How to Calculate Your Max Cost Per Lead [Whiteboard]

One of the biggest mistakes we see a lot of real estate investors and agents making with their paid advertising is honestly, you stop doing your marketing way too soon.

One of the calculations we’ve come up with over the last year or so that kind of helps you wrap your mindset around where you should be putting that money and when you should stop is just something that I call your max CPL, your max cost per lead.

In this short video, I’m going to walk you through this really, really simple calculation. In under three minutes, you’ll be able to figure out your ceiling for the max amount you should be paying for leads.

The funny thing is we want you never to have to pay this amount, but this calculation is what the big guys in every single market are doing. So, if you’re wondering how the big guys in your market are winning and getting most of the leads, it’s using this calculation.

You just don’t know it. I’m going to walk you through this really, really quick, and I want you to grab a piece of paper and follow along as you’re doing this. I want you to do it yourself and come up with your max cost per lead.

I’m going to tell you exactly what to do with that when you’re working with your pay-per-click person or when you’re doing it yourself to really go out there and dominate your market.

How to Calculate Max Cost Per Lead

The first thing we want to put down here is your APD, your average profit per deal. Your average profit per deal, of course, is going to vary in markets, so write down yours. For this particular scenario, we’re going to use $20,000.

Let’s assume that your average profit per deal is $20,000. Now what we’re going to do is how many leads does it actually take to get one of those deals?

The acronym for that LPD, so how many leads per deal?

How many leads does it take to get one of those $20,000 deals? Write that down. We’re just going to use a really, really round number here. We’re going to use 10 on here.

The average that we see, honestly, the average for pay-per-click is about 10 to 15. The average for SEO is between 8 and 14, 8 and 15, around there.

If you’re doing direct mail, it’s going to be closer to the 30 to 40 to 45 range leads before you get one of those deals, but when you’re doing pay-per-click, which is what this particular video’s about, this is probably pretty close to where you’re going to be, 8, 10, 15, somewhere around there.

Now, this is where we kind of changed the calculation over the years for people to really make it hit home. Now, this is not scientific.

I’m probably going to get comments from people saying, “Well, that’s a complete guess. What does that matter?” Well, this does matter because this helps you psychology-wise wrap around what your ads budget should be.

To get one of those $20,000 deals, what would you trade? How much would you actually trade to get that $20,000 deal, assuming that you know all the effort it will take, the commissions you’ve got to pay out, and things like that? So, would you trade $2,000? Would you trade $5,000? What’s the max amount you would trade to get that deal?

In this particular instance, we’re going to use $5,000 because I’d trade five grand all day to get 20 grand all day. Now, it’s probably pushing it to say that you’d trade $10,000 for $20,000 because then the risk becomes too much.

What’s the max amount that you know you would be insanely ecstatic if you were able to trade those all day for that? I’m going to put $5,000.

This is way, way simpler than you think it is. Right?

What Would You Trade to Make a Deal?

Here’s what we’ve got. We’ve got your average profit per deal of $20,000. You’ve got 10 leads per deal, which, once again, that’s just using an assumption here. Then you’ve got, I would trade $5,000 for that $20,000 all day long.

All we’re going to do now is we’re going to take this number, your $5,000, divide it by how many leads it takes, what you would trade divided by the number of leads it would take to get there, and that’s your max cost per lead. In this case, it’s $500.

So, a lot of you are probably looking at that going, “Oh my gosh. A $500 lead is insane. Why would I pay $500 so I can get leads for $120 or for $80?” or, “My friend over here’s getting leads for $62.”

The thing is, when we think about leads in the mindset of trying to get them for as low cost as possible, what happens is you really limit the number of leads you can go after.

The big guys in the markets, when you start to see how they’re going in there and dominating the markets, it’s because they know their numbers. It’s because they know they’re willing to trade $5,000 all day long for 20, and they can go out there and outspend you.

They can spend more money to get in front of the prospect. They can spend more money on Google Ads on Facebook to get in front of the prospect. They’re willing to spend up to $500 in this scenario to get that same exact prospect that you’re stopping your marketing at $100, or at $150, or f$200.

You can look at that and see who’s going to win the game. If you’re stopping your marketing, you’re turning your campaigns off, you’re bumping your bids down, and you’re stopping it at, man, $150, “I don’t want to go over $175 a lead,” and your competitors know that they’re insanely profitable at up to $500, they’re going to win all day long.

Now, do you actually want to spend up to $500? Ideally, not. Ideally, our clients don’t spend anywhere near their max cost per lead, but we have a client in Boston whose max cost per lead is pushing $700 or $800 per lead when you look at his numbers.

He’s spending about $300 to $400 per lead in his market, sometimes $250, and crushing his market, where his other competitors are coming at us saying, “Hey. We’re struggling. We’re getting leads for $150, $175.” We’re like, “Spend more money, and you’ll start competing.”

Calculating Your Max Cost Per Lead

Find your max cost per lead. Figure out what you would trade to get that average profit per deal. Then divide it by how many leads it will take to get that, and that will give you this nonscientific but insanely, insanely effective, mathematical max cost per lead number.

You go to your pay-per-click person with that number. As long as they’re managing your pay-per-click well and your pay-per-click campaign, your stuff is converting well, and your averages hold still, spend as much money as you can up to that cost per lead, and you’re going to win.