Marketing

How saving a few dollars is costing more than you realize

Quantifying the value of relationship marketing

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Takeaways:

  • Many real estate professionals know that building relationships is vital to growing business, yet relationship marketing is often lost in budget cuts.
  • Part of the reason for that cut is probably because it’s difficult to quantify relationships.
  • But by using certain formulas you can figure out about how much a client is worth to your business.

Most real estate professionals understand that building relationships with their clients is crucial to growing their business. So why is relationship marketing often one of the first things cut from the budget?

I think the main reason is that it is difficult to quantify the value. If you know only what something costs, you tend to think of it as an expense.

Sometimes you can tie a referral directly to a particular effort, like a particular customer. But often those referrals come as a result of cumulative efforts over time. How can you determine the return on investment (ROI) on a long-term effort?

It’s tricky, to be sure. There might be no perfect formula, but the following should at least give you a ballpark idea.

The cost of losing touch with clients

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First, you need to figure out how much repeat and referral business each client brings you per year. To do this, divide the number of transactions from repeat business and referrals in the past year by your existing client database.

For instance, let’s say you have 50 contacts in your database, and you sell 10 houses in a year. According to the National Association of Realtors, 54 percent of homebuyers and 64 percent of home sellers found their agent through referrals or had worked with them before.

So let’s assume that 60 percent of those houses sold (six houses) were the result of a referral or repeat client.

In that case, each relationship would bring you 0.12 repeat and referral transactions per year. Here’s what your calculation would look like: 6/50 = 0.12.

Next, multiply this number by the number of years remaining in your career to determine how many transactions that client would bring you before you retire. If you plan on working for 15 more years, you will get 1.8 (15 x 0.12 = 1.8).

Finally, multiply that number by your average commission for the lifetime value of that relationship. Let’s say your average commission is $9,000. Then the total value would be $16,200 (1.8 x 9,000) per relationship.

And as you add contacts to your database, that value compounds. If you maintain an average of 100 contacts in your database throughout the rest of your career, the total value is more than $1.6 million.

Not too shabby — that is until you factor in that 70 percent of clients forget their agent’s name after just one year. If they don’t remember you, they can’t give you referrals or come back to you when it comes time to sell their house again.

In our example, you’d miss out on more than $1 million in repeat and referral business.

Relationship marketing is an investment

Now think about that investment in relationship marketing again. Let’s say you spend $21 per client on relationship marketing each year. That’s what it costs roughly to mail the custom magazine my company offers. In the span of 15 years, that costs just $315.

Using the numbers above, that gives you a 5,043 percent return on your investment for each client who otherwise would have forgotten you.

I encourage you to do the math for yourself, using your specific figures. Here are the formulas again:

  • (New repeat and referrals / existing relationships) x years remaining x average commission = lifetime value.
  • (Lifetime value x average number of contacts) x .7 = cost of not using relationship marketing.
  • (Lifetime value – Lifetime cost of relationship marketing) / (Lifetime cost of relationship marketing) x 100 = ROI percentage for every relationship saved.

The results are likely to surprise you.

Sean Kirby is copywriter for ReminderMedia, a relationship marketing company that helps businesses solidify their key relationships and generate repeat and referral clients. Follow them on Twitter and connect on Facebook.

Email Sean Kirby.