We know that budgeting for your marketing expenses is complicated. Even though you might not be able to nail each line item perfectly, you can cut down on the guesswork with a basic understanding of how businesses determine costs and pricing. This knowledge will help you answer questions like:
- How much should I pay vendors for necessary products and services?
- What methodology should I use to create a marketing budget?
- How do I know if the professional web designer I hired is charging a fair price?
You have probably heard of back-of-the-napkin (or envelope) calculations. These are quick calculations that aren’t always precise, but help you understand the building blocks of a transaction or business model. You can use back-of-the-napkin calculations to reverse-engineer real estate revenues, pricing for marketing services, and many other business numbers.
Back-of-the-napkin calculations will give you “ballpark” numbers or ranges using information that is already available and easy to find. For instance, if you wanted to estimate another real estate agent’s revenue you wouldn’t have to look hard to find the typical commission rate or the volume of homes they’ve sold. In fact, some agents proudly display this number on their websites to let potential sellers know that they are good at selling property.
Let’s say that the average home they sell is roughly $250,000 and they split a 6% commission with the buyer’s agent. That leaves them 3% of $250,000, which comes to $7,500. Assuming they sell an average of 20 homes per year, we’ll multiply 20 homes sold per year by $7,500 of revenue per home to get roughly $150,000 of yearly revenue.
It’s important to note that 150k would be their top-line revenue. We’d need to take out marketing and advertising expenses, fees, and other costs of doing business to determine their bottom-line revenue – their net income.
That wasn’t too bad, right? Here’s where it gets interesting: advertising, print, and design vendors have done the same sort of ballpark math to determine what kind of budget you have for their products or services. And you can do the same back-of-the-napkin calculations to determine if what they’re asking is a fair price!
The Small Business Administration recommends that businesses budget at least 8% of their total revenue on marketing expenses. In the example above, our agent’s revenue per home sold is roughly $7,500, so 8% of that ($600) would be their marketing budget for that sale. When you think about it, it makes sense to do a little advertising and promotion for a property that will bring in thousands of dollars in revenue. Marketing vendors understand this too, and naturally want their price points to intersect at the higher end of what you are budgeting!
With this in mind, ask yourself how much a given product or service should cost you. Back-of-the-napkin calculations won’t tell you exactly, but they will help you choose products and services that are priced fairly for the quality or ethical standards that you need. The phrase “you get what you pay for” is absolutely true for two “identical” products priced at $50 per month versus $600 per month. If you go with the $50 per month product, you can go ahead and expect lower quality results. In other words, you’ll need to lower your expectations. The opposite is true for a higher-priced product – expect more!
However, as the prices go higher you’ll eventually see the law of diminishing returns kick in – the price increase won’t be worth the corresponding increase in quality.
It is also important to factor in the long-term effects of a product or service. Frugality is wise, but don’t cut corners on investments that build your reputation and attract profitable clients. Just because you can save money on a cheaper option doesn’t make it a good business decision!
At the end of the day, your budget for real estate website development (and any real estate expense) comes down to how much money you want to keep – for now. While you should use back-of-the-envelope calculations to confirm a reasonable price, keep in mind the saying, “money isn’t everything”. We would also add that in general, more profits later (due to better quality marketing) are more important than extra cash in the present. You may stand to “lose” a little more of your profits for now, but you stand to gain clients for life.