Advertising 101 (Part 5)

In the last part we covered developing your advertising budget and then translating it to a budget per lead.  Now I’ll show you how to calculate your cost per lead.  After you have your budget per lead and your cost per lead, it is easy to see which ideas are good and which ones are… well, not so good.

Cost per lead.  When I teach this in a classroom setting, I am often amazed at just how many smart and experienced agents totally miss this concept.  Funny thing is that it is really very simple, but we’ve all been taught only part of the cost equation.

costWhen calculating the cost of any advertising idea, you must take into account both the hard costs and the soft costs.   The hard costs are the out-of-pocket dollar costs.  The soft costs are the hours spent planning and implementing the idea.  And all advertising ideas have both types of costs.  Let me give you an example of what I mean.

Let’s say you decide to do an open house.  Some of the hard costs might be the cost of purchasing a classified ad in the local newspaper, the purchase of some balloons and streamers, a few disposable directionals, an open house sign, and some refreshments.

But there are also soft costs associated with putting on the open house.  You have the time spent writing and placing your classified ad, the time putting up directionals and yard signs, the time shopping for the refreshments, the time setting up balloons, streamers, and refreshments and getting everything ready.

Then, of course, you have the time of the actual open house and the time of the teardown and cleanup when it is over.  When you add it all up, that four hour open house takes six hours.  And that time is all a soft cost.  How much?  That depends.

Let’s say you plan on making $100,000 this year doing real estate.  Let’s also say that you plan to take a couple of weeks off and you plan on working forty-hours a week.  Here is the math: Your income of $100,000 divided by 50 weeks, then divided again by 40 hours per week and you have a value for your time of $50 per hour.

If you don’t count that as being a legitimate cost, you are only stealing from yourself.  Soft costs need to be counted when you are evaluating your cost per lead.  Now let’s finish calculating the cost of that “free” open house.   Six hours at $50 is $300 in soft costs.  Add to it $100 in hard costs when you add up the directionals, balloons, streamers, refreshments, and the classified ad and you have a cost of $400 for your free open house.

Now that we know the total cost of the advertising idea — both hard costs and soft costs — we can finish calculating cost per lead.  We just need one more piece of information: the number of leads produced by the advertising idea.  In our open house example, let’s say that we had six visitors who came to the open house and signed the guest register.

The total cost of the open house was $400 and we got 6 leads.  Do the math: ($400 / 6 = $66.67 per lead)  That is a pretty expensive advertising idea.  If you recall from the last installment, my budget per lead was $20.35.  Those leads from my “free” open house cost me over three times my budget.

And you can go through this same process and calculate the cost of any advertising idea, from home magazine ads, to sitting model homes, to floor duty.  Simply add up the hard costs and soft costs and then divide the total by the number of leads and you have your cost per lead.  It really is that easy.

Now comes the hard part.  Hard in the sense that you need to be honest with yourself.  Does the cost per lead of each of your advertising ideas fit within your budget per lead?  If it does, great!  If it doesn’t, then you need to make a decision.  Can you really afford to continue with that advertising idea?

If you are truly honest with yourself, you’ll discover that most of the traditional methods of gathering leads are simply too expensive.  The cost per lead far exceeds the budget per lead.  And if that is the case, you need to make a business decision to just say no.  Sure, the ad salesman might be nice, but this is a business.

Now let me show you why you need to think about looking online for your business.  Not only do over nine out of every ten real estate customers start online (in other words, that’s where the fish are biting) but more importantly, generating business online is very inexpensive.  I’ll prove it to you.

Let’s take an imaginary market where the home prices are low.  Let’s say the average home price is only $80,000.  The average commission side is 3%, giving us an average commission of only $2,400.  If we take 10% of that as our advertising budget per transaction and then divide that by the 24 leads per deal average  and we have a budget of $10  per lead.  That is low.

Now let’s look at the cost of online advertising using my Ultimate Website with LCM technology.  First let’s count the cost of the technology.  If you went to my website right now and pre-paid for six months, you would have a monthly cost of $66.66 for everything — the website, the LCM gateways, the client manager, the mobile app, and the coaching.

We recommend and show you how to use nothing but free online advertising.  But while it is free in terms of hard costs, the soft cost amounts to probably 5-minutes a day.  That means that over the course of a month you will have 150 minutes or two and a half hours.  Let’s assume the same hourly cost as our example above and you have $125 soft costs per month.

Total up your hard costs and your soft costs and you have a total cost of $191.66 for the month.  Now let’s see how many leads you generated.  If you did exactly what we told you in placing and renewing your ads, you generated 2-3 leads per day.  Let’s be conservative in our numbers and you have 60 leads.

Now take the cost of $191.66 and divide by 60 leads and you have a cost of only $3.19 per lead — way below the budget of our imaginary market.  In fact, being conservative on every calculation and factoring in the worst market imaginable, and we still generate business for less than a third of our meager budget.

Imagine what that would do in your market.  Run the numbers.  Nationally, agents who use my Ultimate Website system generate 2-3 leads every day using only free online advertising. If you do the math, you’ll see it’s a no-brainer.

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