Greg Crabtree, CPA is back on The Property Management Show to talk about marketing spends and the return on investment (ROI) that property management companies should expect to see on marketing budgets.
If you’re not already familiar with Greg, he’s an accomplished entrepreneur, financial expert, and the author of Simple Numbers, a book that every business owner should have read by now.
When we first had Greg on The Property Management Show, it was at the beginning of the COVID-19 pandemic, and we were talking about managing cash flow for small businesses. He said that although company owners pick marketing as the first thing to cut back on, he didn’t necessarily agree. You can watch/read our previous interview: Managing Hits to Your Property Management Cashflow.
We asked him back on the podcast to talk about why that behavior exists in business, and why he thinks it’s a big costly mistake.
First, let’s talk about the effect of economic trends on marketing spend.
Marketing Spend and Economic Trends
Marketing spending is traditionally seen as a canary in the coal mine for economic slowdowns. The spend may not be cut to zero, but companies don’t want to spend extra money on marketing when they feel like there’s not a customer willing to respond to those marketing efforts. When marketing budgets are cut, it’s an indicator that the economy is softening.
While researching for his next book, Simple Numbers 2.0, Greg created a model that aggregated clients’ data as if it was one big conglomerate. This was across a blend of industries and across geographies. This model focused just on U.S. economic statistics and captured data from 100 companies.
The marketing spend of that model dropped about 60 percent right at the beginning of COVID.
Remember that a lot of businesses closed during the early days of the pandemic. You’re not going to market a business that no longer exists.
On the other side of that trend, some companies saw a huge influx of business because they served the needs of customers during an unprecedented pandemic. Business was coming in faster and faster.
They didn’t need to invest in marketing, either; they had more business than they could respond to.
It took over 12 months for the rate of marketing spending to get back to the pre-COVID level.
Fast forward to today. There have been a lot of wild shifts. Companies have done a lot of different things, but even many of those that suffered are now getting back to the feeling that things are working. The biggest issue for those companies, right now, is labor.
Labor Supply’s Effect on Small Business’ Bottom Line
The biggest issue businesses are facing is the labor issue – they are finding it difficult to find people to do the job at the same price.
It’s not a question about generating new sales. It’s a question of not having the people they need to deliver on the product or service they’re selling. This is a population problem.
This is a problem that had already been set in motion years before now; COVID did not cause it.
In the U.S., we don’t have enough people to do the labor. In 2001, we were at about a 2.4% replacement birth rate. Today, the U.S. is at about a 1.6%. A stable society is a 2.1%. And, we are not willing to fill that birth gap with immigrants at the moment. This is a serious problem globally, and quite a few countries are in what we call an inverted pyramid when it comes to population.
We don’t have enough people.
Marketing Spend is Going Up Despite the Economy Tanking
The economy is slowing, but marketing spends have not dropped. Marketing spends are continuing to increase in the current economy. Here’s why Greg things that is:
Your highest production and earnings capacity is the last 10 years that you work.
In 2019 and 2020, a vast majority of the baby boomer generation in this country decided to retire.
And, there aren’t any replacement workers to fill the gap. Those baby boomers retired with more money than previous generations. They also retired with a pretty developed habit of consumption that is breaking the pattern of previous retiree generations that as you get older, you spend less. This generation likes to spend money. That’s creating a demand that doesn’t necessarily get met. There’s an economy of people who are consuming, but not producing.
Businesses have to increase their marketing because new business is not going to show up through an expanding economy. You’ve got to take that business away from someone else, which is why you’ll see more aggressive and more expensive marketing that helps you differentiate what you do against what your competition is doing.
Not only do you have to market better, you have to perform better, too.
How Economic Factors and Marketing Spends Impact Property Management
When COVID first arrived, a lot of property management marketing was suspended. We were at a standstill, waiting to see what would happen.
In the world of property management, Greg sees some distinct cross-currents.
When it comes to residential real estate markets, there are two things for property managers to understand:
- You need to keep marketing so you can attract new properties to manage. There’s a good chance you’re losing existing customers through acquisition. Good customers have sold or are selling.
- Rents are at historic levels. Multifamily properties are a great place to deploy a large amount of money because occupancy rates are also high. This could potentially lead to some sort of national rent control, if not legislatively than definitely through bureaucracy.
Property tax increases are another problem for investors in rental real estate.
You may be earning high rents, but you also have a huge property tax bill.
For commercial rental properties, there are different challenges, specifically when we talk about retail spaces. Office spaces, too. We have seen a bit of a return to the office, but not to the point that it was pre-COVID. These commercial properties usually don’t have long-term mortgages, either, so when it’s time to reset their mortgage, expenses will skyrocket.
