Let’s face it — we all know that much of what we spend our marketing dollars on is a complete waste of money. And what’s worse is our advertising amounts to the single biggest expense we have as agents — as much as 20% of GCI or gross commission income! That means if you gross $100,000 a year in commissions, you are likely spending up to $20,000 a year in advertising.
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With that much money being committed to marketing, spending it wisely is very important. But how can we know if an advertising or marketing idea is a good one? Simple. Any idea can be evaluated by knowing just two things. What are they? The first is your budget per lead. The second is your cost per lead. It’s really that simple. But that’s the problem — most agents never think about advertising in those terms. Budget and cost. Let’s look at them both.
Budget Per Lead. Budget per lead is how much you can afford to spend for each lead. Here’s how you can calculate it. First, you need the average sale price in your market. Let’s say, for example, that it’s $200,000. Next you need to know what the average commission side is (in percentage). Nationally, that number is 2.5% of the sale price, but your market may be different.
Now multiply those two numbers together. ($200,000 X 2.5% = $5,000). That gives you your average Gross Commission Income (GCI). Next, let’s calculate your advertising budget per closed deal. According to all our industry experts, you should budget 20% of GCI for advertising. That means that if your average GCI is $5,000 then your advertising budget should be $1,000. ($5,000 X 20% = $1,000) That’s per closed deal, not per lead.
Next we need to convert deals into leads. The best information available is that you should need 24 leads to close one deal. That’s a national average. Some agents are better than others, but until you know your own number, it’s a good place to start. So let’s do the conversion. Take the $1,000 budget per deal and divide it by 24 and you have your budget per lead. ($1,000 / 24 = $41.67) That’s the budget per lead.
See how easy that was? In other words, you shouldn’t spend any more than that budget for any one lead. I know that most advertising sales people say things like, “All you need to do is one transaction and it pays for itself.” Well, duh! You should return your advertising money a minimum of five times over. The idea is not to pay for the ad, but to get a 5:1 return on your advertising investment.
Cost Per Lead. Now that we know how to determine our budget per lead, we next need to compute our cost per lead. This is where most agents fail. So how do we calculate the cost per lead for any idea? It’s really not as difficult as you might imagine. You need three pieces of information: cash cost, time cost, and number of leads produced.
In fact, here is the formula: The total of Cash Cost (CC) and Time Cost (TC) divided by the Number of Leads Produced (NOL) equals your Cost Per Lead (CPL). See how easy that was? Now let’s look at each step, and then put the steps together.
Step 1. Cash Cost. For any idea there is a cash cost. Maybe a magazine ad is $500 for one issue. Or it might be post cards and postage that cost 40 cents per unit times 500 pieces for a total of $200. Or maybe it’s an open house where there is a classified ad cost of $50, and another $20 in balloons and refreshments for a cash cost of $70. Those costs are pretty straight forward and easy to calculate.
Step 2. Time Cost. This one is trickier, because we don’t naturally think in terms of our time costing us money. That’s why we are willing to waste untold hours in sales meetings and caravans. But there is a real hard cost in our time. How much do you plan to make this year? How many weeks do you plan to work? How many hours per day?
Let’s say your goal is to earn $100,000, and work 50 weeks. Your time is worth $2,000 per work week. If your plan calls for a 40 hour work week, then your time is worth $50 per hour. It’s not free. So that sales meeting just cost you $100. Now let’s apply this time cost to your advertising.
For every advertising idea there is a time cost. It might be minimal or it might be huge. Let’s look at a homes magazine ad. At first glance, you might not think there is a time cost, but if you’ve ever run a homes magazine ad, you know there is a first time investment of about 4 hours and an ongoing time cost of about 2 hours per ad. You have to change the houses, proof the ad, write the copy, re-proof the ad, and so on.
Two hours times your hourly rate is your time cost. Let’s look at floor duty. Let’s say you spend two half-days per month. That’s 8 hours at let’s say $50 per hour, or $400 in time cost. Making sense? You weren’t thinking about that were you?. Now sitting in model homes, holding open houses, walking neighborhoods, and many other labor intensive activities don’t look so attractive do they?
You need to think of time cost as if you were actually writing yourself a check for performing the service, because you are. That check might not be made out to you, but rather to your client or your broker, but make no mistake, you are writing a check to someone.
Step 3. Number of Leads Produced. Here is where you need to be brutally honest. The only one you’re cheating by exaggerating is you. How many leads will that idea really produce? I realize that you might actually have to try an idea before you can know for sure, but generally you can ask several other agents who have already tried the idea. Get a consensus. Your results won’t be much different than the average, or at least you shouldn’t plan for that. Hope for the best, but plan for the worst.
Now add your cash cost to your time cost. Next, divide that total by the number of leads the idea produced (or you can reasonably expect it to produce). Viola! Cost per lead. See how simple that was?
We decided to make to make it even easier by building an advertising calculator. All you have to do is fill in a few blanks and press a button and the calculator computes cost per lead and budget per lead and compares the two allowing you to make an instant decision. Now how cool is that?!