I just re-read a draft of this post that I wrote on the plane last night. It is super geeky and a bit mathy (not a real word). In B-School, I loved micro economics because in the case studies there was a right answer – an optimal output, an equilibrium price, an economic order quantity. I try to apply the concepts in the significantly less black and white world of real life. This time, I am looking at marketing decisions in the Multi-Family space and can’t quite understand the forces that drive them.
How much is too much to spend in sales and marketing to acquire a customer? In some industries this is a relatively common question to answer. For example, in the online retail space where you are selling to a very fickle customer (who has limited brand loyalty), you know you have spent too much when the cost to sell and market has exceeded the marginal profit of the product you just sold. Until you have reached that point, all of your marketing is profitable. Typically, there is a curve from cheap marketing sources to expensive marketing sources and you only throw out those sources that meet the above definition of “too much”. This does not seem to be the case for Multi-Family marketers.
We see a lot of churn of marketing partners for apartment owners, consistently moving money from one marketing tool to another. I have asked myself “what conditions must exist to get rid of a marketing partner?”
Here is what I can think of:
- Full Up! The community is at capacity and need fewer leases, so it cuts out its most expensive sources. (They should probably get more units).
- All Duplicates – No Unique Leads. All of the specific leases that a marketing partner generates can be sourced elsewhere at a cheaper rate. In that case the community will only do better by moving, because every lead is a duplicate.
- Unique Leads are not Profitable. In the case where the marketing partner generates some unique leads, there is some math to do. I would guess that you would look at all leases – see how many were sourced ONLY from this partner and then calculate a cost per lease – rather than 1st to source the lead, last to source the lead or other attribution model. To test if the unique leads are profitable, you must first answer, “How much revenue do you expect from a renter?” The easy math is just (lease rate * expected months of rental). Next, “How much will it cost to maintain that unit (maintenance costs over the term)?” If the cost to acquire that lease exceeds the profit – get rid of that source. Unless my estimates are wrong, this is an extraordinarily big number. Average rent is ~$675, average tenure exceeds 14 months – so ~$9,500 in revenue. Even with ridiculous ongoing unit maintenance of 75% of revenue a cost per lease of $2,300 would still be profitable and worth the spend.
- Can’t Tell What Leads are Unique. This could truly be a conundrum in the print world – just because someone called from one magazine does not mean that they would not have called from another magazine. Since we can’t really track unique magazine readers, this could be the cloud that influences decisions. But in the online world you can use tools like Hitwise, Comscore, Compete and others to see the unduplicated audiences.
- High Required Return on Marketing. If you assume that you have many places to invest the free dollar, you should invest it where it gets the highest rate of return. If the Multi-Family industry has super high return expectations, the break even point falls dramatically. Using some round numbers from the above example, if the industry expectations for return on investment are 20% the you could only spend $1,900 to obtain that $2,300 in profit.
- Finite Budget. In a world where budgets are arbitrary and finite you are always trying to replace expensive sources with cheap sources. But you should only have a finite budget when you have finite supply. Unless you have reached the point of “Full Up!”, spending an extra $1.00 to get $1.20 back within the year is always good business.
So, what are some other explanations for constantly shifting dollars?
- By moving dollars you gain negotiating leverage to reduce marketing cost for a long time. In the example I had above, if by temporarily firing that $2,300 marketing partner I would forgo a lease or two, but reduce my rate to $2,000 per lease thereafter – that is a good game to play (much more profit in the long run). The question is could you have achieved the new negotiated rate without firing the provider?
- You want to truly test what are unique leases. I am a bit suspicious of this in a world where everything is pretty well tracked. But, one method to see how much a marketing partner is worth is to fire them, measure the change in income and determine what you are willing to pay to get them back.
- You think that the renter will eventually find you. While this is a bit of a twist on the Unique Renter scenario – here you believe that by putting a sign on your building you will eventually get your renter in the door – it just will take some time. In that case you would need to do similar math and just use the extra time to get the apartment rented. So if it took 3 months more to rent the apartment without the marketing partner you would have $675 * 3 = $2,205 in revenue. Assume the same ridiculous 75% of revenue in maintenance cost and if the cost to acquire the lease exceeded $500, you should get rid of the partner.
I am sure that I am missing something in all of this calculus – I just can’t put my finger on it.