How franchise lead generation is NOT like the lottery – And why you think it is
Franchise lead generation is sometimes (incorrectly) compared to a lottery: A franchisor is paying a relatively small sum of money to purchase an individual lead (“buying a ticket”) in the hopes that this lead will ultimately turn out to be their next franchisee (“a lottery ticket that pays out”). Based on this simple comparison of a lottery & franchise lead generation, it's easy to see why a franchise could consider lead generation as a lottery.
Or so the flawed thinking goes.
The truth is, for successful franchises the differences between buying lottery tickets and hoping for a random windfall vs. buying leads to fuel a well-designed (and ever-improving) franchise development process couldn’t be greater.
For lottery players, buying tickets is ultimately a losing, rigged game of pure luck over which they have no influence. No matter what “strategy” they employ or how many tickets they buy, lottery players have no chance at generating long-term, predictable, growing return on investment.
For successful franchises, on the other hand, buying leads is the feeder step in a franchise development strategy that delivers predictable, long-term, and ever-increasing return on investment. It’s a process the franchisor can continually and directly improve through a variety of strategies and techniques. And unlike the lottery, the more leads a franchise system with an effective development process buys, the higher their return on investment becomes.
The goal of this paper is to clearly illustrate this difference, delving into the numbers to reveal how a lottery really works, how franchise lead generation is different, and how franchises can use this difference to their advantage.
How the Lottery Works For Players (Part I)
Before we dig into exactly how people play the lottery, we have to come to terms with an absolute truth:
Everyone Wants More Money than They Currently Have
The number of ways that people address their desire for more money varies wildly. One could --
Get a job
Take out a loan
Win the lottery
Inherit from a deceased relative
The only truly risk-free method above is to inherit money, however, not everyone in the world is positioned to receive such a windfall. So what happens? Almost everyone in society works if they are able. Working a job is a completely safe way to ensure that your net worth is growing every day.
However, as we all know, working at a job is hard. It takes a lot of time, a lot of effort, and causes you to make sacrifices that you would prefer not to make.
Because of this, many people elect to increase their income by doing one of the three other activities mentioned above, but each of these alternatives has significant drawbacks. In a loan, your upside is capped and you have to pay back the money plus interest in the future; in the stock market, you risk that you lose your investment; and in the lottery you are likely to lose all your investment plus have no control in the outcome.
Loans and stock markets are relatively low-risk relative to the returns of the lottery because you are more likely to know the outcome of a loan or market relative to the likelihood of knowing the winning lottery numbers.
So then if it’s so risky, why do people actually play the lottery? It seems to come down to two main reasons:
The ability to win a life-changing sum of money (unlikely to be garnered from stock market returns)
The ease of playing the game.
These are two incredibly strong incentives, so every day thousands of Americans trek to their local convenience store and give the attendant $1 in exchange for the possibility to win millions.
How the Lottery Works For Governments
If only it was that simple. With few exceptions, the lottery is sponsored by a state government looking to raise revenue for a state-run program. Therefore, for every dollar that is paid into the lottery, it goes to one of three separate accounts --
Prizes paid back out to winners
Administration costs (salaries, marketing, etc.)
Proceeds to be distributed by state governments (Most are reserved for higher education subsidies)
The percentage that each state’s lottery allocates toward each of these varies dramatically. Based on U.S. census data available for 2013, here’s the breakdown:
As you can see, the range of money allocated into the three accounts ranges considerably --
Prizes: From 16% (West Virginia) to 77% (Massachusetts)
Administration: From 1% (Rhode Island) to 17% (Maryland)
Proceeds: From 21% (Arkansas) to 79% (West Virginia)
When you look at all of the lottery income and payments across the entire United States, the picture looks like this:
What this means is that on average, a government gets to keep $0.33 of every dollar that is put into the lottery. A 33% profit margin if you would. What a fantastic situation for the institution administering the game.
