Episode #012 – The ROI Trap: How to know when your marketing is working, even if you haven’t closed a deal yet

You're listening to the REI Marketing Nerds podcast, the leading resource for real estate investors who want to dominate their market online. Dan Barrett is the founder of Ad Words Nerds, a high tech digital agency focusing exclusively on helping real estate investors like you get more leads in deals online. Outsmart your competition and live a freer, more awesome life. And now, your host, Dan Barrett.

Dan: Alright everybody, welcome to this week's episode of the REI Marketing Nerds podcast, as always Daniel Barrett here from AdWords Nerds. How are you? How are you doing? What are you doing right now? Are you driving, and are you running, are you puttering around the kitchen? I am legitimately curious, I am legitimately curious. What are you up to right now? I hope it is awesome, I hope you're having an awesome day. Day is just starting here in rainy, gloomy Connecticut and it's really good day to get into a really fun topic. This week we are talking about real ROI, real return on investment. This is a metric we use at AdWords Nerds, we use it with our clients, I use it with my own marketing when I do marketing for my business, I use this metric and it is a real lifesaver. I want to dig into what I mean by that, but to do that I've got to take a step back a little bit and talk about marketing, which of course you know this is the stuff I want to talk about, I love to get into these marketing topics that are going to be universal, that are going to be just as relevant in ten years as they are today and capable of really making a huge impact on you and your investing business. So let's take a step back and talk about what effective online marketing is really all about.

If you are going out there and you are looking for motivated sellers and you are looking to boost your reach, get more of these leads and help more of these people, you're going to have to make decisions. In actuality online marketing is essentially just it long stream of decisions. You've got to decide whether to run this ad or that ad, you've got to decide to run with this targeting or that targeting, this list or that list, this channel or that channel. I mean it's just decision after decision after decision, that's all that really is. And the better your decisions, the better your results. If you pick the ad that everyone loves you're going to have better results than if you pick the ad that everyone hates. If you pick the channel where there's a lot of growth, you're going to have more success than if you picked a channel that's dying. Effective decisions give us better results, it's all pretty obvious. So the question becomes like how do I make effective decisions if I'm getting into an online marketing universe and I'm targeting motivated sellers, I'm trying to grow my investing business, how do I make the decisions that put me on the right path. How do I make the decisions that are going to make me more money. How do I know I'm making those decisions. Well the best decisions, obviously, are based on data. We can't know really what's going to happen. We can't look into the future and with 100% certainty say, "Yes, if I do X I will get Y results." The best we can do is make probabilistic guesses. The best we can do is say, "Alright, based on all that I know, based on all the data I have, I expect this to happen." So the better the data we get, the more data we get, the better our decisions are going to be, and the better our decisions are going to be, the better our results are going to be.

Online marketing, one of the things that makes online marketing great is that it provides a lot of objective data. You can launch an ad really quickly, like we're doing AdWords, you can come up with an idea for an ad in AdWords, you can type that ad in, that ad will be launched in under an hour and it can get in front of thousands of people and you can see exactly how many people saw the ad, exactly where the ad was when people saw it, exactly how many people clicked, exactly what it cost you and exactly how many leads that ad generated. That's amazing, it's amazing. If you are coming from the direct mail world or you're coming from the world where you have to spend three months making an ad in photo studio with a model and then you ran that ad in a magazine and the magazine had come out and then some people called you and some people didn't, it's tough, man. You didn't really have a clear sense of what's going on. With online marketing we basically see everything that's going on as it's happening. It's really incredible. So the amount of data that we get is incredible, the objectiveness of that data, you know, the accuracy of that data is incredible, and that allows us to make really, really good decision. All makes sense, right? The more data I get, the better the decision I make, the better the results that I get. All that, I'm sure, makes some sense.

