As someone who spends a large part of my life training agents to succeed in this new age of real estate, I’m often amazed at the general lack of understanding on the topic of advertising in our industry.  I’m not talking about understanding the nuances of Madison Avenue or even being a student of David Ogilvy, Al Ries, or Jack Trout (some of the giants in the advertising industry).  I’m simply talking about having a good working understanding of the fundamentals of advertising, since as working agents, advertising is our single largest expenditure.

With a basic understanding, you can determine which ads are working, and which ones aren’t.  You can decide where to put your adverting dollars, and how much to spend.  You can know exactly how to take control of your largest single expense, and start keeping more of your hard earned commission dollars.

When I teach agents how to advertise, I basically show them a very simple two-step process for evaluating any advertising idea:  First, I teach them how to calculate their allowable budget-per-lead, and  second, I teach them how to evaluate any advertising ideas based on their cost per lead.  Sounds simple enough.  Right?  But before we dig in, let’s first define advertising.  Dictionary.com defines advertising as:

Advertising [ad-ver-tahy-zing] - noun.  The act or practice of calling public attention to one’s product, service, need, etc., esp. by paid announcements in newspapers and magazines, over radio or televisions, on billboards, etc.: to get more customers by advertising.

When Lee Iacocca was the President and CEO of Chrysler Corporation, and he was asked about advertising, he made an amazing statement:  He said that he was convinced that half of the millions of dollars that Chrysler spent every year on advertising was utterly wasted.  He went on to explain that if he could only figure out which half it was, he could save the stock holders  millions of dollars.

I know we all laugh when we hear stories like that, but the reason we laugh is because we all know, deep down, that we do the same thing.  We know that half the things we spend our time and energy on, in trying to attract customers, is a waste of time and money.

Budget per Lead. As agents, we’re taught to spend 20% of our GCI (gross commission income) on attracting customers.  That’s our budget.  But let’s take it a little closer to home.  Let’s break that number down.  Here’s what I mean:  Suppose the average sale price in your market is $200,000.  Let’s also suppose that the average commission side is 2.5% of the sale price.  That means that the average gross commission is $5,000.  ($200,000 X 2.5% = $5,000)  Now let’s calculate 20% of that gross commission income.  The result is an advertising budget of $1,000 per closed transaction.  ($5,000 X 20% = $1,000)

Next, we divide the total budget by the number of leads that’s typically required to produce one closed transaction.  According to a study done by Corcoran Coaching and independently confirmed by data from the National Association of REALTORS®, that number — the number of leads required to result in one closed transaction, is 24.  Your number may be different.  I’ve closed as high as one deal per 16 leads and I’ve had one new agent that I gave over 1,000 leads and he never closed a deal.  Nevertheless, there’s good data to suggest that a reasonable average is 24 leads for one deal.

Now we take that $1,000 budget per deal and divide it by the number of leads per deal, and we have a budget per lead of $41.67.  Again, if you have your own numbers, use them.  What this budget per lead means, is that you can spend as much as $41.67 per lead and still be within budget.  Any idea that costs more than that amount, cannot even be considered and must be ruled out.

I, personally, train agents to only invest 10% of their GCI on advertising, and if they do it the way I teach it, they will not only have more business than they can handle, but they’ll have plenty of business to fuel the growth of their practice and maybe even grow a team. Now, if your budget is 10% of GCI, all the numbers above are half.  Total budget per deal is only $500, and total budget per lead is only $20.83.

Cost per Lead. First, we need to agree that time is money.  While you may not actually write a check for your time spent on an advertising idea, if you pay for it with your time, you’ve effectively paid for it with dollars because the only thing you have to sell is your time.  You’ve spent valuable time on advertising that you cannot use to practice real estate.  The business term for that is “opportunity cost”, and it’s a real cost and must be considered.

Ok, let’s evaluate your “cost” per hour of time spent on an advertising idea.  Suppose you plan to make $100,000 this year practicing real estate.  Further, suppose that you intend to work 50 weeks, taking two weeks off for a vacation.  That means that you should earn $2,000 per week.  Let’s also assume that you want to work a 40 hour week.  Divide $2,000 by 40 and you have an hourly rate of $50.  That is how much your time is worth: $50 per hour.

Now, in order to calculate a “cost per lead” we must take our actual cash-out-of-pocket costs and add to them our time cost.  That will give us our total cost.  Next we need to divide that total cost by the number of leads produced by any advertising idea.  The result will be our cost per lead.  See how simple that is?