For those of you familiar with financial statements, one would imagine the government’s to look like this:
How the Lottery Works for Players (Part II)
The numbers do not lie. If the governments choose to run the games at a 33% profit, there’s only one group that can pay for that: the players.
This isn’t likely to be something you didn’t know already. If you wager $1 in the lottery, then you can expect to lose $0.38. (Don’t forget the administration costs.) In other words, the lottery is a game with a -38% return. For comparison’s sake, betting on red during a roulette spin has between a -5 and -6% return. The lottery is -38%!
It’s really that simple. An economist would pull their hair out trying figure out why someone would actually play a game with these odds.
But let’s go back to what I wrote earlier –
“It seems to come down to two main reasons: The ability to win a life-changing sum of money (unlikely to be garnered from stock market returns) and the ease of playing the game.”
Essentially, lottery players’ lives are not materially changed by the $1 or $2 that they wager in the negative direction if they lose, i.e. the cost is negligible. However, if they win, the reward is massive and their lives are changed forever. In the face of such a disparity, the objective expected value (the economist’s value) is negative, but the subjective expected value (a human with feelings) is positive.
Comparing Franchise Lead Generation to the Lottery
So why again does franchise lead generation get compared to the lottery? A franchisor is paying a small sum of money to a lead generator in exchange for an introduction to a prospect who has expressed interest in their franchise concept. There’s a significant chance that the introduction to any one particular prospect is worth zero (i.e., the prospect does not become a franchisee in that system), and there’s a small chance that the contact information is worth a large sum of money (the value of the franchise fee + all royalties paid into the future). Each individual lead purchased is likely to be a rounding error on a financial report, yet each new franchise opened could meaningfully change the business, especially if you hit the jackpot and end up recruiting a major multi-unit franchisee.
When we see how some franchises – especially those new to online marketing and franchise lead generation – interact with lead generators, the lottery narrative seems to dominate. Lead generators are often seen as the government -- a faceless institution hosting a game designed to keep people interested but ultimately indifferent to the success of the franchisor.
In reality, franchise lead generation (and a successful relationship between a franchisor and its lead generation partner) simply doesn’t work this way, and I want to focus on four very important points that franchises who succeed in franchise lead generation understand.
1. Franchise lead generation doesn’t have a negative objective expected value.
Very core to the foundation of how a lottery works is that it has a guaranteed negative objective expected value for the player. (Here’s a Business Insider article that digs into the numbers even further.) Based on their calculations and what we demonstrated earlier, a player should expect to lose $0.38 for every $1 played in the lottery.
Again, franchise lead generation simply doesn’t work this way. Here’s how we see the math work:
When you close a franchise, you get a franchise fee. (We’ll ignore the future royalties for now, although one may argue that they are more important.) The average franchise fee we see is around $30,000.
For the purpose of illustration, let’s assume that leads cost $30 each.
Depending on what source you look at, the average close rate of a lead is somewhere between 1/200 and 1/400. (No one has very good data across the franchise spectrum. You should be able to input your franchise’s close rate and calculate the same math.)
If you assume a close rate of 1/300, then it costs $30 x 300 leads to get a close on average.
That equates to paying $9,000 per close. You are expecting to pay $9,000 to earn a franchise fee of $30,000.
Each of your 300 leads has an expected value of $100 and you are only paying $30 per. That’s a 233% positive return.
2. Playing more is better for you
If you were to ask an economist how many lottery tickets you should buy, they would give you a resounding answer of…zero! Since playing the lottery has a negative objective expected value, even buying one ticket is a bad idea. If you countered the argument by claiming that you were going to increase your chances to win the jackpot by buying additional tickets (a true statement by the way), the economist would freak out even more. Every single ticket you buy means that your expected returns get lower and lower. A $1 investment means that your expected return is -$0.38. A $20 investment means that your expected return is -$7.60.
Once again, franchise lead generation couldn’t be more different. Because your expected return is positive – buying additional leads is a good thing!
