Understanding ranch marketing ROI for ranch brokers
What? Brokers do not look at returns on their ranch marketing dollars spent? You just fronted $14,000 on the ranch listing you just took on. How soon will you get that money back? What is the ROI on that ranch marketing investment? This article is probably going to be a “duh?” article that we all read …one where it states the obvious on a subject we already knew but what the article does is formulate the thought and process into an actionable list for ranch brokers.
I’ve found that the ROI calculation for ranch brokers is simple, but where you get tripped up is costs. Allocating costs to a listing isn’t always clear and straight forward. What is cost of goods sold (COGS), operating costs, marketing costs, etc. I’ll hold off on allocating costs discussion until the end of the article to maintain the simplicity of our example below.
Let’s begin with high level ranch marketing budget. The best way to develop a marketing budget is to treat that budget as if it’s an investment, i.e. something that delivers an expected return. Your listings represent the portfolio of investments.
Review last years ranch marketing spend and calculate the ratio of cost to revenue to give you a benchmark starting point in the new year. So if your firm did $500,000 in fees and spent $100,000 in marketing (yes you need to include fees from outside vendors) then your marketing cost ratio is 20%.
Now, there is a catch. If your brokerage let’s say carries 10 ranch listings on average your ranch marketing cost ratio is likely higher than if your brokerage carries 30 ranch listings on average. The ranch brokerage with more average listings count gets an economies of scale in most cases because resource costs are spread over more listings and higher total revenue. An example of this is print advertising where larger ranch brokerages put more listings on their full-page ad. A smaller brokerage may only be able to put 4 listings in an ad whereas another brokerage may have 10 listings in the ad.
Another example would be somewhat fixed service costs such as SEO or social media. Whether you have 10 listings or 30 listings those services may not increase with more listings.
I see marketing cost ratios vary from 10% to 25% depending on the total revenue of your brokerage and other variables. The important data point here is get your benchmark ranch marketing cost ratio from last year and use to measure against going forward. This is a measurable key performance indicator (KPI) for any brokerage.
Now that you have your ranch marketing cost ratio, let’s get into an example listing and ROI. I like round numbers so let’s start off with a property for sale at $1,000,000. It has 400 acres with a nice cabin to add some liveability. That’d make it $4,000 per acre.
Easy commission calculation is $1,000,000 x 3% = $30,000. So if your marketing cost ratio was 20% last year then your planned ranch marketing spend could be up to $7,500. This listing marketing budget doesn’t mean allocating all of it to paid ads such as print, social, video, etc. You have to leave plenty of room in there for services.
NOTE: I don’t like to plan commission percentages on “double ending” deals. The best practice would be to budget a marketing spend around representing one side or the other on a transaction.
The next number we need is “average days on market”. Take each listing that sold last year (or last several years) and individually calculate days on market from listing creation date to closing date. Sum the days on market for all these sold listings and divide by total number of sold listings in your data set.
I personally prefer to look at months so take your average days on market number and divide by 30. You probably won’t get a whole number so just keep it to 1 decimal place.
Let’s presume that your brokerage average months on market is 10 months. This means that your $7,500 investment will likely come back to you in 10 months. If all goes well the brokerage commission will be $30,000. This would be net return on investment of $22,500 or 75% Return on Investment (ROI) or 360% annualized yield.
Now take this a step further …your brokerage has 30 listings and each listing has $7,500 in marketing costs tied up in them. That totals $225,000. So presumably you’d have about a quarter of a million dollars tied up at any given time in marketing of ranches. If you’re running this as a line of credit with a bank then there is a carrying cost associated with these allocated funds.
- Benchmark your marketing cost ratio. Work from there moving forward. Possibly work to lower it with more efficient ranch marketing spends that can achieve better or same results in sales as in past.
- Benchmark your average months on market. All brokers want to sell listings fast but in many cases the velocity at which a listing sells is largely due to a number of factors …months supply of similar listings in that area, popularity of an area, proximity to major metro areas, income production, land amenities, and much more.
By benchmarking your ranch real estate brokerage you’ll be able to target new listings that fit your formula for marketing cost ratio and average months on market. Any time you can make a more informed quantitative decision, the more likely you’ll realize the anticipated ROI.
Quick notes on allocation of costs to listings …
I’ve found it hit or miss that a brokerage will assign direct costs to specific listings. Here are some simple practices to start allocating costs to listings accurately and some suggested practices.
- When you purchase a print ad and receive an invoice from the publication, enter the invoice into your financials then itemize the total to each “product” aka listing. By itemize, if the total print ad cost $3,000 and included 6 listings then each listing would get charged $500 when itemizing the invoice.
- You’ll also have direct costs from outside vendors that can get directly charged to the listing such as professional photographer/videographer, surveyor, GIS mapping services, soil samples, etc. When you have these direct service costs, assign the invoice to a specific listing.
Ranch marketing expenses that appear to be operational expenses:
- SEO services
- PR services
- Social media services
- Brochure design services
- Website hosting
- Online classifieds subscriptions (i.e. Lands of America)
These ongoing marketing expenses can be consistent or fluctuate depending on how you operate your brokerage. My suggestion is take your monthly average spend on services used monthly and divide by average # of listings you carry at any given time. So if your monthly services average $5,000 per month and you carry 20 listings on average then each listing costs you $250 per month it isn’t sold. Then if your average months on market is 10 months that equates to $2,500 per listing of services carrying costs for the year.
Remember the $7,500 marketing budget from earlier? Well, there goes $2,500 of that budget in marketing services carrying costs. Now you have $5,000 left in the budget.
Bank fees and interest. There is always interest cost if running your brokerage on a line of credit (LOC). That interest is certainly entered into the financials each month during reconciliation. Again, you can chose to average it out based on months on market to arrive at a month finance fee to charge to each active listing that has money tied up in the LOC.
If your brokerage has an in-house bookkeeper, controller, or CFO then you should make absolutely sure your business begins measuring these number every month, quarter, and year. If you use outside financial services, then make a point to set down with your bookkeeper or accountant and get a game plan together to begin tracking these numbers and measuring against your brokerage benchmarks. This is how efficient business are run!
Get started benchmarking ranch marketing cost ratios and listing average months on market. Take a deeper look at how best to allocate costs to individual listings and establish cost averages where fees are spread over all listings.