Why Over-Emphasizing Cost Per Lead Is Killing Your REI Business

"Hello and welcome back to another episode of the Collective Clicks podcast. This is your host Brandon Bateman, and today I'm joined by Garrett Cregan, our—I don't even know what we call him—our professional marketer internally, one of the best paid ads geniuses I know. We're going to talk all about the metrics that you're measuring campaigns by and how this can mislead you. We'll talk about different metrics that you should focus on at different points and why the answer is not as simple as you might think as to where in the funnel you should be looking for your optimization.

How are you doing today, Garrett?"

"Doing good, how are you?"

"Hey, awesome. Excited for episode number—who knows what—of the Collective Clicks podcast. I think it's number three thousand."

"Three thousand. Okay, three thousand. Big day."

"Big day for us."

"Two thousand episodes. Yep."

"So today, the plan is to talk about metrics, which we do a lot. So if you're surprised, then you probably haven't been here before. But let's talk about specific metrics that people measure their marketing by because it turns out what you measure and how you feel about it really affects what you do with your business. It affects the kind of actions that you take, and everybody kind of has their own metrics that they think are most important for a marketing campaign to measure it in different ways that they optimize and all those types of things. So I'm really excited to dig deep into all that and find out what are the real metrics that matter and how do they interact with each other.

So, what do you think when you're measuring a marketing campaign is the most important metric to keep an eye on?"

"Well, I think it depends a lot on the goal of the campaign. Like, for instance, if I'm running some TV ads, then I'm probably not going to have that be measured on our—like on just a pure cost per contract basis because that's not the full intention of the campaign. That's not the only reason why it's active."

"Um, and so I think in part it depends on the goal of the campaign, but that's more of an aside and that's me talking as an agency employee, right? Um, but I think the—to kind of speak out of both sides of my mouth—I think it's important to focus primarily on the bottom funnel metrics. And by that, I mean the revenue-tied metrics because if those aren't there, then you're optimizing for the wrong things and you're going to get the wrong outcomes. So I think at the heart of things, it's important to have the core of your measurement be based on as close to revenue as possible and as close to revenue as that campaign is going to be tied to, if that makes any sense at all."

"Yeah, I totally agree. I think since the beginning of time, marketing companies and normal companies hire marketing companies—what do you call them? My clients, and this is what we would call them. Um, I think they've always kind of had friction on these specific metrics, right? Like, I think the most stereotypical example is the company paying for the marketing is like, 'Well, I need revenue,' right? And then the marketing agency is like, 'Well, you got a lot of impressions, you got a lot of clicks, um, you got a lot of leads,' or whatever the case is, right?

And really, the main difference here is that we're just looking at different points in the funnel, right? There's a top of the funnel and then there's the bottom of the funnel. Um, and that's kind of what you mentioned, right? You want to stay in the bottom of the funnel closer to revenue. Um, and you know, I've seen a couple people in different camps, and honestly, I don't think I fall like fully in one versus the other. I'm really curious to hear your perspective because you'll find investors that are like, 'ROI is the only thing that matters,' and while I believe that is true, I think that leads us down paths that aren't good sometimes.

Extreme example: let's just say you spent ten thousand dollars on one lead. That one lead turns out it closes into a contract, and that contract turns into a deal, and you make a hundred thousand dollars on the deal. It technically worked, right? The result is there. However, is that process repeatable and is likely to continue to provide that outcome? You're probably not going to find any marketing channel where you close every lead, right? So you probably were a little bit lucky.

Sometimes I compare this to like, let's just say we're talking like investing—not like real estate investing, but just investing in general, right? You have like an investment manager where their job is to make returns on money. So I give like ten thousand dollars to two investment managers, and one of them invests it in the S&P 500, and you know, two years later, we have, you know, what, 24% return, and it's, you know, 11% IRR or whatever the case is, right? And then someone else buys lottery tickets with the ten thousand dollars, and we just win the Powerball, and you know, now we have this like insanely high return, right? Who's the better investment manager?"

"If you're purely results-focused, then it's the guy who bought the lottery tickets."

"If you're more of a process-driven person where you kind of care about the underlying aspects there and like the repeatability and the sample size and how that affects things, then it's not the person who bought the lottery tickets because, on average, that's gonna make you fail, right?"

"So anyway, I kind of view it both ways, right? Like on one hand, the bottom of funnel metrics are the most important thing. However, I like to look at the funnel too because if you're getting those bottom of funnel metrics but the rest of the metrics don't look natural, then it's very likely that you're just running into good results but due to a small sample size. And that can be really dangerous because if you're choosing to double down on your marketing channel based on having a 10x return when that's not actually repeatable, then you're gonna waste a lot of money."

