Any savvy business owner will tell you that having a solid grasp on the numbers is one of the major keys to success. Perhaps the single most important number to know is your customer acquisition cost. While many law firms have never felt the need to understand a metric like this, times are quickly changing. Clients are cutting their legal budgets, and technology driven services are creeping in on lawyers’ turf, making the future a bit precarious. Understanding the numbers behind your law firm is increasingly important to get ahead in today’s hostile legal market. Here’s how to measure the client acquisition cost for a law firm.
How to Measure the Client Acquisition Cost for a Law Firm
Perhaps the single most important metric for any business to have a firm understanding of is how much money it costs to bring in a single paying customer. This is known as the customer acquisition cost (CAC), or “client acquisition cost” for law firms.
Once you know how much it costs to acquire a client for your law firm, you can leverage this knowledge to make better business decisions in a variety of different areas. Read on to learn how.
Every Activity Has a Cost
Regardless of whether you get most of your clients from word of mouth, marketing, or advertising, there are almost always costs incurred during the process.
Depending on your practice area and preferred marketing methods, client acquisition costs may come from wining and dining business owners, paying referral fees to other lawyers, throwing parties or hosting events, purchasing ads on a city bus or radio commercial, or even spending time writing answers to questions on Avvo (time is money, after all).
In some instances, it can be difficult to keep track of the exact costs for any individual client. But this level of detail isn’t entirely necessary. The CAC metric is intended to be an average anyway.
The Basic Formula for Client Acquisition Cost
The formula to calculate client acquisition cost is as follows:
CAC = total money spent on all marketing activities / total number of new clients acquired over the same time period
For example, let’s say you spent a total of $10,000 on client acquisition over the course of 2 months – some of this was allocated to referral fees, some to entertaining prospective clients, and some to online marketing activities.
In those same 2 months, you brought in a total of 18 new clients. This gives you a basic CAC calculation of $555.56 per client ($10,000/18 clients).
That number is useful, but it’s more informative if you’re able to break it down further and calculate the CAC separately for each channel through which new clients were acquired.
Breaking Down CAC Per Channel
So, assuming your marketing efforts were focused on the three channels in the example above, the next step would be to look at each channel in isolation.
Let’s say you were referred 4 cases, for which you paid $6000 in referral fees. Your CAC from referrals was $1500 per client ($6000/4 clients).
Let’s say you spent a total of $1000 on a lavish event for high net worth individuals, and 2 of them became your clients. Your CAC from entertainment would be $500 per client ($1000/2 clients).
Online Marketing Activities
Your online marketing activities actually consisted of several different things – Google ads, an Avvo subscription, and an active law blog which you publish content on every week. Because these activities are quite diverse, you should really think about breaking down the CAC even further.
- Google Ads
Let’s assume 8 clients came from your Google ads, which cost $2500, yielding a CAC of $312.50.
- Avvo Subscription
You spent $200 on Avvo (subscribing to their $100/month plan) to acquire 1 client for a CAC of $200.
- Law Blog
You spent $300 on web hosting, content creation, and other services related to your law blog. The blog produced 3 clients, giving a CAC of $100.
Comparing CAC Per Channel
Now that you have broken down your client acquisition cost per channel, there are some interesting things to analyze. For one, you might compare each channel’s average CAC to your overall average and see what stands out.
Notice that the overall average was $555.56, but in fact, every single channel actually had a lower CAC in comparison to the average, with the exception of referral fees which were substantially higher at $1500 a piece. Entertainment yielded clients at a cost right near the average, at $500 each, and the online activities had the lowest CAC.
The law blog appears to be the most cost effective marketing channel, at only $100 on average (as we have written about before, blogging tends to be a budget friendly marketing tactic). Avvo and Google Ads weren’t far behind at $200 and $312.50 respectively.
It’s also important to take note of the client volume from each channel: Avvo and the blog combined only produced half as many clients as Google ads, meaning they were not as effective in terms of conversions despite being less expensive.
Putting It All Together and Analyzing ROI
While these client acquisition cost numbers are interesting to look at, it really isn’t giving you the complete picture. It’s essential to take into consideration the total amount of fees generated across channels, and consider the ratio of your CAC to your revenue in order to understand which sources actually yield the best ROI.
At first glance, it might seem as though paying referral fees is too expensive to justify, since they cost nearly 3x the average CAC for all your marketing efforts combined, and 15x the cost of a client through your blog.
However, if the cases from referrals were higher value and averaged $10,000 each in fees, while the blog clients only averaged $500 a piece, the referral fees were actually quite a bit more cost effective. They cost you 15% of the total revenue they generated, compared to 20% cost for the blog clients. Plus they generated $40,000 in total revenue compared to a measly $1500 from the blog. That’s unlikely to even cover your monthly rent.
If the high net worth clients from your lavish party ended up becoming longterm clients of the firm and spent an average of $5,000 each year with the firm for the next 10 years, it may very well be that entertainment is actually your most cost effective marketing channel.
What it boils down to is that you must determine your goals before spending money on marketing. Take into consideration the type of practice you run (high volume vs. boutique), the area of law you focus on (transactional vs. litigation), and what your ideal clients look like. You must look at your firm holistically to truly understand what makes the business work and what your numbers really mean.
The reason CAC is so important is that it’s the cornerstone to analyzing many other important aspects of your business. For instance, it plays a crucial role in determining the lifetime value of a client, a metric which factors in not only the CAC, but also the total revenue generated over the client’s lifetime.
At the end of the day, law firms should be tracking many other metrics and KPIs beyond just their client acquisition cost. But CAC is the first piece of the puzzle, and the foundation for measuring truly insightful metrics like CLV and ROI, so understanding your CAC is an excellent way to start.