Cost Per Funded Loan

We are now on part 3 of my conversation about evaluating ROI. I have introduced what I feel are the key components and subcomponents of ROI (see below).

1. Costs

1. 1. Cost per Lead

1. 1. Cost per funded loan (CPFL)

2. Conversion Ratios

3. Income

Firstly we discussed Costs, specifically the Cost per lead. This post will be about the Cost per Funded Loan (CPFL).

Cost Per Funded Loan (CPFL)

There are ultimately 3 key things that I feel are worth emphasizing with respect to CPFL:

1. How to Calculate

2. Sample Industry Benchmarks

3. The CPFL Golden Rule: On its own, it is a completely worthless and meaningless statistic! (Much more on this part later)

Calculating CPFL

There are a number of ways to calculate CPFL and I am sure if you are using some sort of lead management system (and if you are not, what the hell is wrong with you?) you can easily access this statistic. The easiest way to do it is via the following formula:

Cost per lead

—————– = CPFL

Conversion Ratio

So, if you have a $35 CPL / 3% funding ratio = $1166 CPFL.

Benchmarks

On the surface, this would appear to be an acceptable CPFL. Typically, what I see in the industry is this:

• $1000 would be a best-in-class operation

• A well run shop is going to generally be in the $1200-$1800 range

CPFL Golden Rule

There really isn’t a great deal to talk about with respect to the CPFL. It is nothing more than a math equation. On its own it is a number that is completely meaningless. I mentioned this nugget previously in my piece on the Cost Per Lead, but I will spend more time on it in this post.

Costs only have significance in relation to their returns. I can’t tell you how many shops I have worked with over the years that could tell me to the penny what their CPFL’s were with each of their lead sources, but when I asked them what was their Return from that source, they looked at me like I just made a joke about their mother. It’s called ROI, folks. The “R” stands for “Return.” Here is a real-world example.

One of my favorite clients is one of the more significant lead buyers in the industry, but obviously I am not going to mention their name. When you look at the three components of ROI, Costs, Conversion Ratios and Income, this shop was among the best in the industry in 2 out of the three.

Because they were buying about 1500 leads per day with relatively open filters, they were able to negotiate lead prices that made me, as a sales guy, cringe.

Their incomes per loan were very solid as well, typically in the 1.5-2.5 point range; very healthy. But their conversion ratios were abysmal.

Even though they had potentially the best lead prices in the industry, and they were making a fair and healthy spread on each loan, their conversion ratios were so poor that their average CPFL was still well north of $2000. But what was their solution? They would continue to try to negotiate down their price with me. I showed them with some very cool excel worksheets that I have developed (if you want copies, email my gmail account) that by increasing their conversion ratios by about ¾ of a percent (no small feat, I understand), they would actually increase their ROI by more than 300%. Lowering their price more would have only netted an ROI increase of a few points, total. It was ridiculous! But they chose to concentrate on costs and costs alone. They were extremely successful in their operations but still couldn’t achieve their CPFL goals because they ignored the area where they had the greatest amount of leverage, conversion ratios. They ignored the “return” component on their investment in leads. I think this example is pretty typical today, too.

So my message to you, lead buyers, is this. Pull your heads out! Lead costs and origination costs are important, but unless you are pulling at least a 2% conversion ratio, you better not complain to me about pricing until you get your own house in order. If you’re pulling 3% and you have a $2500 origination cost, then you have something to bitch about. But if you are managing your campaigns to costs but not paying at least as much attention to your conversions, then you are wasting my time and yours. Whew! That felt pretty good to get off my chest…

.

.

.

Popularity: 3% [?]