Advertising 101 (Part 4)

Okay, so now that we know who our customers are, what they are looking for, and what motivates them to respond to our advertisements, we’re almost ready to talk about the advertisements themselves.  But first we need to cover developing our advertising budget, and put in place some “rules” that make sure that we stay within our advertising budget.

Budgeting for advertising is probably one of the places where I see most agents go horribly wrong.  Either they spend way too much money on largely ineffective marketing or else, they don’t spend any money and then wonder why they have no business.  I’ve even seen people do both — first they spend tons of money on advertising that doesn’t produce results, and then they are broke and can’t afford to advertise at all.

budget calculationIn order to evaluate any advertising idea, you really only need to understand two concepts:  budget per lead, and cost per lead.  Once you know your budget per lead, you can then calculate the cost per lead for each idea and see which ideas fit into your budget, and then you use only those ideas.

Budget per lead.  The experts all tell us that we should allocate 20% of our gross commissions to advertising.  I say that number is way too high.  Nearly every other business you can think of operates on a 7-10% of gross revenue advertising budget, and there is no reason that a real estate practice can’t operate efficiently like other businesses.

The reason that most experts preach 20% is that they are also preaching some poor advertising ideas and in order for those bad ideas to work you have to spend a lot more money to produce business.  I say, there is an easier way:  Cut your budget and lose the bad marketing ideas.  That leaves an extra 10% or more in your own pocket.

Let’s use a budget of 10% of gross commissions and that will allow us room to grow and expand our practice.  When it is the size we want it, we can begin to slowly lower our budget to a lower number to maintain the level we want.  Ultimately you will probably have your marketing down to 5-7% of gross commissions, but for now let’s use 10% to be safe.

Next we need to convert that to a per-lead budget.  Here’s how we do it.  We take an average transaction amount and calculate the average commission side.  In my market, the average sale price is $162,828.  Yours is probably different.  But whatever it is, that’s your number.

Now we take the $162,828 and multiply it by 3% (that’s the average commission side in my market) and we get $4,885 average gross commission.  ($162,828 X 3% = $4,885)  The next step is calculating 10% of that average commission to get our budget per transaction.  In my market that would be $488.50.  ($4,885 X 10% = $488.50)

The final step is converting that to a per-lead budget.  If our budget per transaction is $488.50 we then need to figure out how many leads are needed for a single transaction and divide our budget per transaction by that number.  It’s really pretty simple.

Data from from two different sources — the National Association of Realtors® and an independent study by Corcoran Coaching — both put that national average number of leads per transaction at 24.  Your numbers might be better, but then they might be worse too.  About the best I’ve ever personally done is around 16 leads per transaction.  Eventually you will have your own numbers, but for now, let’s be conservative and use 24.

Here is the math.  We divide our per transaction budget of $488.50 by 24 and get a budget per lead of $20.35.  ($488.50 / 24 = $20.35)  That’s easy enough.  Now take a minute and do it for your own market.  Whatever that number turns out to be is your budget per lead.  You cannot do any advertising that costs more than that budget per lead.

You budget per lead needs to be a hard and fast rule.  A litmus test.   If any advertising idea costs more per lead than your budget you need to just say no.  I’m your friend, and friends don’t let friends make bad advertising choices.  Don’t do it.  Just say no.

Now in the next segment we are going to discuss calculating your cost per lead on any advertising idea.  You will be amazed at what some advertising costs when you calculate it on a per-lead basis.  But that’s next time.

Finally, I’d like you to check out my Ultimate Website.  It comes complete with the latest generation of lead capture technology, a client manager, and everything you need keep your advertising costs to a minimum.  You’ll be amazed at how much you get for so little.


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