Lead Generation

What is lead generation?

Lead generation (German Gewinnung von Interessenten) denotes the systematic creation of contacts with potential customers who match the target customer profile and have shown a demonstrable interest in the offering. Such a contact is called a lead. It passes through defined qualification stages, is handed over to sales from a certain stage and, if successful, becomes a concrete sales opportunity.

Lead generation forms the first stages of the sales funnel, the staged model from first contact to closing, and links marketing and sales. It covers channels through which prospects get in touch themselves (inbound) as well as active outreach by the company (outbound). In funding rounds, the main question is whether the inflow of prospects can be increased predictably with additional budget. In due diligence, in which investors or buyers examine the company before signing a contract, it is also checked whether contact data and consents were obtained lawfully.

Qualification stages

Lead generation becomes steerable only with clearly defined stages whose transitions depend on verifiable events. The following division is common:

• Lead: a contact with name, company and a first interaction, such as an enquiry or registration for an event.
• Marketing qualified lead (MQL): the company matches the ideal customer profile, the description of the customer companies that fit best economically, and the person has shown an interest that goes beyond a one-off interaction.
• Sales qualified lead (SQL): sales has confirmed need, decision-making authority, budget range and timeframe in a conversation.
• Sales opportunity: the same contact, as soon as it is entered in the CRM, the system in which contacts and sales opportunities are managed, as a concrete purchase project with estimated order value and expected closing date. It is the recorded sales qualified lead, not a further check. From here on the contact counts towards the sales pipeline.

Many companies additionally rate leads with a points system (lead scoring) that weights profile fit and behaviour. It does not replace qualification in conversation but determines which contacts are handled first.

Channels and their characteristics

• Expert content and search engines: specialist articles, own analyses, webinars. Building this usually takes several months; afterwards the cost per lead falls.
• Paid advertising: immediately measurable and controllable. Costs rise with competition for the same search terms and target groups, and the inflow ends with the budget. The metric usual in online retail, return on ad spend (ROAS), revenue per euro of advertising spend, helps little in business-to-business sales because months often lie between click and contract. More meaningful are the cost per qualified lead and per customer.
• Events and trade fairs: personal contact with many target companies, but high individual costs and an effect that is hard to attribute.
• Referrals and partners: often the highest closing rates, but only limited predictability. Partner channels need demonstrated customer benefit and long ramp-up periods.
• Active outreach: plannable in volume, labour-intensive and tightly limited by law.

Legal framework in Germany

Lead generation touches two areas of law: fair trading law for the question of how a contact may be advertised to, and data protection law for the question of whether its data may be processed. The German Act against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb, UWG) also protects businesses as recipients of advertising, and the General Data Protection Regulation (GDPR, in German DSGVO) applies because the contact persons are natural persons.

Consent to advertising

Advertising by e-mail is, under Section 7(2) UWG, in principle permissible only with the recipient's prior express consent, towards consumers as well as towards businesses. Consent must be given voluntarily, for the specific case and with knowledge of the facts, that is, knowing which company may advertise for what. The advertiser must be able to prove it. The double opt-in procedure is therefore widespread, in which registration is confirmed via a confirmation link sent to the address given and logged.

Anyone who offers a specialist document for download does not thereby obtain consent to further advertising. This requires a separate, clearly worded declaration. If the download is made dependent on this declaration, it must be examined under Article 7(4) GDPR whether the consent is still voluntary; the assessment of such tying arrangements is not uniform.

Without consent, only existing customers may be advertised to by e-mail, and only under the narrow conditions of Section 7(3) UWG. The customer must have provided the address themselves in connection with a sale, and only own similar offerings may be advertised. In addition, the customer must not have objected and must be informed of the right to object when the address is collected and each time it is used.

A graduated standard applies to follow-up by telephone. Towards consumers, prior express consent is required; towards businesses, at least presumed consent, for which concrete circumstances must indicate an interest in a call specifically. Whether the download of a specialist document suffices depends on the individual case; an expressly requested call-back creates a clear basis.

Data protection

Every processing of contact data needs a legal basis under Article 6(1) GDPR. In lead generation, consent (point (a)) and legitimate interests (point (f)) are the main candidates. If a person enquires in their own name, for example as a sole trader, pre-contractual measures (point (b)) can also be the basis. Legitimate interests require a balancing between the interests of the company and those of the data subject. Because of the accountability obligation under Article 5(2) GDPR, this should be documented.

On collection, information on purpose, legal basis and storage period must be provided under Article 13 GDPR. If the data come from other sources, such as purchased lists or public directories, Article 14 GDPR applies. The information must then be provided within one month, for data used for making contact at the latest with the first communication. For cookies and comparable access to end devices, for example to measure campaigns, Section 25 of the German Telecommunications Digital Services Data Protection Act (Telekommunikation-Digitale-Dienste-Datenschutz-Gesetz, TDDDG) also applies. Under it, consent is in principle required if the access is not strictly necessary for the requested service.

