I recently had an interesting discussion about determining how to best allocate advertising spend on third party leads. The question was, which would be more important in determining effectiveness of a given lead source, close rates or engagement rates? Close rates were defined as the percentage of deals sold versus the number of leads purchased. Engagement rates were determined by the number of contacts (or conversations) versus the total number of leads purchased. On the surface the answer seems clear: “Tell me how many deals I will sell by the number leads I need to purchase and I can see exactly what my cost per sale will be.” Easy? Not so fast. I offer my analysis on the difference and which ultimately is more effective. Let’s look at both.
The number of sales made vs leads purchased. This calculation is historically the one most often cited. It makes it relatively simple to compare dollars invested against dollars received thus cost to benefit ratio and is easy to calculate. Many investments in marketing are made with this analysis. “How many more cars can I sell by investing in this?” Also, in comparing different investment opportunities the ability to determine the net profit per opportunity makes the decision easier. So if lead provider A has a close rate of 10% and lead provider B has a 5% close rate and the cost per lead is the same the answer would be easy.
Engagement or contact against the number of leads purchased. This calculation is harder. It’s less cited because it is less understood. Engagement relates more to “number of opportunities” to make a sale. Number of opportunities is the total possible number of sales that can be made. You cannot sell more vehicles than opportunities to do so. The ability to connect with a lead and start a conversation offers the possibility to make an appointment and create the waterfall effect of engagement to appointment to showroom visit to sale. So, if lead provider A has an engagement rate of 60% and lead provider B has an engagement rate of 30% the answer would be easy.
The question is, which is more important? Which offers a more cost effective investment? If for the same investment I could buy a lead that had a higher close rate or a higher engagement rate, which would make more sense?
I offer that it is Engagement Rates. Why?
Close rates are more like looking at today’s lottery numbers to determine tomorrow’s winners. Looking at 17 dealerships in the same general geographic area over the last year period I was able to see the following. Looking at several examples of third party providers’ leads they had close rates that varied from 1.9% up to 13% between different dealerships and in the same dealership in different months the same provider had close rates that varied up to 6%. This was looking at 12,393 leads and 1,445 sales. What this tells me is that several factors were at work:
- OEM specials
- Used Car values for trade in
- Management Teams
The analysis showed that giving the same exact 100 leads to each of the 17 dealerships would have resulted in different close rates at each one. And even taking the same 100 leads to the same dealership in different months would have closed at different rates. The fact that that close rates are a look backward at a snap shot of time at a set of circumstances that are not usually present from one month to the next makes this an unreliable source to use in determining effective value.
Engagement rates give the dealer the chance to have more opportunities to sell a car in the present state. Engagement rates by provider over the same period had less volatility. Over the same year as mentioned above, engagement rates fluctuated by less than 2-3%. This showed that the marketing done to drive traffic to the third party sites were relatively constant and less prone to movement in the shorter time frame. Higher showroom traffic in the present gives the dealership more opportunities to overcome obstacles that, looking backward, were present at the time. Since in any given month a lead provider might close at different rates more opportunities is a better investment.
Here is an example: Dealer A chooses to use close rates to buy 100 leads from lead provider X compared to Y. In the past X lead provider closed at 8% so 8 sales are expected compared to Y which closed at 4% which would have been 4 sales. But given that each month a new set of circumstances present themselves these 8 sales may be more or less determined by circumstances you might not control.
Dealer B chooses to use engagement rates to buy 100 leads from provider X which has a 60% engagement rate against lead provider Y which has a 30% engagement rate. Lead provider X is expected to engage or contact 60 out of the 100 leads. Taking 60 leads that are engaging in the waterfall effect of appointments to showroom traffic to sales, one only needs to get 9 of 60 engaged leads to purchase to find more value against close rates. Because we are dealing in the present state. The obstacles of current rates, inventory, and used car values for trade in are part of the conversation and are solved in the current or now time frame.
The question becomes which is more valuable: The possibility of the exact circumstances existing to sell 8 cars, or 60 leads engaging in the process of buying a vehicle in the present state? I would want the opportunity of the 60 engaged leads. More opportunity is a better investment than using historic data to determine fate. Looking at past lottery numbers does not make it easier to pick a winner today, but if the lottery gave you more opportunities to win for the same investment, now that would be a good deal.