Some Real-Life Examples. Next let’s evaluate a few of our favorite advertising ideas in order to show you how to calculate your cost per lead.  I think when you take the time to calculate the ideas for yourself, you will be surprised by the outcome.  I believe that if you’ll take the time to work through this simple exercise, your practice will never be the same.  Let’s start with everyone’s favorite:

Open Houses. Let’s assume an open house has an out of pocket cost (gas, signs, balloons, a newspaper ad, streamers, and refreshments) of $100.  Now let’s say you spend 6 hours on the entire project, from running the ad, to setting up the neighborhood, to coaching your seller, to hanging signs and banners, to manning the open house, to cleanup afterward.

How many leads do you get?  Maybe 1-2?  Maybe you are lucky and get 3.  Let’s evaluate the cost per lead.  Hard cost of $100 plus soft cost (time) of $300 gives us a total cost of $400 for the idea.  Let’s say we were very lucky and got an outstanding 4 leads!!!  What is the cost per lead?  We spent $400 and got 4 leads so the cost per lead is $100 per lead.  Budget per lead?  $21.  Survey says… eeennnnggghhhh!  Bad idea.

Newspaper Ads. Assume the average ad costs $50 and produces 2 leads.  You spend an hour placing the ad.  You have a total cost of $100 and a yield of 2 leads for a cost per lead of $50. Budget per lead?  $21.  Survey says… eeennnnggghhhh!  Bad idea.

Homes Magazine Ad. Let’s assume you buy a page ad for $500.  Let’s further assume that you spend only two hours setting it all up (good luck!) for a time cost of $100.  Total cost of $600.  Now let’s say that your ad produces 12 leads for the month (that’s typical).  Ok, now calculate the cost per lead:  $600 divided by 12 is $50 per lead.  Budget per lead?  $21.  Survey says… eeennnnggghhhh!  Bad idea.

Now let’s say you use a call capture hotline on the ad and run it that way.  Your hotline cost for the month is $100 counting air time.  Add that to your other costs and you are at $700.  Now let’s say your yield is 40 leads instead of the 12 without the hotline.  Now your cost per lead is $17.40. Budget per lead?  $21.  Survey says…ding, ding, ding, ding, ding!  Are you getting the idea?

Duty desk. Let’s think of sitting floor duty at the office.  Your time investment is two four-hour shifts a month.  Eight hours at $50 per hour is $400.  Your total yield is 3 leads.  Your cost per lead is $133!  Budget per lead?  $21.  Survey says… eeennnnggghhhh!  Bad idea.

Internet leads. Let’s say you spend $20 per day in a pay-per-click advertising campaign at an average cost-per-click of $1 per click.  Let’s assume that your website is a typical agent website and gets 1% of the traffic to register (become a lead).  Finally, let’s say you spend an hour a month running the campaign for an additional cost of $50 bringing the total ad spend to $650.  Now let’s count the leads:  600 clicks times 1% (the capture rate) and you have 6 leads.  Now divide $650 by 6 and you have a cost of $108 per lead.  Survey says… eeennnnggghhhh!  Bad idea.

Now let’s say you use a lead capture gateway on your website and run the same campaign.  Instead of capturing 1% of your traffic you capture between 25-30% of all your website visitors.  Let’s calculate the campaign using the higher capture rate: 600 clicks times 25% is 150 leads.  Now divide $650 by 150 and you have a cost per lead of $4 (or the price of a cup of Starbuck’s coffee for a lead!!).  Survey says…ding, ding, ding, ding, ding!

Ok, now I’ve walked you through the process of evaluating your advertising.  See how simple it is?  First you calculate your budget per lead, and then you calculate your cost per lead for each idea.  Then you simply determine how many leads you need to meet your financial goals.  Starting with the least expensive advertising idea you produce as many leads as you can toward that total, and then you move to the next cheapest source of leads.  It couldn’t be any easier.

So, the next time you’re tempted to try another strategy for attracting new business, use this simple two-step evaluation process and then follow your head and not your heart.  Your wallet will thank you, and you’ll be on your way to running your practice as a business!  Finally, if you have any questions regarding this two-step strategy for evaluating your advertising, don’t hesitate to contact me.  My contact info is on my website at FavoriteAgent.com and I’ll be happy to answer any questions you might have.