In Part 1 of this series, Edward Nevraumont, Chief Marketing Officer at A Place for Mom, demonstrates how using the right metrics to measure your marketing efforts is important in understanding your return on investment. Part 2 introduces leveraging marketing channels to determine the cost of a move-in.¬†
In my last post, we looked at the value of a move-in. This post builds on the concepts I discussed in that article, turning our focus to the cost of a move-in.
We started last time with the idea that you are handing out $1 bills (with marketing) in order to get a $5 bills back (with revenue). I spent the post doing some basic math to determine what that $5 bill is really worth. This post will dive into figuring out what the $1 bills are actually costing you.
How Marketing Channels Work
Today we will also introduce marketing channels into the mix. In order to spend marketing dollars effectively we need to know what a move-in costs in different channels. For simplicity I am going to make a few assumptions (all of which I will challenge in future posts, but we need to start somewhere):
- Let‚Äôs assume that whichever channel brings you the “lead” first is fully responsible for when that lead moves in.
- Let‚Äôs assume that no channel has any impact on any other channel (i.e., television doesn‚Äôt make your yellow pages ad any more or less effective).
- Let‚Äôs assume that if a channel gets involved later it doesn‚Äôt have any impact (i.e., only the first channel matters ‚Äì the “first touch” model).
- Let‚Äôs assume that all of the leads you get from a channel are completely incremental (i.e., you wouldn‚Äôt have got any of those leads later from a different channel).
All of those assumptions are wrong by the way, but they keep things a little simpler for this first analysis. I will come back and challenge each one of those assumptions one by one in future posts, but for now, even with this simplified model, it is not straightforward to know what a move-in is costing you.
Generally, most marketing channels work like this:
- Marketing is done (and money is usually spent).
- Families or seniors reach out to a community due to that marketing and you collect contact information (‚Äúleads‚Äù).
- People in the community spend time working with the family/senior. (This has costs too which may or may not be variable depending on your community staffing model. This is where I draw the line between marketing and ‚Äúsales.‚Äù)
- Some of these seniors end up moving into the community (‚ÄúMove-ins‚Äù/‚ÄùLeads‚Äù = Conversion Rate).
The first challenge you have is identifying which marketing channel generated a given lead. This is made a little easier with our simplifying assumptions, but in many cases you just won‚Äôt know. One option is that if someone walks in the front door of a community you can just ask them, ‚ÄúHow did you decide to come in the front door of our community?‚Äù That will give you an answer, but it won‚Äôt necessarily be the right one. (Try giving new families a multiple choice option, but put down marketing channels you don‚Äôt use. For example, give TV as an option when you know you‚Äôve never run a TV ad. Some percentage of people will swear they saw you on TV.)
Again, to make things simple we can just take people at their word if they walk in the front door and you don‚Äôt already have them in your CRM system. If you already have them in your system, then just use whatever channel put them in that system (the “first touch” model I mentioned earlier). Now you have an assigned channel for every lead.
Costs per Marketing Channel
The next step is to back into what the cost was for each of those leads. That cost will depend on the type of channel it is associated with. I like to think of channels based on how they require you to pay:
1. Flat Rate
Flat rate channels quote you a price to participate in the channel and you can take it or leave it.¬†If you want to run an ad in AARP‚Äôs magazine it will cost you $xxK. If you want to put a listing in your local Yellow Pages it will cost you $xxx. You pay the same price regardless of how many people see your ad or how many leads it generates. Granted media outlets that get more viewers or readers can get away with charging more, but if no one reads the New York Times this weekend, they don‚Äôt give a refund to their advertisers (although if there is a big news story that causes a lot more people than expected to read the paper they don‚Äôt charge you more either). This is a great model for the advertiser who forces you to take all the risk. If you are marketing with a flat rate channel, your cost per lead is just the dollars you spend on the channel over a specific time period divided by the number of leads that channel generates. Flat rate deals vary from $10/month through to hundreds of thousands of dollars per placement in a major magazine. (This begs the question: ‚ÄúWhat time period do you use.‚Äù I‚Äôll come back to that in a future post).
2. Cost per Impression
Usually this is called CPM (Cost per Thousand Impressions ‚Äì where the ‚ÄúM‚Äù is for the Latin thousand and not the English million).¬†Here the media company only charges you if people see your ad. If no one sees it you don‚Äôt pay anything. What the advertiser doesn‚Äôt guarantee is anyone engaging with the ad. Just like Flat Rate, you could spend money and have no leads generated, but at least you are guaranteed to have people see the ad. If the NYTs charges a CPM rate for their website and they have a big news story, you will pay more because more people saw the ad. To calculate your cost per lead you need to finalize what you paid for the placement and then divide that by the number of leads it actually generates. CPM deals vary from $1 CPMs to $100 CPMs or more depending on how engaged or targeted the media company feels their reader base is.
3. Cost per Click
Now the media seller is starting to put its money where its mouth is. In CPC you pay if someone clicks on your ad (the equivalent in offline advertising is pay per phone call generated). There is no guarantee that the clicks will turn into leads, but you at least know that someone saw your ad AND interacted with it. To calculate your CPL, you take your CPC and multiple by your Click-to-Lead conversion rate (i.e., the % of visitors (or clicks or phone calls) that turn into leads). CPC rates vary from $0.05/click to $25 or more per click depending on the term you are advertising on, how effective your advertising is, and where you want to rank when there is more than one advertiser. (Usually if you want to be on top you will need to pay more per click. In exchange, the top listing tends to get a lot more clicks ‚Äì so you are trading cost per lead to get more leads ‚Äì or at least more clicks.)
