By Peter Troast, founder and CEO of software and marketing company Energy Circle

An original version of this article was first published on Peter’s Blog on the Energy Circle website.

For solar installers, purchased leads—from lead brokers, franchises, lead-only marketing firms, Google or HomeAdvisor—are the way of the world. Being overly reliant on purchased leads is a bit like the path to alcoholism: one or two glasses of red wine each night is good for your heart, but when it starts to be bourbon in your OJ each morning, it ultimately leads to dependency, a failing liver and death.

The lure of outsourcing your lead generation is understandable. Companies that offer these services promise “no risk,” “no money upfront” and to be “100% performance based.” If your business can rely on a third party to provide a steady flow of cost-effective leads (more on that math in a bit), then everything should be hunky dory, right?

Wrong. Here’s why:

Dependency

Choose your analogy—alcohol, drugs, health—but when you outsource lead generation to a third party, you are setting your company up for a very unhealthy and risky addiction. Leads are clearly the lifeblood of every solar company. In today’s marketing world, the reality is that your leads will typically come from a wide variety of sources.

For healthy solar businesses, the lead mix is diverse and no one or two channels dominate. A typical business should have about 15-20 different sources of leads, not one of which represents more than 20% of overall lead volume. This variety can certainly be intimidating (keeping an eye on 20 lead channels — yikes!) but it is also healthy, similar to diversity in an investment portfolio. With the digital world changing so frequently, and the possibility of a single flip of the switch at Google causing an entire channel to dry up overnight, lead mixes that are overly dependent on one source are high-risk. Companies reliant on purchased leads seem to have all or most of their eggs in one basket.

Your lead mix: Healthy and diverse or too dependent on purchased leads?

The other side of outsourcing your leads is that you are ultimately dependent on some third party for a fundamental driver of your revenue. That can work, but what happens when the quality of leads from that source declines? Or when the third party jacks up the price?

Whose leads are you paying for?

In models where you hand over control of your website to a third-party lead generator, there is inevitable conflict over who gets credit for leads. If someone saw your truck, remembered your company, found your website and called for a quote, is that a lead you should be charged $500 for? Should a past customer that just happened to be reminded about your latest promotion via a Facebook advertisement be a lead you should pay for?

Do you own your company assets?

In today’s marketing world, your company’s place on the web— primarily your website, but also your presence in social media and online directories—is the funnel through which virtually all of your leads flow. Very often, companies that rely too much on purchased leads also outsource their web presence. Marketing companies insist on building a second or third website so they can track leads separately. A new breed of marketing firms build you a website for free in exchange for a commitment to buy leads, but you don’t own or fully control your own site. If you ever need to separate from that firm, you’ll often face costly technical challenges to transfer your site content, and sometimes legal and logistical battles about URL or site ownership.

Owning your data

Third-party lead generators are very often “black boxes”—they develop and charge you for leads, but provide little transparency on how those leads were generated. You get a monthly report on volume, but little to no detail on where the lead came from, what keywords are working and what the cost was to create that lead.

When you control your own marketing—meaning you own and have sole access to your Google AdWords, Google Analytics, Facebook and other accounts—you possess enormous amounts of intelligence that can help shape your marketing. In the era of Google “not provided” organic data (Google hides the majority of organic keyword data from users), AdWords performance is the core source of which specific keywords are converting at what price. This provides the essential insights that guide your focus on content and organic lead generation. It’s a 24/7/365 stream of information about what homeowners are thinking (based on what they are searching) and how those searches change over time.

Most critically, in the world of digital marketing, AdWords guides you to which search terms convert to leads at the lowest cost. And that customer-owned pay-per-click (PPC) data can be used to improve your overall business in many other ways too. Paid search campaigns require constantly A/B testing ad copy—splitting campaigns into two ad options, and seeing which one wins. This becomes a vital source of real-world research where you can definitively and objectively choose winning messages. Once you identify a particular message or call-to-action that drives stronger performance, those improvements can be rolled out and tested in other marketing or advertising channels.

An example here would be “solar panels” vs. “solar contractor.” Although click thru rate (CTR) and conversion rate (CR) are similar for the two, overall volume and competition levels for “solar panels” are greater than for “solar contractor.” Click thru rate is the rate at which a user clicks on the ad and conversion rate is the average number of conversions per ad click (as a percentage). Information like this is essential for making informed decisions about marketing strategy not just in AdWords, but also in other channels.

Improving cost per lead over time

Most lead generation approaches work on a fixed cost—anywhere from $300 to $2000 per lead, some of which might even be non-exclusive, being sold to three or sometimes more companies. This flat approach means that improvements over time go in the pocket of the lead gen company, not you.

The reality, in a well-managed marketing campaign, is that your cost per lead (CPL) should improve over time. As you build up your database, test and improve landing pages and fine-tune your campaigns, your performance should improve. Done effectively, with weekly optimizations, you can improve your CPLs over time.

The multiple website problem

Local search marketing firms like ReachLocal and Yodle insist on creating a duplicate website in order to be able to track the leads they generate. Honestly, this is just lazy, and it hurts your company’s standing on the web because you split your web presence. It is difficult enough to build up authority for your primary website—via consistent traffic, link building and fresh content. When you divide up your presence in two (and sometimes three) you make that task even more challenging and ultimately hurt yourself.

Not all leads are alike (or of equal value)

In the real world, all of us know that different types of leads are of different quality. You will treat a referral from a happy, long-term customer differently than you would someone you met tabling at the Farmers’ Market. When you purchase leads blindly, you get little of this information.

Canvassing door to door has been the staple diet of solar leads. Now everyone’s doing it. Some communities in California and other aggressive solar states have three or more teams walking the same neighborhoods every day. Are these leads bad? Not necessarily, but on the quality spectrum of leads, one that is generated by such an aggressive and competitive approach is certainly suspect. We hear from virtually every solar installer that the quality of purchased leads is in decline. The average cost of a non-exclusive solar lead varies widely by state and ranges from $300 to $2,000. Is that a quality lead? You tell me, but mostly likely, heck no!

Cost per acquisition (CPA) or the customer acquisition cost—a measure of the full cost of a completed job—is what really matters. The quality of leads and the rates at which they convert to appointments, quotes and jobs has a huge impact. Self-generated leads are inherently “exclusive” and some channels — like paid search ads—produce customers that have clear buying intent. Someone who clicks an ad and calls you wants to buy. You can expect a much lower CPA.

So when you think about what you may be paying for leads, make sure to follow the math all the way through. In the end, if the full cost of acquiring that customer is more than around 7%, you are probably giving away too much of your already tight margin.

Are most of the leads price shoppers?

Many brokers acquire leads with the message of finding a customer the lowest-priced contractor. So even if you’re lucky enough to be the first to connect with a HomeAdvisor lead, that homeowner is already predisposed to be looking for the low bid. EnergySage’s message is: “Don’t overpay for solar. Compare offers and save 20% or more.” When low price is the customer’s first priority, it is inevitable that close rates will be low.

Lay off the (purchased) leads & improve the health of your business

We’re not saying that purchased leads don’t serve a role. But relying too heavily on purchased leads is an addicting and ultimately dangerous path to go down. When all of your eggs are in one basket and you’re dependent upon potentially unreliable and expensive leads, you’ll never be capable of sustainably growing your business and learning what’s actually working with your marketing.