June 16

How To Calculate Advertising ROI

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How To Calculate Advertising ROI

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Today I’m going to show you how to calculate ROI from online advertising. 

This is important because knowing this formula is going to allow you to capitalize on massive opportunities for sales growth, and also avoided sinking money into systems that aren’t producing positive results. 

You see, without a formula for calculating ROI, brokers look to the wrong things to determine if advertising makes sense. 

Some think they should be closing 50% of the leads they get. 

Others measure things purely based on the cost per lead – which is foolish. 

What you really need to measure is the cost to acquire a customer. 

You need to determine the maximum you’re willing to pay to get a new deal, and then use that benchmark to determine if your campaigns are a success or not. 

Oh, and you don’t want to be greedy about how much you’re willing to pay. 

Sure, with referrals, you pay zero to get a customer. But would you rather have 3-5 referrals per month where you pay nothing to get them, or would you rather have 3-5 referrals per month where you pay nothing, and another 10 deals from ads where you pay $1000 per customer from those ads? 

The answer should be simple, but in case it isn’t apparent yet, let me walk you through the numbers. 

The average mortgage in Canada is give or take $500,000 and most brokers are getting about $0.9% of that. 

So that’s approximately a $4500 commission. 

Let’s say, at most, you’re willing to spend up to half of that to get the deal in the first place. 

So a cost per acquisition of $2250. 

When it comes to advertising then, the formulas to use here are:

Number of Leads / Sales Conversion % = Total Sales 

Total Sales x AVG Commission = Total Commission 

Number of Leads * Cost Per Lead = Total Advertising Cost 

Total Advertising Cost / Total Sales = Cost Per Acquisition 

Total Commission / Total Advertising Costs = Total ROI 

The 3 biggest levers you can pull here are the number of leads, cost per lead, and your sales conversion %. When you get the right combination of lead volume, lead cost, and sales conversion %, you get profits. 

Here’s an example: 

Let’s say you pay $50 per lead and close 5%

20 leads will therefore cost you $1000, and you should get 1 sale. 

Therefore your cost per acquisition would be $1000, and on a $4500 commission deal, your ROI would be 450% (that’s $4.50 for every $1 invested into advertising). 

Another example:

$100 per lead and close 10% 

20 leads cost $2000, and you should get 2 sales

Therefore your cost per acquisition would be $1000, and on a $4500 commission deal  x 2, your ROI would be 450% (that’s $4.50 for every $1 invested into advertising). 

(notice the numbers are the same here because although the cost per lead doubled, so did your close rate. Sometimes paying more for leads makes sense, especially if you’re paying for quality, because your projected close rate should be much higher). 

One Last Example…. 

$450 per lead and close 20% 

20 leads cost you $9000, and you should get 4 sales. 

Therefore your cost per acquisition would be $2250 (the max we defined earlier on), and on a $4500 commission deal, x 4, your ROI would be 200% ($2 for every $1 spent). 

Now obviously, if you’re paying someone $450 per lead, these leads better be highly, highly qualified and likely to close. 

But the point is, you should never calculate value based on cost per lead alone. 

And, you need to be willing to pay to get more customers, so long as you’re still profitable, any “losses” from your profit margin on each individual deal, can be more than made up from increasing the volume of your deals. 

Instead of doing 3-5 per month, do 30-50. 

Yes, you’ll need a sales team, and to hire to grow your business. 

But unless you just want to stay a one-person shop, that’s what its all about. 

Business growth. 

More on that in a later issue. 

PS – you also need to understand the length of your sales cycle. Sometimes it can take 90-180 days or longer for a lead to turn into a deal. So if you try to calculate ROI in the first 30 days, it’ll be negative, but over the long term, as leads from month past move through that cycle, you get to see your true ROI. Again, another topic, for another issue. 

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About the Author

I started out as the Internet marketing director for an Automotive Group. I learned about Facebook & Google advertising running campaigns for auto loans. I transitioned to full-time entrepreneurship in 2014, and have been at it ever since.

James Vannelli

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