ROI, ROI, ROI… What is It?

When you start advertising, I’m sure you are going to hear the term ROI constantly.  But really what is ROI? And is it truly important?

R.O.I. = Return on Investment

Regardless of what business you are in, you must keep track of your ROI.  This means, figure out what your expectation is on the investment and track the results.  Is your investment profitable?

Now the term investment is generally used in reference to money that is being spent, but it can be something else ie: your time.

Let’s break this down further.

I will use the example of someone who is using Google Adwords to promote their real estate business and hoping to gain seller and/or buyer clients.

  • If you are spending $500 a month a google adwords, that is $6000 annually being spent.
  • How many clicks should you expect for a $6000 annual budget?
  • How many leads / conversions can you expect from a $6000 annual budget?
  • What is your average commission amount for homes in your area?

**the number of clicks and leads you can expect change from location to location.

So for this example and ease of calculations, I will say that for $6000 you will get 300 leads.  (Note: this # is totally incorrect, there is actually a formula that can give you a better estimation of what conversions you can expect).  I will also say that the average commission amount for listings in my area is $10,000.

Now, out of those leads, how many will you close? Generally in real estate, online leads have a 1% closing rate.  Therefore for every 100 leads you get you should get 1 closed transaction. Therefore out of 300 leads, expect to close 3 leads. 3 x $10,000 = $30,000.  Therefore if you spend $6000 you can expect to get a revenue of $30,000.

To get your ROI you need to do some math (30,000-6000)/6000 = 400%.  Therefore, for every dollar you spend, you can make $4 back.

That is a great ROI.  And therefore the investment of $6000 would be a good one.

Every prospecting method that take on, you may not have an expected ROI or  well known % to use.  In cases like, you will have to analyze your previous success and create your own percentage.

Each month / quarter / year; you should be measuring your ROI and only continue with the methods that are proving useful to you.