How much should you spend on advertising? How much is too much?
A recent trade magazine posted an article promoting the advantages of using two particular lead generation companies (Houzz and Yelp). The title of the article is “Two ‘No Brainer’ Lead Gen Tools Contractors Aren’t Using”.
The article states that both sites are free, but the examples given are contractors who choose to pay for better exposure. The closing paragraph:
“Menn pays about $1,200 a month for his ‘pay to play’ advertising, but he says he gets at least one qualified lead a week from it, which more than pays for the cost. McGowan currently pays $500 a month for Yelp and says he has gotten three times the response from his investment. ‘It’s one of our least costly channels, and it’s the best money we’ve spent,’ he said. ‘My advice is to buddy up to Yelp, advertise on it and manage it.'”
If those numbers raise red flags, good for you. Is an investment of $1,200 a month reasonable for one qualified lead a week?
It depends on your company, and that’s the analysis that’s missing from this article.
Let’s say your company builds $1 million a year in remodeling projects. Your average job size is $50,000. That means you’re selling 20 jobs a year.
If your sales-to-leads ratio is 1 in 4, you’ll need 80 leads to sell 20 jobs. With an advertising budget of 3% of sales, you have $30,000 or $2,500/month available for advertising, with a need to generate about 7 qualified leads per month. If your entire advertising budget is spent with lead generation companies (a really bad idea that I’d never endorse), you could spend about $350 per qualified lead. $1,200 per month for 4 qualified leads might be reasonable but it’s high.
Don’t forget that your website should be the first expenditure for advertising. All other sources for leads take a backseat. Having a well-optimized website that generates leads should be the top priority for your advertising budget, everything else comes next.
If you’re a specialty contractor, building $1 million a year, your average job size might be closer to $15,000. You need to sell 150 jobs a year. With a sales-to-leads ratio of 1 in 4, you’ll need 600 qualified leads to sell 150 jobs, or 50 qualified leads per month. If you have the same advertising budget of $2,500/month, you definitely can’t afford to pay $1,500 for four qualified leads. If your entire advertising budget was given to lead generation companies (please don’t), that’s $50 per qualified lead.
What’s a qualified lead? It’s a lead that’s worth spending time on. A potential client who has a job they want done, has the funds available to do the job, wants it done in a reasonable time frame, and isn’t calling ten contractors to find the lowest bid.
Plug in your own numbers. Are you paying a reasonable amount for your qualified leads?
Contractors who maintain an advertising budget of three to five percent of their total annual sales can usually generate qualified leads year-round. That means they can also keep busy during the so-called “down time” every year (November to March) or when the economy goes south.
Rather than depending on a lead generation company to provide your leads, take the time to establish your own website and learn how to optimize it. You’ll generate far better leads, you’ll spend considerably less money per lead, and you’ll be in control of your company’s information. You also won’t be at risk of losing money or business if a lead generation company decides to raise their rates. That’s the no-brainer.
“Success or failure in business is caused more by the mental attitude even than by mental capacities.” — Walter Scott
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations as needed.
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