LEADCRITICThe Ever-Elusive ROI, Part 2
Cost Per Lead
In my previous post I introduced the series about ROI and its three key components: Costs, Income, and Conversion Rates. In this piece I intend to take a more in-depth look at one of two the key components of Costs, Cost per Lead. I will also share with you some tactics that you can employ, outside of just hard-nosed negotiations, to lower your acquisition costs.
Costs – Cost per Lead
The bottom line for lead costs is pretty much universal with almost any purchase; that is, you get what you pay for. It needs to be understood that leads are not a commodity like coffee, orange juice, or pork bellies… used to make bacon… like in 
a bacon, lettuce and tomato sandwich (you’ll have to remember Eddie Murphy in Trading Places to catch that obscure reference, but I do crack myself up sometimes…). In this piece I will give you some tactics to help you manage your lead costs, but I want to throw down this gauntlet. Of all of my components for managing ROI: Costs, Conversion Ratios and Funding Ratios, the Cost per Lead is by far the least significant. With the right metrics, it is pretty easy for a $40 lead to outperform a $15 dollar lead. But if you concentrate on lead costs without looking at the whole picture (ROI), then you may never be able to see this and pass up a windfall marketing source.
Here are some tactics to help manage your lead costs.
Volume
Think Walmart and Costco. Volume powers buying leverage. OK, this was not much of a secret. But even if you can’t buy more than 100 leads per day from one source, you can still apply leverage in your lead buying
States
Cast a wide footprint. Lead sellers are looking for buyers that are going to benefit their distribution channel and provide wider coverage. If you are clamoring for the same leads as everyone else, then your business is frankly not as valuable. You are the commodity. This is also going to benefit you by helping make you “bubble-proof,” in these more challenging lending times, best described here by Barry Habib’s “bowl of pasta,” simile. This is truly a win-win.
Loosen Filters
One of the things that I get frustrated with is how many buyers want me to do their job for them. They don’t want their LO’s to have to qualify a consumer or discover needs for a sale. All they want is a lay-up. For example, they want a lead that is a cash-out refinance, with a 75% LTV maximum. Now, we all know that home values are dropping and consumers are typically over-stating the value of their house, but if a consumer wants $40k in cash, but that would bring them to a 110% LTV, then no one is going to be able to do the loan. Set the right expectations for the consumer, be their advocate and get the loan done with less cash. Train your loan officers to be able to convert more than just the lay-ups. This will bring down your cost per lead while still getting the frequent lay-up, too. Set your LTV maximums at 90-95% and don’t filter on Loan Purpose.
Buy Leads 7 days a week
Again, by providing benefit the lead seller’s channel , they are likely to make concessions in price. If you don’t have loan officers taking leads on weekends, then you are missing out on a huge opportunity. For those shops that do, they typically see their best contact and application ratios on weekend leads because consumers are home, available to speak and actually have all their documents available for reference. Even if you don’t call until Monday, most consumers fill out the form with the expectation that they will be contacted during the work week, so there isn’t going to be disappointment on the consumer’s behalf.
Take Purchase Leads
If you don’t feel like you can stay with a consumer for the longer sales cycle, there are still other options. Most good lead companies provide you with the ability to filter leads on where the consumer is in the buying process. If you can get volume from the lead provider, buy the leads where the consumer has said they are inside of 30-45 days from buying a house or already under a purchase contract. The time-frame will now be the same as the typical refi deal, but these leads will usually be priced about 50% less than the typical refi lead. Furthermore, you get the whole loan amount and not just the amount being refinanced.
Hopefully you got some ideas as to how you might be bale to better manage lead costs but I can’t stress the following point enough. While important, Costs per Lead is the least significant component of ROI, because it is only important relative to the leads performance.
Next Up, Cost Per Funded Loan…
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some Insider | Jan 8, 2008 | Reply
looks like the link to the Barry Habib clip didn’t come through. It’s worth a watch, check it out here.
http://www.paperdinero.com/BNN.aspx?id=30
Lead Critic | Jan 8, 2008 | Reply
Great post,
I especially think the point of buying leads 7 days a week is very important. I performed a 3 month analysis and found that leads purchased on the weekend converted at a higher rate than any other day even if they were not called until Monday. The leads that were bought and called on the weekend performed even better. The study took into count 10,000 plus leads.
weekend kick as for leads.
Noel Collins | Jan 8, 2008 | Reply
Good post, Boy I heard this story hundreds of times over the years, brings back good memories for someone no longer buying leads. Thanks Insider, LOL.
nowayoj | Jan 8, 2008 | Reply
Think about weekends from a consumer perspective. Workweek - busy. Weekends - less busy.
You can buy a car on the weekend, buy a house on the weekend, buy.a plasma tv on the weekend, buy groceries on the weekend… Why can’t you get a mortgage on the weekend?
Morgan | Jan 8, 2008 | Reply
Some great points here. A couple of additional thoughts:
Filters become less important as volume of leads increases that’s because there’s enough wheat to separate from the chaff and still make the economics work. If you’re only buying a handful of leads a day then you could be stuck with a bunch of unworkable leads where people at 95% are really at 110% before we even get started with cash out. So I recommend adjusting accordingly.
State selection. This is an incredibly important part of the process but often misunderstood. The cheaper leads are not the only factor. You need to look at the full gamut of issues in the state. Are prices severely depreciating? Are costs for licensing high? Insurance costs? etc. What are the average loan sizes and concomitant fees. Is the net per loan worth the time? If you’re only making $600 per loan in Michigan but are having plenty of leads but can make $1,200 per loan battling with everyone else in CA then the only way MI leads make sense is if you’re cranking at least 2 MI deals for every 1 CA deal you’re giving up.
Weekend leads. If I could have sales people only work weekends and processors work M-F we’d close just as many loans (or damn near close) that’s how valuable the weekends are to sales. Another nuanced factor to consider: If you are having a hard time cracking the filter you want for a particular lead type (due to volume requirements, monthly spend, etc.) ask your rep to give you that filter on the weekend. They’ll be glad to sell some volume on the weekend and you’ll get some of the best leads that filter has to offer.
Lead Critic | Jan 8, 2008 | Reply
Morgan,
I agree with your point on state diversification. I always got a kick out of providers when they wanted me to pick up other states and claimed it would improve my conversion ratios. The key issue is I could care less about conv. ratio and only was concerned with ROI and when you are only concerned with ROI you have to take into account exactly what you mentioned.
some Insider | Jan 9, 2008 | Reply
Love the dialogue! Morgan, I agree with you on the state comment, too. This is why it is so important to know and measure your ROI. There is certainly nothing that says you can’t have different filters per stat. The more you do, certainly, the more difficult it can become to manage. But if you know your margins are smaller in certain states, then up the minimum loan amount so that your fee incomes remain consistent. It may not be the IDEAL situation for me, the lead seller, but at least I am still getting significant sales coverage for my distribution channel.
Noel Collins | Jan 9, 2008 | Reply
You are only effective if you can measure all of the above, that comes with using a solid LMS and marketing professional who knows what to look for. Job security?