"Yeah, and I think—I mean, first of all, I thought what is the average cost per winning ticket from the lottery? Because that's making me really rethink my buying decisions because, you know, you make a good point. I could just put all my earnings into the lottery and it might be a good idea. But back to the main point, I think when you are looking at the bottom of the funnel, there's a few metrics that you have to consider in real estate to see if you're working off of small sample size or a skewed sample. And I think for me—and if there's any that I'm missing here, let me know—but I think that the first one is going to be the profit, right? Of like, of the fees that we collect minus what we spent on just the ad platform. The second is going to be the cost per deal, which is not going to take into account the difference in value of those deals. And then the third is the appointment to deal ratio. And I think if any of those three seems off, then you probably need to look a little bit higher in the funnel to see if, like, as that campaign runs longer, are those going to hold steady? And so you kind of have to look at the efficiency, the net, and the volume of your funnel to kind of get a really good idea of the full story."

"Because I can have like a thousand dollar cost per deal, but my spreads are 5,000 each, and that's not a win. But if I have like, you know, the inverse and have huge deal spreads but those deals can cost a bit more, that can be a win still. And so you kind of have to look at all of those metrics when assessing the campaign. And if, like you said, if those don't look very real and predictable, then you probably need to look further up the funnel."

"Yeah, what about—so really common talked about metric, this is probably the single metric that we're asked most about when people are talking to us in our sales process, which it makes me a little bit upset that it's the most common metric asked about because I don't think—spoiler, I don't think it's the most important one—but what about cost per lead? Famous metric."

"Yeah, so with cost per lead, there's a lot that you can control, which is the bulk of what we talk about on this podcast, right? Like things that you can do in your marketing to bring down your cost per lead and bring up the quality. Things like better keywords, better ad copy, better tracking, better page performance—all of those things can impact your cost per lead. But there's a lot that you can't control about your cost per lead that's very market-driven, not marketing-driven. Things like the size of the area you're targeting, the channel that you're working in, the number of other investors in your market—there's a lot that you can't control and that you can't predict.

So if you base your marketing on just cost per lead, that doesn't take into account the lower stages of the funnel as far as how are those leads going to turn into appointments, how are those appointments going to close, and what's the deal spread of those contracts. And if you're just looking at cost per lead, then you're going to basically always choose the channels that have the lowest cost per lead and don't always have the best deal spreads, always have the best motivation, or don't have the fastest cash cycles. So I think that's probably worth considering when looking at what seems like the golden standard of metrics when it misses a lot of deeper gray area that probably needs to be considered."

"Yeah, it's a really nuanced metric too because everybody defines 'lead' differently. I've noticed I've had a few conversations with investors recently where like there are like five different metrics that were pretty much used interchangeably throughout the entire conversation, and it creates a lot of confusion because we're not talking about the same things, right? So I really firmly believe that we need to like have some type of standard of, you know, what do different things mean? Because it creates so many communication issues, and I've noticed like the same person will say 'lead' but mean a different thing each time they say it. Like, 'Oh, in this case, I'm talking about like, you know, leads that are like, you know, really good that I can have an appointment with.' You know, and in this other case, I'm talking about like, you know, like the 'real leads.' My favorite word is 'real leads'—like, what does that mean?"

"Yeah, there's so many different—like that could be defined like 10 different ways."

"A person, an actual human being?"

"Yes. Um, but some leads aren't, you know, quote-unquote 'real leads' for a whole bunch of different reasons."

"Um, yeah, and I think people generally fall into two camps, and I don't like the two camps. I think there's like a middle ground that makes sense where like, there's on one side you have the really lead cost focused, where it's all about getting a lead at the right cost, and then on the other side you have this like quality focus where it's like, 'I don't care what it costs, I just want quality leads.' What I've noticed about every one of the people that's ever said that is they really care about what it costs too."

"Someone brought it up to me recently. They said they heard on a podcast, 'If you want Ferrari deals, you got to pay for Ferrari leads.' What do you think about that?"

"I mean, I think it sounds really good on the surface, and it's a great phrase. And I think there is some truth to it where like, if you want to get above market value, you can't pay like—uh, well, and that's probably like a bad way of phrasing it for our audience—but like if you're wanting high-quality leads, you have to be willing to pay at least what other people are willing to pay for it. And so, um, I think that's true. I think that you can't over-emphasize the best leads at the expense of volume. I think that's the only thing I would say, but I think overall it is fair to expect that the best leads are the best leads for a reason, and if you know that, then it's likely that other people also know that, and it's going to be hard to, you know, change those market dynamics too much."

"Yeah, it's funny because it just depends on who's hearing it, right? If I'm telling you you need to get paid for Ferrari leads if you want Ferrari deals, right? And you're the person who's way too focused on cost per lead, it's like the most brilliant message in the world for you. If you're the person who's already focused on lead quality, then you create some type of idea of like—we've even seen some of our clients where they go so far pushing quality up, and you can get pretty far down that road if you want to, but you get to these points where like your quality is improved by 20% and you're paying three times more per lead.

