign from a handful of leads or a few days of results.
Look at performance over a meaningful period and follow leads through the sales process.
A lead should not disappear from your reporting simply because it did not become a customer during the first phone call.
Build Your Own Lead Cost Calculator
You can calculate a reasonable CPL target with four numbers from your own business.
Write down:
1. Average job revenue:
How much does the average customer spend?
2. Gross profit margin:
After the direct cost of completing the work, what percentage remains?
3. Target acquisition percentage:
How much of your gross profit are you comfortable spending to acquire the customer?
4. Close rate:
What percentage of qualified leads actually become customers?
Then calculate:
Average Revenue × Gross Margin = Gross Profit per Customer
Gross Profit × Target Acquisition Percentage = Maximum CAC
Maximum CAC × Close Rate = Maximum CPL
Want to skip the math and see what this looks like for your business? Use our Double My Money Calculator to enter your average job revenue, profit margin, and win rate and see the maximum amount you can afford to pay per lead while working toward doubling your marketing investment.
Even better, run the calculation separately for your most important services.
You may find that your acceptable CPL is $40 for one type of job and $200 for another.
That information can completely change how you evaluate your marketing.
Stop Asking Whether a Lead Is Expensive
When a contractor tells me that a lead source is expensive, my next question is usually some version of, “What happens to those leads?”
Because cost alone does not tell us whether the marketing is working.
A lead that costs $150 and generates $1,500 in profit is more valuable than a $30 lead that goes nowhere.
Instead of asking:
“Is $100 too much for a lead?”
Ask:
“If I spend $100 on this lead, what is the probability that it turns into a customer, and how much profit does that customer produce?”
That is a question you can answer with your own numbers.
Start by pulling your last three to six months of leads. Calculate your close rate, average job value, gross margin, and customer acquisition cost. Then break the results down by marketing source and, if possible, by job type.
Once you know those numbers, you no longer have to guess what a lead should cost.
You know what a lead is worth to your business.