Here is the problem, and there's a problem specifically with a real estate investing. If you are a real estate investor, I hope you are if you're listening to this podcast, but if you're in real estate in general, specifically if you are real estate investor and you're going after motivated sellers, there is a very real problem with this model of get the data, make the decision, get the result. The problem is that real estate investing is relatively low volume. Real estate investing is relatively low volume. What do I mean by that? I mean if you look at any market, let's say whatever, Chicago, I'm going to pick off the top of my head. If you look at that market, you can picture a big circle containing everyone that's searching online in Chicago. So we've got a big group of people, everybody that's searching online, tons and tons of people. The hundreds of thousands of searches every single hour, who knows. Lots and lots of people, lots and lots of searches. Now out of that big circle, everyone who is searching about real estate that's a smaller circle within this circle. So we get all the people that search and then all the people are searching about real estate, well that's a smaller group within that group, but hey, it's still a pretty big group. And then within that group, so within the large group we've got the real estate group, and then within the real estate group we've got people who are searching for selling a home. That's an even smaller group of people. And then within the group of people that are searching for selling a home, we've got the people that are really motivated, and that's an even tinier slice. So we've got the big group of people searching and then the smaller group of real estate searchers and then the smaller group of people searching about selling, and then we've got even smaller group, a really, really tiny group of people that are really, really motivated and they're searching about selling.

The better you're targeting gets, meaning the more motivated your leads are, the lower the volume of them you're going to get, just in general. If you imagine going out and saying, "Okay, I only want to target the people that are 100% ready to sell tomorrow, they're not going to care what I say to them, the second I walk up to them they're going to give me the keys to the house and they're going to say, 'Take my house.'". That's the only kind of person you want. There just aren't that many of those people, there just aren't. And then even if you have the total number of those people in your area, you're talking only about the people they're searching online, and then even then you're talking about only the people that click on your ad, and even then you're talking about only the people that actually contact you. So the tighter the targeting, the better the targeting, the more motivated the lead becomes, the less of them there are, the lower the volume there is in your market. Therefore, and I'm going to bring this into AdWords, but it's true in Facebook, it's true in any channel you're going to work in. The very best keywords, by which I mean the keywords that produce the leads that are the most motivated often have very little data.

I often use the example, and we're talking AdWords here, I often use the example of two keywords. We've got "sell my house" and we've got "sell my house fast". Two different keywords, "sell my house" and "sell my house fast". Now "sell my house" might have, let's say, 1000 people searching for it in a month in your market. These numbers are hypothetical. You might have 1000 people searching for "sell my house" in your market this month. You might only have ten people that actually type in "sell my house fast", and five of them are probably real state investors. So the difference in volume as you target higher levels of motivation is dramatic, it's dramatic. So the keywords and the targeting segments of the population that investors most want to go after often have the lowest amount of volume and have the least amount of data. What this ends up doing is like if you're an investor and you're managing your marketing, you're doing your marketing, you log in your AdWords account, you're looking at all your keywords or you log into Facebook and you're looking at all your ads and you say, "This one just isn't generating anything, no one's even seeing it, it's not running, it's not any good. I'm going to pause it." And what it's of happening is that you end up pausing stuff that would have been very, very profitable. It was just slow, it didn't have the data. Just because one person searches for "sell my house fast" in your market every month doesn't mean the keyword "sell my house fast" is not going to generate lots and lots of profit for you, it's just going to do it here and there.

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So this is a thing I always stressed with everyone, I said no leads and no data from an ad or from a keyword or from a campaign does not mean that ad or keyword or campaign will not have a really great ROI. This is a critical mistake that will absolutely cost you tens to hundreds of thousands of dollars over the lifetime of your investing business, and this is not an exaggeration. If you are getting rid of or giving up on things that do not have enough data, you are leaving money on the table. Someone else is going to come along and take that money, someone always does. It might as well be you. I honestly would rather be you, because you're listening to my podcast. So again, no leads, no data does not mean there's no ROI. But that begs a question because just because something doesn't have leads, doesn't have data, of course it doesn't mean there is no ROI, but it doesn't mean that it's a great keyword either. It might be a real stinker, we just don't know. So what is the solution? And this is where real ROI comes in, and I'm going to tell you exactly how we calculated, exactly how we use it and exactly how you can use it to grow your investing business over time.

