Mathematical Proof that Maximizing Your ROI Will Destroy Your Business

If you have a 10X ROI on your marketing, you are failing!

In order to scale your REI business, you need to understand the tradeoff between Return on Investment and Absolute Profit. Let’s define these metrics in the context of this post.

Return On Investment is the amount of money you earn for every dollar you spend. Spend $1, Earn $5, is a 5X return.

Absolute Profit is the total amount of money you net after expenses, period. Percentages don’t matter here.

Both compete against each other, but are vital to understand to make good decision about where to put your marketing dollars.

Most investors only care about Return on Investment.

Let’s compare 2 different investors who prioritize these metrics the opposite.

Bob & Nia Start Cold Calling

Two wholesalers are given a secret ninja cold calling list from the local guru to start their wholesaling businesses…

Meet Bob.

Bob’s goal is to maximize his ROI.
Bob keeps his expenses low, pounds the phone, and makes about $10,000 per deal.
Bob’s ninja cold calling list gives him a 10X return on his money.
Bob maxed out his list and is closing 20 deals a year and is living a life of luxury!
He brags to all of his builder friends how amazing of a return his ninja dragon cold calling list is giving him. Bob is still searching for the next killer marketing channel that can match his current amazing returns. Everybody wants to be more like Bob.

Meet Nia.

Nia’s goal is to maximize her Absolute Profit.
Nia pounded the phone for a while making $10,000 per deal, but once the cold calling list was maxed out, she wanted more raw profit.
To get more profit, she needed more deals, but cold calling was taking up her all of her time. She can’t find another marketing channel that comes close to her cold calling…
After weighing her options, she decided to hire a ppc agency to bring in more high quality leads for her. She let the agency manage the marketing and didn’t waste any time talking to tire kickers.
PPC is only providing her 3X on her money with the same $10k profit per deal. She closed 6 deals with PPC this year.

Bob can’t understand why Nia would “waste” money on PPC when they were crushing it with cold calling…

Bob and Nia represent the real estate investment community. Most wholesalers think like Bob and want to be Bob.

Let’s take a look at their income statements.

Bob’s Income Statement

20 Cold Calling deals @ $10k = $200,000

Cold Calling Marketing $20,000

Net Absolute Profit $180,000

Total ROI = $200,000 / $20,000 = 10X Return On Money

Nia’s Income Statement

20 Cold Calling deals @ $10k = $200,000

6 PPC deals @ $10k = $60,000

Total Gross Profit = $260,000

Cold Call Marketing = $20,000

PPC Marketing = $20,000

Total Marketing = $40,000

Net Absolute Profit $220,000

Total ROI = $260,000 / $40,000 = 6.5 Return On Money

Bob’s Out Of Business

Bob has a total higher Return on Investment (10 vs 6.5), while Nia has a higher Absolute Profit ($220k vs $180k). Nia is taking the necessary steps to scale her business while Bob is not.

What do you think Bob & Nia’s businesses will look 2 years from now? Bob may have found another smaller high-return list, while Nia has hired cold callers, doubled her ppc budget, and added direct mail. Nia will most likely be doing double or triple the number of deals Bob and netting a lot more money too! Nia’s team will cold call the same list as Bob 3X as much, take Bob’s deals, cut her return in half, and put Bob out of business.

Bob took all of the necessary steps to maximize his ROI.

And he went out of business.

The most successful real estate investors focus on Absolute Profit. You will notice that all of them have multiple broad marketing channels, including PPC. Very few, if any, of them have crazy high overall ROIs.

The Easiest Way to Increase Your Absolute Profit

Hiring a PPC Agency is the easiest way to increase your Absolute Profit, hands-down. You will only receive the highest quality leads and not have to manage any of the marketing. It’s a long-term staple of any business that wants to scale. It doesn’t require you to build any new systems, scrub new lists, manage direct mail schedules, manage new callers, or hire new team members. It’s instantly implementable. This is why most of our clients add PPC to their marketing mix. They are already successful in other avenues, but want instant growth in their company. Their mindset is on scaling the Absolute Profit.

This is why you rarely see brand new investors start out with PPC. In some markets, PPC does not have as high a return on investment as a highly targeted direct mail or solo cold calling, and requires capital to get started. Beginning investors who want to take on less risk and who have more time should start out with a low cost marketing channel. The lower the cost, the higher ROI. SEO, Driving for Dollars, Craigslist (see Clint’s Case Study for proof of this), and cold calling, can be great places to start!

But the highest performing, most successful long-term investors use PPC to dominate their market. All of our clients are already successful with other marketing channels, and are looking for an easy way to grow their bottom line. It’s a no brainer!

A Word On Risk

Choosing Absolute Profit over ROI is not as clear cut as this example shows though. Nia is taking on more risk, overhead, and responsibility than Bob, but has put her business in a stronger position than him. There are a lot of investors who do not balance risk properly, and try for too much Absolute Profit too quickly. They might invest too much in systems or employee overhead that doesn’t product immediate returns. Then they have a low month and they run out of cash. Or, they don’t have the systems in place to manage their team or execute their marketing well and end up wasting a ton on marketing dollars. Any hiccup can cause this business to plunder as well. To be a successful long-term business owner, you need to balance risk with profit. It’s a tradeoff that you must balance for as long as you are in business.

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