[vermontpainter]

This spins off from the thread "Your Business Goals" where in a recent post Brian discusses the importance of lead cost in understanding your numbers.

In determining lead cost, do you only consider the cost of the specific advertising medium that generated that lead, or do you factor in the overall cost of all your advertising across different media?

This seems like a really important concept to understand. In the Goals thread, Brian gives an example of 33% closing rate, $2500 avg. job, cost of lead $100. If it costs $300 to generate $2500, that is 12%. If you are not aware of it, then there went your profit...

 

[Brian]

This spins off from the thread "Your Business Goals" where in a recent post Brian discusses the importance of lead cost in understanding your numbers.

In determining lead cost, do you only consider the cost of the specific advertising medium that generated that lead, or do you factor in the overall cost of all your advertising across different media?

I do it both ways. I want to know the cost per lead for each medium, as well as my overall cost. That allows me to compare a particular medium to my average.

This seems like a really important concept to understand. In the Goals thread, Brian gives an example of 33% closing rate, $2500 avg. job, cost of lead $100. If it costs $300 to generate $2500, that is 12%. If you are not aware of it, then there went your profit...

Not necessarily. If you have 12% in your overhead for advertising, you're right on track. Admittedly, 12% would be a high number. Typically, 5% to 10% should suffice.

The cost per lead isn't a hugely important number. It provides some information. The real important number is return on investment (ROI). For example, you do 2 different pieces of advertising and each costs $500. One generates 2 leads and 1 sale for $5,000. The other generates 5 leads and 1 sale for $2,500.

The first ad had a lead cost of $250 each, and a ROI of 10 ($5,000/ $500). The second had a lead cost of $100 each, and a ROI of 5 ($2,500/ $500). In this case, the first ad has a better ROI.

In this example, the sampling is very small and I wouldn't make any huge decisions based on it. I would likely try both ads again (or several times) to get a better sampling. Doing it one time can create aberrations that don't hold up over time.

Brian Phillips

 

[vermontpainter]

Brian

Great explanation. I see it now.

Thanks

 

[Ethan]

The first ad had a lead cost of $250 each, and a ROI of 10 ($5,000/ $500). The second had a lead cost of $100 each, and a ROI of 5 ($2,500/ $500). In this case, the first ad has a better ROI.

Brian Phillips

Hey Brian, I agree with you, larger numbers always create more accurate samples.
Question about ROI, do you look at that as an ROI of 10 or if your profit margin is say 10% and you therefore make $500 off of that $5,000 job is say 100% return on your investment in a 2 month time period.

Might just be semantics, but curious how you looked at ROI.

Ethan

 

[Brian]

Hey Brian, I agree with you, larger numbers always create more accurate samples.
Question about ROI, do you look at that as an ROI of 10 or if your profit margin is say 10% and you therefore make $500 off of that $5,000 job is say 100% return on your investment in a 2 month time period.

Might just be semantics, but curious how you looked at ROI.

Ethan

Ethan,

When I say a ROI of 10, I mean I brought in $10 for every $1 spent. Obviously this doesn't tell me about the profitability of the jobs, but that is a different analysis. I use this number simply to tell me how effective my advertising is. I then dig deeper as the numbers warrant.

You could certainly look at the actual profit to calculate your ROI, but the profit on the job isn't necessarily the ad's responsibility. By that I mean, if the job is underbid, or you bid it with a lower profit margin, etc. that's not a consequence of the ad itself or its effectiveness.

My primary reason for not using the profit number is it is tougher to track. It takes a lot more calculations. Raw sales is pretty easy to track, but if you use the profit number you have to calculate that at the end of the job and then plug it into your calculations. I like keeping things as simple as possible.

My avatar hates this expression, but there is more than one way to skin a cat. As long as you are measuring your results, and doing it in a consistent manner, you will have the information you need to make wise decisions.

I look at a lot of things when I analyze my marketing, but the bottom line is ROI.

Brian Phillips

 

[Ethan]

Ethan,

My avatar hates this expression, but there is more than one way to skin a cat.

lol.

Thanks for the info. So do you consider 10 to 1 a good ROI for a paint business?

Also, if you get a referral from a job generated by a specific ad, do you consider that in the effectiveness of the ad, or only the ad itself?

I'm asking this because we haven't done much better than an ROI of 5 to 1 for jobs booked solely from, "we saw you in that ad", but when I consider referrals our marketing budget usually hovers around the 5 to 10% you mentioned.

We are working on a marketing plan now and I'm trying to set the right expectations for a particular medium. Thanks for the info Brian.

Ethan

 

[Brian]

Also, if you get a referral from a job generated by a specific ad, do you consider that in the effectiveness of the ad, or only the ad itself?

We generally do not try to match up referrals with the ad. That can be a lot of work to track down the original source.

I'm asking this because we haven't done much better than an ROI of 5 to 1 for jobs booked solely from, "we saw you in that ad", but when I consider referrals our marketing budget usually hovers around the 5 to 10% you mentioned.

A ROI of 10 translates to spending 10% of revenues on advertising. A ROI of 20 is 5%. And a ROI of 5 is 20%. So your target ROI will be determined by your ad budget.

Referrals kind of skew the numbers a bit. We don't spend anything specifically for referrals. I just figure them into the overall ROI.

I don't expect every medium to hit my ROI goals. We do one ad that has a ROI of about 5 (last year's overall ROI was about 45). We continue to do the ad because: 1. It is cheap, and 2. It goes to our primary market. It gives us additional exposure in that market and helps the overall effectiveness of our marketing.

Brian Phillips