And I think everybody just assumes if your lead quality gets better, then your cost per deal goes down. That's not true. Like if you were to keep the cost probably the same and make lead quality better, then you're better off. But if you have to inflate the cost really significantly to get the quality a little bit higher, it just doesn't make sense, right? So that's where people are sometimes a little bit confused when I say that like optimizing towards return on investment and optimizing towards lead quality are two different things. They will get you different outcomes, and sometimes improving your lead quality and paying more per lead is actually a good move.

But there's a diminishing return on that, and you can push that farther and farther and farther to your filtering out like all the leads except for the one that you think is the best lead ever, and you paid a ton of money for it, but then if it doesn't close, you're, you know, you're not going to do very well, right?"

"And then I think that, um, I think there also is the idea of like the incremental value of an additional deal. If you're focusing so much on just getting those Top Line leads, then you're losing out on those more like medium quality leads that could help you get that next incremental amount of Revenue. And so I think that's where looking only at cost per lead and cost per deal is flawed because that's not taking into account those other metrics of the return on investment as well as the net profit of your campaigns. If you're so over-focusing on just efficiency, you can end up like, you know, being your Own Worst Enemy by actually under-driving volume and being in the red even if you have this screaming good cost metric. If there isn't volume, you still lose."

"Yeah, it's almost like the real only good strategy is just the one that your competition's not doing, in the sense that like that's where you find these undervalued leads, right? That's a word I like to use: undervalued. You know, as a real estate investor, you don't go into a market and say, 'Well, that house is worth a million dollars, I'm not interested at all,' right? Because if it's worth a million dollars, there's a price that you could buy that house at where it's going to be a great deal for you. Um, you could say the same about a hundred thousand dollar house, right? Well, there's a price that you can buy that house at where it's a good deal for you, right?

So it's all about kind of finding that sweet spot, which often depends on what your competition is doing. Because if they're just focused on volume of leads, which I seem to find tends to happen especially with larger companies where they have like marketing held accountable to lead generation and you have Acquisitions held accountable to closing of those leads, then marketing just does what they're supposed to do, which is drive as many leads as they possibly can. And then they say, 'Well, it's acquisition's fault they're not closing those leads.' And then acquisitions says, 'Well, these things are bad. It's all marketing's fault. They're bringing in bad leads.' So you have this like friction between them versus, you know, when we have just like a solo owner-operator of a business, they tend to be really focused on the quality because they feel like they control the whole thing and they have more the salesperson perspective.

But it's, you know, it really is a mix between both of them that you have to care about, because sometimes the way to win is actually lowering the quality. Like, what if you could lower your lead quality 10% and get three times as many leads? That'd be a huge win, right? And sometimes it's about just increasing that quality really significantly, and they both make a difference at the right time. Um, how do you find that hole though, like where where your competitors are just not focused?"

"That's it. That's a very good question."

"Um, if we're speaking more to PPC, because I think that's probably where our audience cares more, it's all about finding those keywords that you are seeing a better cost per click and a better return than your average. And I think that comes down not only to your average but also to benchmarks for your market and for your area, which if you want those benchmarks, they are found with us."

"So, I think if you know what can be achieved versus what you're seeing, then it's easier to find those hidden nuggets of value. But it kind of takes some knowledge of the benchmarks to be able to identify what's a win versus what's a less bad outcome."

"Alright, one final thing that I want to discuss that I think is interesting is how do you measure lead quality?"

"I mean, I have a thought, but I'd love to hear yours."

"I see you're playing a negotiation."

"That's right. I'll give mine and then I want to hear your better one. I think quality for me is tied to—okay, I'm going to hedge, but it's for a good reason. I think it's the percentage of leads that take the action that's nearest to revenue, and you have enough volume to have a big enough sample size."

"Yes, I follow that. I'm not sure anything—"

"That's what I would say. So, let's say that each month you get two deals, right? It's very hard to use leads to a deal as your number for quality because let's say there's a third deal that comes through and it's your next lead, then all of a sudden that looks like a killer metric. But there's not enough sample size to have that be meaningful. So, that's why I would say the lowest funnel metric that you have enough—and again, enough is so subjective, I'm sorry, I'm a marketer, so it's always going to be 'it depends'—but I think that's kind of the number. Whichever stage in the funnel that's going to be least impacted by the next lead being that action is probably where I would use to gauge quality."

"Does that make sense at all?"

"Oh, it absolutely does. It's the concept of measuring as deep in the funnel as you can with a relevant sample size."

"That was much better."

