Ten Steps to Real Estate Success (Step 4)

If there is one thing that agents do that makes me crazy, it’s this:  Agents waste more of their money on worthless advertising ideas than on all other expenses combined.  No kidding.  There just seems to be an assumption in our industry that you just throw it out there, and maybe it works and probably it doesn’t.  And for some unknown reason, that’s all right.

I’ve seen many a smart agent completely check their brain at the door when it comes to this one simple thing.  I’ve seen agents who simply couldn’t afford it, and shouldn’t afford it, continue to run ineffective ads because they liked the ad rep or because he or she was cute or because their friend or their broker said it was a good idea.  I’ve seen agents continue with the same worthless ads, month in and month out, believing that somehow the results would be different this month.

I know, by now you’ve probably pigeon-holed me as an “advertising-hater.”  If you have, you seriously misjudged me.  I’m just a “bad-advertising-hater”.  I hate all bad advertising the same.  And just because I’ve singled out a few advertising examples, don’t assume I’m OK with other bad ideas.

Here are some of my favorite bad ideas:  Driving around town handing out business cards and so-called “drumming up business” (most brokers’ favorite idea for getting the agents out of the office).  Or how about floor duty, open houses, geographic farming, post card mailing, newsletters, sitting in new construction model homes, online advertising, newspaper classified ads, refrigerator magnets and other branded trinkets, homes magazines, billboards, radio and TV ads, to name only a few.

Now it probably sounds like I’m against all advertising, and I’m not.  I think advertising is the one single expense that every agent needs to budget and make a regular part of his practice.  You’ll understand my perspective more as we get into this installment, but I’m all for smart advertising.  I’m just against dumb advertising.  And frankly, most agents do dumb advertising, or at at least can’t tell the difference.

So let me ask you a question.  What makes an advertising idea a “smart one”?  What makes it a “dumb one”?  Think about that for a minute.  If you can’t immediately determine whether it’s a good idea or not, then this installment is for you.  When we’re finished, you will know exactly how to determine instantly, whether any advertising idea is good or bad.

OK.  There are only two things you need to know in order to evaluate any advertising idea. Are you ready?  The first is, what is your budget per lead?  The second is, what is your cost per lead?  Budget per lead and 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 in my market of Fayetteville, North Carolina, it is 3%.  It is probably different in your market too.

Now multiply those two numbers together.  $200,000 times 2.5% is $5,000.  That gives you your average Gross Commission Income (GCI).  Next, you need to 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.  Per closed deal, not per lead.

Next we need to convert that 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 divided by 24 is $41.67 budget per lead.  Go ahead and calculate yours.

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.

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In fact, here is the formula: The total of Cash Cost and Time Cost divided by the Number of Leads Produced equals your Cost Per Lead.  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.  Remember back to our planning installment?  How much did you plan to make this year?  How many weeks did you plan to work?  How many hours per day?

Let’s say you wanted to make $100,000, and work 50 weeks.  That means that 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 listening to some vendor pitch you while stuffing your face with stale donuts just cost you $100.  It could have been a nice steak dinner and a glass of wine for two.

Whatever you do, don’t underestimate the value of your time.  If you do, you’ll give away your entire work week before you know it, and you won’t have anything to show for it.  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 openhouses, 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.  It might not be income, but rather lost income, but make no mistake, you are writing a check.  Hopefully, you will do it wisely.

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?  Let’s do a few for practice.

Lets say you pull floor duty twice a month for a total of 8 hours.  That’s $400.  Let’s say you average 2 leads every time or 4 leads for the month.  $400 divided by 4 leads is $100 per lead.  Or let’s take a magazine ad that costs $500 cash and 2 hours for a time cost of $100.  That gives you an ad cost of $600.  Let’s say you got 8 leads over the course of the month.  That’s $75 per lead.

How about an open house that you spent $70 in cash and $300 in time cost.  Total cost, $370.  Number of leads?  Let’s say you got 3 good leads.  That is a cost per lead of $123.33.  Hmmm.  I’m sure by now, you get the idea.  You can do this to any idea and calculate the actual cost per lead.

Now What?  Now, let’s make that last step.  If your budget per lead is $41.67 and the cost per lead is $123.33, what do you say?  Ennnnngggggghhhhh!  Bad idea.  Horrible idea.  Not even close.  I don’t care if the broker says it’s a great idea.  He’s not the one paying your bills.

Now at this point, many agents say, “Well Matt, it sounds like you just toasted all of my marketing.  The way you describe it, there is nothing I can do that will be OK.”  That’s simply not true.  I can think of several things that will work, even with the lowest budgets per lead.

Magazine advertising with a call capture hotline will produce your leads for about $20 each and in most markets that is well within the budget.  But failing to use that simple piece of technology will make your lead capture rate so low that the cost per lead is way over most budgets.

Or, how about online?  Internet advertising using an LCM gateway will produce leads in most markets for under $5 per lead.  In my market I produce hundreds for under $3 each.  But again, failing to put an LCM gateway in the customer path will cause the capture rate to be so low that most agents simply can’t afford online advertising.  Most agents have a cost of over $100 per lead from the Internet because they are using their website without an LCM gateway.

Well, that gives you a lot to think about, and some homework to do.  You should be able to produce as many leads as you want for well under your budget.  In fact, I teach my agents to budget only 10% of GCI for advertising, and they still make more leads than they can ever work.

That’s it for advertising.  In our next installment, we’re going to talk about today’s real estate customer.  Misunderstanding today’s customer is probably the single biggest reason for failure in the real estate business, and understanding him will make you rich, so you really won’t want to miss the next installment.

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Comments 4

  1. author Cynthia posted June 24th 2010. 12:44 pm Reply

    I’ve been telling my broker for years that floor duty and open houses are a waste of time. Now that my time is spent on appointments that produce far more dollars, I think he gets it. The mystery to me is why he still pushes the other agents to work floor and open houses, when there is just no good reason to keep following a business model that doesn’t work. Thanks for great article, I’m evaluating my advertising program now, thanks to you.

    • author Matt Jones posted June 24th 2010. 1:08 pm Reply

      Thanks for reading, Cynthia, and for your kind words. I’ll tell you why the broker keeps doing it: a) It’s free secretarial service for the office and hey, even a blind hog finds an acorn every now and then. Occasionally, an agent will get a lead. b) He doesn’t have any better ideas to offer them. c) Tradition — most people are afraid to break away from the crowd. Think the emperor’s new clothes. Thanks again for your post. It means a lot.

  2. author Cindy Balouris, Associte Broker, GRI ,CRS, ABR posted June 24th 2010. 1:50 pm Reply

    Excellent detail in your article, Matt. Real estate is the only industry where agents don’t do a business plan prior to starting. Experienced agents rarely follow one. Professionalism starts when there is pride within your profession. You are the owner of your shop. How do you open a store without knowing your expenses? Hmmmm.

    • author Matt Jones posted June 24th 2010. 1:56 pm Reply

      Thanks for reading and for your comment. I couldn’t agree more!

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