If you’ve ever spoken to our sales team before, you’ll have heard the words, “Our happiest clients are the ones who buy the most leads.” Imagine that! The people who pay us the most money are the happiest! Seems self-serving, how is that even possible?
The easiest way to explain it is that as you buy more leads, the price per lead comes down. You are able to achieve economies of scale as an advertiser and take advantage of price discounts. Moving your price per lead from $30 to $25 increases ad spend effectiveness by 17%.
We've already established that if you buy 300 leads that cost $30 and are able to close them at a 1/300 rate, you turn $9,000 into a $30,000 franchise fee. That’s a 233% return.
Now watch what happens when you increase that to 400 leads at $25 / lead. Using the same 1/300 close rate, you can expect to net $40,000 in fees while only paying $10,000. That’s a 300% return!
3. You can directly influence and continually increase your odds!
Another core principle of the lottery is that every player has the same odds. It is the ultimate fair game. The rocket scientist’s chances to win are the same as a two-year-old.
There’s no getting around it…you can employ any number of lottery “strategies” you like, but you can’t change the odds.
However, this statement cannot be less true when looking at franchise lead generation! In fact, the entire reason we created the Lead Generation Resource Center is that there are hundreds of things you can do to increase your chances of finding a franchisee…
Responding to leads quicker, improving your email strategy, introducing text messaging to your mix, developing compelling print collateral, sending sales people to meet potential franchisees in person, increasing your advertised capital required to open a franchise, and hiring highly trained sales people are just a few ways you can increase your odds. The list is huge, just check out our Resource Center. Or even better: give us a call!
There are many characteristics of a great franchise, but without a doubt, every great franchise has mastered the art of franchise sales. And the first part of all sales is generating a lead. In the grand scheme of all the myriad issues that a franchisor has to face, refining and improving their lead generation and sales process should almost certainly be near the top.
But let’s say you were able to improve your close rate from 1/300 to 1/200. Now you’re paying $6,000 for a $30,000 fee. Each lead has an expected value of $150 and you’re only paying $30. That’s a 400% positive return.
To summarize our previous two points, here's a sensitivity table demonstrating the ROI for various price per lead and close rate combos:
4. We (the lead generator) are incentivized for you to win
Finally, it is very important to the government that the expected value of winning a lottery is negative. In other words, the government actually (and obviously) wants people to lose the lottery on average. They can’t generate the type of proceeds they want unless that fact is true.
Sometimes, franchise lead generators are assumed to behave in a similar way. This line of thought says that it’s in the franchise lead generator’s interest for the franchise to spend thousands of dollars without succeeding. Yet once again, this couldn’t be less true (at least if it’s a reputable lead generator that hopes to stay in business!). Franchise lead generators only succeed when their franchise partners succeed. If a franchise calls a lead generator and says that they wish to discontinue their service this is the worst outcome possible. Franchise lead generators need their clients to succeed because without them, the business wouldn’t exist.
The more franchisors who find franchisees, the better. It’s that simple. More franchisees is better.
Speaking about franchise lead generation as a form of a lottery or as similar to a lottery is a gross mischaracterization. At a simple first glance, there are a few basic similarities, but some of the most important underlying truths are in direct competition.
Franchises who are most successful in their use of lead generators seem to fully appreciate this fact while less experienced franchises are prone to mistaking a small sample size or ineffective follow-up process as a symptom of the franchise lead generation “lottery.”
As the franchise lead generation industry continues to grow and follow the path of more mature lead generation industries such as automotive, insurance, education, and financial services, the burden will fall on the lead generators to help break these stereotypes.
We’ve done our best to spur that change through the Lead Generation Resource Center. But we believe there is much more that we – and the entire industry – can contribute here and have major plans to do so.
If you have personal stories about your experience in franchise lead generation or have a comment about how you think franchise lead generation compares to a lottery, shoot us a note here! We'd love to hear from you.
Eli Robinson is the General Manager of FranchiseHelp. He hasn't purchased a lottery ticket in at least 3 days.