Infringements of the UWG can be the subject of warning letters from competitors and associations, and the recipients of the advertising can demand cessation under general civil law. Infringements of the GDPR can be sanctioned by the supervisory authorities with fines. Which legal basis supports a specific campaign depends on data source, channel and content and belongs in a legal review before launch.

Worked example

A software provider has an annual contract value of EUR 12,000 and a gross margin of 80%, that is, the share of revenue that remains after the direct costs of the service. It wants to earn back the customer acquisition cost (CAC) within twelve months, measured as the CAC payback period. Sales costs per new customer are EUR 4,800. The following conversion rates are known from the last twelve months: lead to MQL 30%, MQL to SQL 40%, SQL to customer 25%.

• Gross profit per customer and month: EUR 12,000 divided by 12 = EUR 1,000; EUR 1,000 × 80% = EUR 800
• Permissible acquisition cost per customer: EUR 800 × 12 months = EUR 9,600
• Of which available for marketing: EUR 9,600 minus EUR 4,800 sales costs = EUR 4,800
• Conversion from lead to customer: 30% × 40% × 25% = 3%, that is, around 33 leads per customer
• Permissible cost per lead: EUR 4,800 × 3% = EUR 144
• Permissible cost per SQL: EUR 4,800 × 25% = EUR 1,200

The comparison of two channels shows why the cost per lead alone is not sufficient:

• Webinars: 200 leads for EUR 24,000 = EUR 120 per lead; at 3% conversion 6 new customers; EUR 24,000 divided by 6 = EUR 4,000 marketing cost per customer
• Paid advertising: 600 leads for EUR 30,000 = EUR 50 per lead; at 0.5% conversion 3 new customers; EUR 30,000 divided by 3 = EUR 10,000 per customer

The channel that is cheaper per lead is the more expensive per customer. At EUR 10,000, a customer there costs more than twice the permissible EUR 4,800, while the webinars stay within the limit at EUR 4,000. Steering is therefore based on cost per customer and channel, not on cost per lead.

Lead metrics in funding rounds and due diligence

Investors ask less about the number of leads than about their repeatability. Expected are stable conversion rates over several quarters, at least two channels with viable cost per customer and a comprehensible explanation of how the inflow can be increased with additional budget. If new business depends on a single channel or on the founders' personal network, this is regarded as a planning risk.

In due diligence, lead numbers, conversion rates and marketing spend per channel are reconciled with the CRM and the accounts. The legal review covers the origin of the contact data, the evidence of consents and the data protection notices. A distribution list whose consents are not documented is only of limited use to investors and acquirers.

Distinctions from related terms

• Outbound: active outreach by the company and thus one of several routes of lead generation.
• Sales funnel: depicts the whole path from lead to closing. Lead generation concerns its first stages.
• Demand generation: building awareness and demand in the target market without immediately collecting contact data. It creates the precondition for later campaigns to generate leads.
• Customer acquisition cost (CAC): covers all marketing and sales costs up to closing. The cost per lead is only a part of it.

Common mistakes

• Volume instead of profile fit. Leads outside the target profile tie up sales time, lower the closing rate and lead more often to cancellations.
• No measurement per channel. A total budget without attribution of results to channels cannot be steered.
• Unclear handover to sales. Without fixed criteria for MQL and SQL, sales receives immature contacts, loses trust in the source and stops working on it.
• Consent assumed. A business card, a download or a connection in a professional network does not replace consent to advertising e-mails.
• Only the first touchpoint counted. With several touches before purchase, attribution to the first contact distorts the budget decision in favour of channels that act early in the process.

Frequently asked questions

What is the difference between MQL and SQL?

An MQL meets the criteria of marketing, that is, profile fit and demonstrable interest. An SQL has been confirmed by sales in conversation: need, decision-making authority, budget range and timeframe are clarified.

How much may a lead cost?

As much as the permissible marketing cost per customer multiplied by the conversion rate from lead to customer gives. The permissible cost per customer follows from the monthly gross profit and the targeted payback period.

May contacts from a download be advertised to by e-mail?

Only with a separate, provable consent to advertising. The download itself is not consent. For existing customers, the narrow exception of Section 7(3) UWG applies.

Is buying address lists permissible?

Acquisition is not prohibited in principle, but use is heavily restricted. For advertising e-mails, consent towards the advertising company is generally lacking; consent that a list provider has obtained for an indeterminate number of partners is regularly not sufficient. In addition, the data subjects must be informed under Article 14 GDPR about the origin and purpose of the data.

Which lead generation metrics do investors expect?

Leads, conversion rates and costs per stage, separated by channel and over at least twelve months. In addition there is the reconciliation to the acquisition cost per customer and its payback.

The Roemer Capital view

In preparing a funding round, Roemer Capital has the lead sources per channel provided over at least twelve months and calculates them through to the new customer. If the marketing budget is to be multiplied with the new capital, Roemer Capital checks whether the planning takes rising costs per lead into account. Additional reach in the same channel generally becomes more expensive.

Whether consents, data protection notices and channels stand up legally is clarified by the company's law firm. Roemer Capital makes sure that the evidence is in order before the process starts and can be placed in the data room. In this way an investor's legal review does not delay the timetable of the round.