So what is real ROI? Real ROI is a metric we use to calculate the potential payoff of a low volume keyword or ad. So the key here is that we are calculating a potential payoff, we are making a guess about what the payoff may be for something that doesn't have a lot of data behind it. This is critical to maintaining long term profitability because a vast majority of the stuff that you can target as a real estate investor is going to be low volume, and especially if you're working in a smaller market or you're working in a smaller budget, you're just not going to have the data, volume that some of the bigger people have, and that's fine. But we need to be able to calculate what our potential payoff can be so we know if we're spending our money in the right way, we know we're being smart with our budgets. Even with large budgets, a lot of your keywords, a lot of your ads are going to need you, especially in the beginning, to try to guess what their potential payoff could be. And if you're doing this you're going to be able to avoid pausing things too early, you're going to be able to avoid leaving money on the table, you're going to make a lot more money over time.

So let's get into calculation and how we do this. Now when we have a volume on a keyword usually what we're meaning is that either not a lot of people are searching for it, meaning we have low impression volume, nobody's seeing our ad right now and searching for it, or no one's clicking. And because no one's clicking we don't have a good sense of our cost per lead. I don't really know what it's going to cost me to generate a lead from this keyword. Either not enough people are seeing it, not enough people are clicking on it, just whatever, I don't know what my cost per lead is. Now to account for that what we do is we use national averages from other investors that we work with and the cost per click that we're seeing in the local market to make an educated guess. You can then combine that guess with your deal value, the amount that you take home per deal, and you're close rate, the amount that you typically, amount of lead you typically need to put a deal under contract, and you can use that to calculate the ROI. So again what we're doing here is we are using national averages for other investors that we work with, I'm going to give you a bunch of these averages in a second, but we use national averages as a rule of thumb and the cost per click that we see in the market, we combine that with the average amount of money we make per deal and our average close rate, and we use that to calculate ROI.

As a podcast, it's a little hard to do that. I've actually made a tool for you to do this. You know me, you know I love a good spreadsheet. If you go to oldsite.adwordsnerds.com/ROI-calculator, so oldsite.adwordsnerds.com/ROI-calculator, and by the way I'm going to put this link in the show notes for this episode so you can go to oldsite.adwordsnerds.com/podcast, that's a little bit easier to remember, oldsite.adwordsnerds.com/podcast, we're going to have a link to the spreadsheet, just find this episode, click the link, you'll be happy as a clam. So this is a spreadsheet, it is going to do the work for you, but I'm going to walk you through it.

Let's say we have less than five leads on a keyword, we really don't have any data for this keyword and I want to calculate the potential ROI. I went through this, I picked the key word "we buy houses CT", or "we buy houses Connecticut", a keyword from my market. I'm taking much of this data just from clients that I've worked with. So let's say the cost per click, the amount we pay when someone clicks on this keyword, which I can see in my ad account is really, really high. So let's say it's $75, which is incredibly high. That's like a three times the national average. So we're being really conservative here. So $75 cost per click. My estimated cost per lead is $1071. That's super high. How did I get that number? Well I'm using a 7% conversion rate on my landing page. That's about average for, let's say, if you're using an investor care website or typical investor kind of website for these keywords. About 7% conversion rate is pretty typical. So 7% of my clicks are turning into leads, so I'm going to guess I need about $1000, $1071 in ads, that's been the generated lead from this keyword. That is high, it's high. Now let's say my close rate is 10%, meaning for about one out of every ten people I talk to becomes a deal and a contract. This is probably the number the varies the most from investor to investor, so you've got to put in your own close rate here. A lot of people, their close rate is about one out of 20 for online lead, so we could do that. But the 10% close rate was a real number for a real client that we worked with in Connecticut, so I'll use that.

