Measure the Effectiveness of Your Advertising Spend
Real estate professionals, like other salespeople, live and die by the quantity and quality of the leads their team generates. But, many cannot accurately track the effectiveness of their marketing and advertising spend, and attribute conversion to closed transactions to particular sources of leads. To begin the process of analyzing your ROI, start by tracking some key metrics, like advertising spend.
Calculate your potential ROI
To calculate your potential ROI for a 12 month period, you’ll need the following numbers:
- the number of leads you generate per year
- your average close rate
- your average selling price
- your average commission
Once you have all these numbers, simply multiply the leads you generate per year by your average close rate. Then, multiply that number by your average selling price. And finally, multiply that number by your average commission.
[(leads per year x avg. close rate)(avg. selling price)](avg. commission)
For example, if you generate 1,000 leads per year, have an average close rate of 3%, have an average selling price of $200,000, and have an average commission of 3%, then your return is $180,000.
[(1000 x .03)(200,000)](.03) = 180,000
Treat this number as a gross sum. When calculating your return, you’ll need to factor in your cost of investment. To do that, you’ll need more numbers. Here’s how to get them:
Calculate your conversion rate
A real estate conversion rate is the rate at which your leads turn into clients. The simple equation for finding your conversion rate is to divide the number of clients you gained that month by the amount of leads you generated. So, if you gained 100 leads and ten of them became clients, then your conversion rate for that month is 10% [eg., 10 clients/100 leads = 10%].
Calculate your cost per lead
Your cost per lead (CPL) is the amount of money you spend on advertising (ad spend) to get a lead. To calculate your cost per lead, simply divide the amount of money you spent on a particular advertising campaign with the amount of leads that campaign generated.
(ad spend over a month/quarter/year) ÷ (leads generated during that period) = Cost Per Lead
($1000 ad spend) ÷ (50 leads generated) = $20 CPL
Once you know your conversion rate—how many leads it takes to get one client—and you know your cost per lead—how much money you spent to get a lead—you know how much money you need to invest in ad spend in order to attract enough leads, so you have enough leads to convert into clients.
Using the examples noted above, if your CPL is $20, and you need 1,000 leads to meet your annual return of $180,000, then your annual ad spend is $20,000.
Keep in mind, though, that your cost per lead may differ based on the type of ad, location, audience and the amount you spent. In the example below, Google may generate more leads than Facebook, but more of Facebook’s leads convert to a transaction…which is more valuable. Calculating CPL based on totals only, will yield and average and potentially mask areas where the lead quality, or their urgency to purchase is as high. Armed with this information, you can optimize where and how much you advertise to achieve the highest returns. Converting more leads you generate from PPC, social, and advertising efforts on sites such as Zillow and Trulia—by even 1%—can have a significant impact on your return. So, look for ways to maximize your ad spend by improving your lead conversion rate. Why not get the most out of the leads you pay to generate?
Calculate what achieving your goals cost
Another, equally important perspective on calculating ROI, is “backward engineering” your sales target for a given period. While calculating your conversion rates as described above is important, it can mean a lot of trial and error. Driving your lead generation efforts toward a goal, and constantly calibrating to achieve them, can avoid extra time and money to get there. To calculate this, follow the logic in the equations below:
# of clients needed = (sales goal) / (average home price)
# of leads needed = (# of clients needed) / (average conversion rate)
Advertising Spend = (# of leads needed) * (cost per lead)
Improve your conversion rate
Beyond lead quality, other factors affect your conversion rates, and cost to acquire a new customer. What actions you take once you receive a new lead can make a difference. Data shows the faster you respond to an inquiry, the more likely you are to convert a lead into a client.
Just check out the numbers:
- When inbound leads are responded to within a minute, sales conversions are 391%
- Your chance of converting a lead decreases by 400% when the lead is not responded to in under five minutes.
- 9 out of 10 people expect to use messaging tools, such as chat bots, to communicate with a business
- 78% of customers bought from the company that was first to respond to their inquiry.
To improve your conversion rate, start by improving your business’s communication and lead follow-up tools. Respond to inquiries from site visitors one-on-one in real time, with digital tools that can instantly provide lead qualification. Enhanced data on your leads will allow you to begin a sales relationship with the prospect immediately, instead of risking missing the opportunity because you sent them to call centers which can delay the process.
In 2016, real estate brokers and agents spent nearly $8 billion on online advertising. That’s a sizable sum and all the more reason to make good on the leads you pay to generate. Don’t miss out on an opportunity because you were unable to act fast. Invest in tools that can speed up your lead response time, qualify leads in real-time, and automate data input into your CRM system. Doing so will help you maximize your ad spend, as you’ll be able to capture more leads to convert into clients.