4. Cost per Lead
Even better than CPC is CPL. Here the media company takes all the risk through to lead generation. They decide where to put their media or which advertisers they should put on any given media placement. They are only paid if those media placements lead to actual leads. Most media firms are not interested in CPL. It‚Äôs too risky. And it‚Äôs too reliant on things outside their control in businesses they don‚Äôt understand. But for advertisers it‚Äôs a great deal. If AARP offers you a placement for $10K, you have no idea before you do it if that is a good price or not. But if they offer to put an ad in their magazine and charge you $50 for every person who calls a number and you add to your CRM database it‚Äôs likely a great deal. You may not get any leads, but you only pay based on the outcome.
The biggest issue with CPL is understanding the quality of the leads. For that you need to know the channels Lead-to-Move-in conversion rate. If that rate stays constant over time then you should be able to evaluate the channel. But if your CPL partner is making the decisions on where to put your messages without your knowledge, there will always be an incentive to find the cheapest ways to get you leads (so they make more money when you pay them the $50). Usually you get what you pay for and the lower cost leads convert at a lower rate. If it‚Äôs too low you will fire the marketer, but they will always have an incentive to send you as low quality as possible without being fired. In the lead generation industry this is called ‚Äúblending‚Äù ‚Äì give some good leads (even if those leads cost you more to get than what you are being paid), but then blend those leads it with cheap ones so they can make a profit.
5. Cost per Tour
This is very similar to CPL, but just a little further down the funnel. Here you only pay when someone actually tours your community. It solves a lot of the problem with CPL since if the media source is sending you ‚Äòbad leads‚Äô those leads are very unlikely to tour ‚Äì so you won‚Äôt have to pay them. You are not guaranteed move-ins ‚Äì you could be scheduling tours with seniors who cannot afford your prices for example ‚Äì but at least you know the dollars you are spending is getting someone through your front door. It is much more difficult for a media company to ‚Äòblend leads‚Äô in a CPT model. Your second challenge with CPT is that media companies who are not laser focused on senior housing will have no way to price it ‚Äì so they are unlikely to operate in this model. But if you can convince a media provider to charge you on a per tour basis, it‚Äôs a pretty low risk way to spend your marketing dollars. (Here your cost per lead is LOWER than the cost per tour you are quoted ‚Äì since some leads will not tour. Just multiply your CPT by your tour rate to get your CPL).
6. Cost per Move-In
The final part of the funnel. When you pay a marketing channel on a per move-in basis, by definition you know what your cost per move-in is. This doesn‚Äôt mean it is the best marketing channel ‚Äì that will depend on how it compares to the cost per move-in for each of your channels ‚Äì but it does mean that it is the lower risk channel type. For every other channel type you won‚Äôt know what your cost per move-in is until after you have made your investment. At least with cost per move-in you know what that return on investment will be when you first look into the channel. Almost. (To calculate your CPL on CPM channels, take your CPM and multiply by your conversion rate).
Other Hidden Costs
In addition to the standard marketing costs, your cost of sales will vary by channel. There are two main drivers of sales cost per move-in. The first is the commission you pay your sales people on a move-in. Assuming you don‚Äôt have an accelerating tiered program, this cost per move-in is the same for all of your marketing channels. Your next cost is the ‚Äòsalary‚Äô cost of your sales people. While it is sometimes nice to think of the salary costs as fixed, in the long run you can always hire more sales people or reduce your number based on how many you need to fill your community. This second cost can vary immensely by channel. Calculating this cost is very difficult, but there are two metrics that will help you get a rough estimate:
- Lead-to-move-in conversion rate of the channel
- Average time from lead to move-in
Both metrics give you an idea of how much time one of your sales people spends on sales in order to get a single move-in. If a channel has a low conversion rate, that means your sales people will have to spend a lot of time on working with many families for each senior that moves in. If a channel has a very long average time from lead to move-in, it means your sales people will likely have to spend more time with each family before a move-in happens. In both cases the sales time required per move-in can vary dramatically.
In my experience the conversion rate is the biggest driver of sales time commitments. It is also the simplest one to quantify. An easy starting point is to assume a sales person can ‚Äòhandle‚Äô working with a specific number of new leads per week. Better tools, training and experience will allow that number to increase over time and you may already know what your people can handle. (If not, it is worth collecting the data to see what they are handling now. If you know the number across many communities, you can use that to see if the conversion rate drops when a sales person is sent too many leads).
Let‚Äôs say you‚Äôve done the math and the answer is that a sales person can handle about 20 new leads a week. After that point you want to hire more people to help manage the incoming families and ensure you stay on top of their needs.
Now just take the fully burdened annual cost of one of your sales people and divide it by 52 (to get your weekly costs) and then by 20. You now have your estimated cost per lead for your internal team.¬†(There are other ways to do this, like time-and-motion studies for example, but I like this one because it‚Äôs fairly simple and based on numbers you can collect fairly easily).
Your Cost per Move-In
You are almost there. For each of your channels you should now have two numbers:
- Your Cost per Lead (CPL)
- Your Conversion Rate (CR)
Plus, you know what your internal cost is to ‚Äòmanage‚Äô a new lead (ICPL).¬†Put it all together and your cost per move-in by channel looks like this:
(CPL /CR) + (ICPL/CR) = Cost per Move-in
We made a lot of assumptions in the post today that we will come back to in the future, but this is a pretty good starting point. When you combine this cost per move-in estimate with the marginal profit per move-in from the last post, you can force rank each marketing channel from most profitable to least profitable. It‚Äôs pretty clear that you would want to spend money on the most profitable channels first. The next question is, ‚ÄúHow much should I spend on each channel?‚Äù I‚Äôll talk about that in the next post.
If you have questions about this post, or any other in the series, please share them in the comments below. I will be more than happy to answer your questions either directly or in a future post.