Lead-to-Customer Conversion Rate

What is Lead-to-Customer Conversion Rate?

The lead-to-customer conversion rate, also known as sales conversion rate or lead conversion rate, is the proportion of qualified leads of a company that result in actual sales. The metric is critical to evaluating the performance of a company’s sales funnel.

Note that in the lead-to-customer conversion rate, we use qualified leads instead of regular leads. A qualified lead is a prospective customer who already expressed their interest in purchasing a company’s product and already met a certain set of qualifications. It is logical to use qualified leads to calculate the lead-to-customer conversion rate because qualified leads are included in the penultimate stage of the lead lifecycle before the actual sales.

Understanding the Lead-to-Customer Conversion Rate

The lead-to-customer conversion rate is a critical metric that assesses how effectively a company converts its qualified leads into actual customers. The metric is typically used as a key performance indicator (KPI) of a company’s sales team. Many companies calculate the metric for each sales representative, as well as for the sales team as a whole.

Additionally, it can be used to compare the effectiveness of a company’s various marketing channels. The conversion rate is generally calculated on a weekly or monthly basis.

No universal benchmark for conversion rates is applicable to all companies. For example, a conversion rate of 5% can be a bad result for some companies, while for other companies, the same rate may be positive. Therefore, when evaluating lead-to-customer conversion rates, an analyst must pay attention to industry averages and the company’s past performance.

How to Calculate Lead-To-Customer Conversion Rate?

Lead-to-customer conversion rate is calculated as a ratio of the number of qualified leads that are converted to actual sales in a given period compared to the total number of qualified leads in a given period. Mathematically, it is expressed using the following formula:

Note that the calculation of the lead-to-customer conversion rate is not always as straightforward as it seems. The concept may have a high degree of flexibility. For example, some companies define conversion as a predetermined amount of time spent on a website or signup for its newsletter.

Therefore, before calculating the metric, a company must clearly define its own definition of conversion. This will ensure that a company tracks the desired events while external parties (e.g., investors) will understand the meaning of the calculations.

Practical Example

ABC Inc. is a SaaS company that develops accounting software. The company started its sales only last month. In the first month, ABC Inc. generated 50 qualified leads. Ten qualified leads from the original 50 leads resulted in actual sales (i.e., 10 qualified leads actually became subscribers).

The company’s management is looking to calculate its lead-to-customer conversion rate for the previous month. Using the formula above, the calculation can be done in the following manner:

In this instance, the company’s lead-to-conversion rate is 20%.

More Resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)® certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

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