I talk to some smart lawyers. Some know the ins and outs of business valuations and can cross-exam an expert to within an inch of her life. Others have practically memorized the DSM IV and can diagnose mental illness better than the psychologists.
But some of those same smart lawyers are clueless when it comes to evaluating the effectiveness of their marketing.
They say things like “We spend $5,000 a month on search engine advertising, but it’s fine because we get at least one new case a month.” Then I find out that their average new case brings in about $5,000. Or they say, “For every $1 we spend on advertising, we generate $3 in revenues,” and smile like they’ve really got it figured out.
They don’t have it figured out. They’re not making sense.
Let’s Crunch Some Numbers
You’ve got to look at your costs and figure out how much it costs you to produce each dollar of revenue.
If, for instance, you’re a sole practitioner and you run at about $400,000 a year in revenues and take home $200,000, then it costs you $200,000 to deliver $400,000 in legal services (and that’s ignoring the value of your time, which is not an unimportant detail). It costs you $200,000 to do $400,000. Got it?
Let’s say a typical file generates $5,000 for you. Let’s break down that case.
- You bring in $5,000.
- You spend $2,500 on various expenses (payroll, marketing, and other items), leaving you with $2,500 to take home.
Let’s say that last month, you decided to try something new with marketing. You decided to run some radio ads for the month.
- The ads cost $5,000 and generated two new cases at $5,000 each.
How did you do with ads?
- Well, you spent $5,000 on ads.
- You generated $10,000 in fees.
- You’re left with $5,000.
Now we know that you spend half of your revenues on expenses, right?
So of the $10,000 you generated, you can expect to spend $5,000 on the overhead we discussed previously, right?
That leaves you with zero.
You also did the work on the two files, so you’re also out your time.
Bottom line: The radio ads left you worse off than you were before you started. You generated two new clients, spent the revenues on the ads and other overhead, and then did the work for free.
That’s not a good deal for you, right?
The 10 Percent Rule
Now, what if the ads had worked?
- What if you generated 10 new clients from the ads?
- That’s $50,000 in revenues: half toward overhead, and $5,000 for the ads.
- Now we’re left with a net of $20,000.
That makes more sense, right?
If you stick to these numbers, you’re expecting any marketing expenditure to generate revenues amounting to 10 times the expenditure. You’re spending 10% on the marketing.
Some firms spend more than that (especially personal injury firms), and some spend far less than that. Personally, I like to spend substantially less than 10%, but I’m willing to experiment if something interesting comes along.
What’s Your Number?
You’ll want to do the math for your practice and decide what’s comfortable for you. You’ll want to factor in the value of your time as well. The value of the time becomes especially critical if the marketing is working so well that you have to add staff to help with the work. When your expenses start to creep up, your profits will start to go down. You can’t expect to keep increasing revenues without reducing your margins because ignoring the value of your time only works until you run out of time.
The key takeaway here is this: You’re not breaking even on a marketing expenditure when you generate business equivalent to the expenditure. If the revenue equals the expense, then you’ve lost money. You’re better off not doing the marketing if it’s only going to recoup your costs.
Marketing is tricky. It’s made much trickier if you aren’t careful about the math involved in being sure it’s working.
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