"Well, it's just a different way to explain it, but I almost didn't understand how I view things until you said that, and I'm like, wait, yes, that's how I view things. Of course, we care about the deepest in the funnel metrics, but if they don't have the sample size that's relevant for us to make good decisions, then we have to just go higher up in the funnel. It's better to have a high sample size with a less relevant metric than a low sample size with a relevant metric. Of course, that's a generalization because it depends on the sample size and how relevant the metric is. There's all those things."

"I can share a little bit about how we measure lead quality and what we've done with a lot of our clients. We put leads into different buckets. If a lead comes in, it's just a phone call or a form submission, we call that a gross lead. If it's spam or they're clearly not interested, like something like that, we would say that's not a net lead. So, you might have 100 leads come in and then you might have 90 of them be net leads. That's what I would call a real lead, you know, it's not like a fake phone number or something like that. Of those, you won't contact every one of them, right? So, you have some type of contact rate, and then you reach theoretically contacted seller leads. These are people that you've been able to get to answer the phone and they have a house to sell. Not every single one of those people is going to be an opportunity because some of them want retail or they're unqualified in other ways, like maybe they're just not in your target location or it's a mobile home and you don't like mobile homes or whatever the case is. Then you get to opportunities and some opportunities turn into contracts."

"The thing that kills me about all these metrics is they're so difficult. I could tell you one of the things that we've been running up against more often recently is pay-per-lead. Pay-per-lead is an interesting concept because what they're basically arguing is that you have to pay for net leads. If it doesn't meet the qualification criteria, then they refund you, and you look, and the cost per leads are pretty low. Sometimes when we're in conversations with people, they're looking at it and saying, 'Okay, maybe I could have a 300 cost per lead with you, but the pay-per-lead's 250, and I don't have to pay a management fee, and I get it refunded if it doesn't match certain criteria.' Then we look at it and they have a worse return on investment on pay-per-lead, and it seems to happen over and over again. I don't know what these pay-per-lead companies are doing, but it's interesting because you can have something still match the same criteria like an opportunity, for example, but be of a different level of quality. Some of it comes down to how it was generated. There's always a range of quality, and we find that most of our clients doing pay-per-lead have close to double the number of leads per contract as they do with their own PPC, which is a wild idea because they're supposed to be PPC leads still. I don't know if you have any thoughts on that or why that could be. I know we've seen some element of that between Facebook and Google, like Facebook generally requiring more opportunities per contract even though the opportunities are defined the same way. It's just the way that the lead is generated kind of affects the quality. That's something to really keep in mind because if you focus on any of these metrics that aren't just the end funnel metric, there's always some way to be misled. That's something that gets us even with pay-per-lead where you're saying, 'Okay, it should be a search lead, and it matches these criteria, and it's at this cost,' it doesn't pencil out for some reason."

"I think I don't want to get too deep into pay-per-click versus pay-per-lead because that's a whole different podcast, but I think that is kind of a case study in the value of looking as deep in the funnel as you can because on the surface it looks great. If I were an investor looking at just cost per lead, I would dump everything I had, my life savings, my 401k, into pay-per-lead because, wow, that's a screaming cost per lead. But if I were looking deep in the funnel, I probably would hold out on putting my kids' college fund into it because those numbers don't hold steady down the funnel. I think that's kind of an example of why you should look at the whole picture because what looks good on the surface might not translate as effectively into revenue. Looking at just apples to apples, that's more apples to oranges if you really look at how it performs deeper down in the process."

"Yeah, probably another way that it's a case study for looking deep in the funnel is you can see why we reach each of these metrics just by what the company generating the leads is focusing on. If you're doing your own PPC, it's closing-focused from the very beginning, and that's going to naturally just push all the quality levers as high as you can. If you're looking at pay-per-lead, what's the goal? Create the maximum number of non-refundable leads for the best margin."

"Yes."

"You can't blame pay-per-lead, but I think that's a flaw with the model. Their goal is to sell these leads for as expensive as possible and not get refunds. It's the only way to be profitable, and they don't have great margins even in the best of scenarios. I'm not talking dirt about pay-per-lead companies, but it's some aspect of just how the agreement is structured that naturally leads to an optimization point higher up in the funnel. Anytime you have a higher up in the funnel optimization point, you can expect a lower quality."

"Any last words?"

"No, I think this was a great summary of how to analyze data. I hope I didn't speak in riddles."

"In this, at the marketers with your riddle speak, a bunch of jargon to confuse the masses. That's me."

"Yeah, you just confuse them into spending more money with you, right? Is that how marketing companies work?"

"Yes, exactly. We optimize for up in the funnel, right?"

"Yes, up in the funnel of confusion."

"That's right."

"Yes, it's been awesome. I hope this episode has value for everybody listening as well, and I will see you next time."

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