Rethinking Property Management Marketing Spend
It’s not so much about how much you spend, but understanding what’s effective when it comes to marketing.
Greg tells his property management clients to spend every amount they can on marketing, as long as it’s effective.
It’s more about your return on investment. Are you getting back what you’re investing into marketing your property management business?
Greg calls it launch capital in Simple Numbers 2.0; the idea that for marketing in general to be effective, you want to recover the cost and improve profitability by 50 percent of what you spent.
His example is this: maybe you could have made $100,000 in profit this year. But, you chose to spend $50,000 on a new marketing campaign in an effort to win new business. Your real profit for the year is $100,000, and your launch capital span was $50,000. You need to make sure your new profit covers the $50,000 spend as well as $25,000 more.
In essence, you’ll want to earn back $125,000 of profit. That’s the way Greg looks at it.
But does that mean you can immediately expect that kind of ROI a couple of months into your marketing campaign? Definitely not, according to Greg. He is a believer in a more patient kind of marketing, which we’ll revisit later.
Greg Says Spending on Marketing is Like Playing Blackjack
Greg likes to use a blackjack analogy when explaining marketing spend. If you’re playing a blackjack hand and you’re betting $25 on this hand and you win, then you know you’ll get some extra money.
You have a choice on whether you want to keep feeding the hand or not. You assess the odds, and as you keep climbing and having success, you keep feeding the hand.
But if you’re not seeing success, then you aren’t going to keep throwing more money at it when there really isn’t an opportunity for you to win.
Understand the Hand You’ve Been Dealt
Marketing does not always have a formula. But there are patterns of things that work.
We’re in an interesting time, and you need to ask two questions of the marketplace:
- Is the market allowing you to be profitable at the moment?
- Is the market allowing you to grow at the moment?
If you’re a real estate brokerage selling single-family homes, the market is not allowing you to be profitable right now in 2023.
You can throw in all the marketing dollars you want to try and create a profit, but the market won’t allow it. So, you may want to save that marketing spend and wait. Mortgage lenders are in the same boat.
On the flip side, property managers are well-positioned.
More people are renting because fewer people are buying. People will always need a place to live. So right now, it seems that the property management industry has been dealt a good hand.
Property Management Marketing is about Timing and Providing Value
Consumers get annoyed when they’re over-messaged. Property owners react the same way.
A surge and pause approach to marketing can ensure you’re getting yourself out there without driving away potential customers. Marketing can sometimes come off as desperate, where you’re doing more damage than good.
Good marketing is staying in touch with people who have been identified as a good potential target. You’re not wearing them out; you’re reminding them that you’re there and you’re ready to step in when they have a problem that they need solved. Marketing has to be patient.
Don’t Turn Off Marketing Just Because Times Are Good
Property managers cannot afford to stop marketing just because they’re profitable and growing. You need to pay attention to the market and you need to have the solutions that owners and investors don’t even realize they need yet.
Those property taxes, for example, are going to be higher because property values are higher. Are you proactive in letting your clients know how this will impact their portfolios? Don’t wait for them to ask, be their source of information.
When you’re spending on property management marketing, you want the fastest ROI. But, that’s not always the best marketing. Take content marketing. You create content that provides value to potential customers, and you’re not pushy. It’s not a sales pitch, it’s providing information that could help your potential customer run their business better.
Some business owners will get impatient with that. But, marketing is an investment.
Offer something of value, and make sure that what you’re offering is something that the marketplace wants.
Your job, when marketing, is to address the pain of the customer. You’re offering a solution. You’re not just trying to beat another company on price.
What Is and Isn’t Marketing Spend?
When you’re thinking about how much to spend on property management marketing, you’re assessing your return on investment. How does that look in your books?
Marketing spends will include any marketing professionals you have on staff, as well as agency work that’s done for you, billboard space you might buy, sponsorships, and online ads.
Greg also asks his clients to think about separating the marketing spend from the sales activities.
Sales and marketing go hand in hand a lot of the time, but if you have a business development manager (BDM) on staff who sort of does marketing, are you paying that person from your marketing budget or your sales budget? It’s tempting to bundle sales and marketing together, but that’s not a good practice.
Think about it. One hundred percent of the time, marketing precedes sales. There’s rarely a sale that happens without some kind of marketing. If you’re really effective at marketing, the sales process is pretty smooth.
Greg says that if you’ve used your marketing efforts to communicate the values and benefits your property management company provides, your sales will close easily.
