Return on Investment: Spending Money to Make Money
Would you spend $1,000 to make $10,000?
For most agents, the answer is probably yes. But what happens when that number gets smaller? Would you spend $1,000 to make $5,000? Would you spend $1,000 to make $2,000? This is called return on investment (ROI), and agents often neglect it when investing in their business.
Why does ROI matter so long as you’re making money? As I've written about previously, knowing the value of your time helps you determine what tasks you should be doing. Knowing the value of your time and your required ROI helps you determine whether it is worth spending both the time and money on certain activities. If the $1,000 will generate $10,000, but it will take 80 hours of your time, is the investment still worth it?
I recommend at least a 4x return on investment in real estate. If your marketing effort isn’t projected to return four times as much as you spend, don’t do it. It’s a classic sales pitch to real estate agents: “you only need one transaction to pay for it!” But that’s an easy way to go out of business. Before starting on a new marketing product, make sure you can reasonably expect to generate four times the money in return. If you only break even, you’re working for free. You’d be better off not spending the money and not doing the work.
Finding the right balance can be tough. Some marketing systems are worth the cost, and others are not. If your only requirement is “one deal to break even,” it can be easy to get lost in sales pitches from Zillow and the like.
To determine the ROI on your current marketing efforts, you’ll need to start tracking. For each lead generating endeavor, track:
How long it takes to setup and maintain
Number of generated leads that ended in a closed deal
Time spent on each lead
Even if you’re only estimating these numbers, with this information you will be able to consistently evaluate your business, growth opportunity, and the most effective ways to spend your marketing dollars. Otherwise, you might get stuck working for free.
Written by Matt van Winkle, CEO, RE/MAX Northwest