Now let's say your average deal value, which is the amount that he thinks he can take home on this flip on average, and look, everybody's deals very pretty wildly, so from one deal to the next you can be me making 5, 10, 40, you know, whatever it is. Let's say the average is $20,000, it's about average for Connecticut when you're doing flips. So again, $75 cost per click, that estimated in the spreadsheet about $1071 per lead, that's ridiculously high, I mean just so, so, so, so high. Estimated close rate about 10%, average deal value about $20,000. That means my cost per deal from this keyword, the amount it's going to take me to generate a deal from this really expensive keyword is about $10,714. So this guys has to spend with this keyword, just this one keyword $10,714 per deal. Now of course, he makes about $20,000, so the ROI, the return on this really, really, really cripplingly expensive keyword is about $9285 on one deal. So this keyword's generating $9000 of profit, but it looks terrible. If you look at the cost per click, if you look at the cost for lead, it looks terrible. And this is one of the things I always point out. We don't care about the cost per click, we don't care about your cost or lead, I don't care about how much you're spending, I don't care about your click through rate, I do not care. I care about your return, I care about how much money you are making. Is this account generating more money than you put into it? If you put in a dollar, does it give you two dollars? If it does, run it forever, run it forever.

Let's change some of these numbers. So let's put the cost per click for something's a little more realistic but still high, so let's say $30. That's a little bit more realistic. I'm going to change the close rate to 20%. I'm going to change the deal value down to $10,000. So we're going to go through this again. But let's say again we're looking to keyword, it's got $30 cost per click, that is pretty high. That's going to be similar to some of the more competitive markets in the United States, so $30 cost per click. That means my estimated cost per lead, and remember I'm saying I haven't generated a lead from this keyword yet, but we're going to guess using the 7% conversion rate. Estimated cost per lead is about $428.57. It's high, it's a high cost per lead, $428, that's high. I want my close rate to be 5%. Now that's one out of every twenty leads. So I'm spending $428 per lead estimated on this keyword and I'm only closing one out of every twenty. Let's say my average deal value is $10,000, that means it's costing me $8571 to close a deal, $8571. That's a lot. I'm only making ten, but that means that my return on this keyword is $1428, I made $1400 of this keyword. Now do I want to run that keyword forever? Maybe I do, maybe I don't, but it's making me money, it is a positive ROI, so even in a situation where the cost per lead's really high, my close rate isn't great, my deal values a lot lower, I'm still making money on this keyword over time. That's the key here, over time. I might not be making money this week, I may not be making money this month, but if I turn this keyword off I will make less money overall than I would have.

And what you do with this information? Look, I'm not saying you always want to run these things, I'm not saying you got to just keep spending money on something that doesn't generate data, not saying that at all, but I'm saying that you need the real information you require to make a smart decision. Objective data is only valuable to us if we actually use it to project forward and understand what we can make from the marketing that we're doing. So look, this is one of those things where it becomes a lot more useful if you actually get in and mess around with it. So I want you to go to oldsite.adwordsnerds.com/podcast, find this episode, it's episode 11, "Real ROI", find this episode and click the link to go to the ROI calculator, it's a free tool just like a Google spreadsheet, you copy it over, you make changes and you can start putting in your own numbers, put in your own keyword data, your own campaign data, your own ad data and start figuring out what your real return on investment from your marketing actually is.

Alright everyone, I hope that was useful. Let me know if you have any questions. Like I said, if you're not in our Facebook group, you got to jump in there. It's oldsite.adwordsnerds.com/group, Real ROI, the tool we originally posted it there and we post a lot of free training in there every single week. So if you're not in there, there's really amazing investors in there and it's an incredible group, no spam, no hitting everyone up for deals, just really high quality content. So again, that's oldsite.adwordsnerds.com/group to join the Facebook group, oldsite.adwordsnerds.com/podcast to find this podcast episode, all our other ones, download the free tool, and hey if you like this and you're getting value out of this podcast, let me know, subscribe leave us a positive review, I'd really appreciate it. Alright, I'll talk to you soon. Dan Barrett out.