Computing Marketing Spend Effectiveness
No matter the size of your business, understanding the effectiveness of your marketing efforts is critical for success. Calculating marketing effectiveness helps you identify what strategies are working and which ones are not so you can optimize your efforts and make informed decisions. By doing so, you can improve targeting, reach more customers, increase conversions, and maximize the return on investment (ROI) of your campaigns.
Is Customer Lifetime Value a Factor?
How does Customer Lifetime Value factor into figuring out how good of a return you got out of your marketing spend? Well, it’s a bit complicated.
Although Greg believes in the value of Customer Lifetime (aka how long your customers stay with you), he doesn’t believe in how Customer Lifetime Value is typically used. You see, a commonly accepted way to compute this metric looks something like this:
Customer Lifetime Value = (Average Contract Value) x (Average Length of Customer Relationship)
Since it’s based on averages, it bundles all customers together into a simple statistic. It also implies that all customers are created equal. However, if you’ve been in business long enough, you know that this doesn’t reflect reality. Not all customers are created equal.
Customer Lifetime Value Is Too Static a Metric
Greg believes that each customer’s value ebbs and flows over time. So when it comes to gauging marketing effectiveness, he believes that a simplified thing such as Customer Lifetime Value is not the most ideal metric.
This is because customer behavior is unpredictable, and thus the true value of a given customer can change over time. For example, a customer may be great when they first join but become less reliable later on; or a customer may start off as a poor customer but become increasingly valuable as time goes by.
Because of this, Greg believes that businesses should consider other metrics to measure marketing effectiveness.
Contribution Margin to Marketing Spend Ratio
Greg Crabtree’s preferred way to measure property management marketing effectiveness is by looking at a specific margin to spend ratio: computing your Contribution Margin (otherwise known as Gross Profit after taking into account fees and labor) and dividing it by the total marketing spend over the last 12 months.
Formula: 12-month Gross Profit / 12-month Marketing Spend
Get that ratio for the last 12 months, and compare it with previous periods to identify the overall trend. Is the trend going up or down? To him, looking at the trend line is a reasonably effective way of saying, am I getting more signal output for the dollar spent?
He goes on to say that even if the trend line is not going up, but the volume of business is increasing, then that can still mean that your marketing strategy is working. However, if both volume and signal rate are going down, then it’s time to go back to the drawing board in terms of marketing strategy.
At the end of the day, Greg says it’s not the dollar amount that matters – it’s the signal-output rate that counts. By paying attention to this ratio and tracking it over time, businesses will be able to assess their marketing strategies and see whether they are effective or not.
Focus on Overall Profitability of Your Property Management Business
Marketing an unprofitable property management business is not a smart thing to do, yet a lot of business owners make the mistake of investing in owner marketing even before they’ve established profitability for the core business.
You have to ask yourself some difficult questions, and if you find yourself “putting lipstick on a pig”, then you have some foundational work to focus on.
A very important overarching metric Greg likes to look at is this: you need a $2 profit for every dollar of labor that you spend, regardless of what that labor does for you. If you can do that for your property management business, you’re in a good position.
Profitability Per Customer
Understanding your profitability per customer by year or by quarter is also important, Greg says. But keep in mind that customer lifetime value is not a constant yield. The profitability of a single customer is never going to be constant.
Expecting to make the same amount of money on a customer every single year is somewhat irresponsible. You might have to fire a long-term customer. If that customer is not profitable any longer, you have to let them go.
Pricing and Customer Churn
Another factor that affects profitability for a property management company is pricing. What should you charge new customers versus what you currently charge your existing customers? As an example, cable companies will often dangle lower prices in front of new customers, and then they’ll raise the rates six months later.
Do increasing prices contribute to customer churn?
Maybe. But, that in itself does not keep a property management company from growing. You set a price, and that’s what your customers have to pay.
A lot of property management companies worry about adding on fees. Whether they’re fees for owners or tenants, there’s the fear that customers may leave. But if serving those customers at a lower price is not profitable enough for you, then it is actually worse for your business if they stay. So look at the overall profitability of the company, and don’t be blinded by misguided metrics such as door count or unit count.
In conclusion, a property management company’s marketing budget should not be determined simply as a percent of expected revenue. As a CPA, Greg Crabtree’s advice to property managers is to spend every marketing dollar that works. He also emphasizes the importance of treating marketing as an investment – there are risks involved, but if you deploy the right strategy and you are patient, then you will win at the end.
To learn more about Greg Crabtree and his book, Simple Numbers 2.0, you can visit: https://www.simplenumberscri.com/books
If you’re looking to get more property owner leads to grow your business, or you’re interested in boosting your property management company’s presence online, contact the Fourandhalf Marketing team via the form below.