Stephen Fairley 2013-08-01 05:44:58
I’m continually amazed when meeting an owner, partner, or managing partner at a law firm who doesn’t bother to keep track of the most basic information required to run a successful business. There are over a dozen key performance indicators (KPIs) law firm partners and owners must know. In this article I’m going to give you two of them. Do you know how much money each lead is really costing you? How much does it cost you to generate each new client? Knowing the answers to these critical metrics can mean the difference between a profitable firm and a struggling one. I was recently invited to speak at the National Association of Consumer Bankruptcy Attorneys (NACBA) mid-year meeting about the importance of lead conversion and “knowing your numbers.” In the business world these numbers are known as “KPIs” — Key Performance Indicators. They are the critical numbers or metrics that run your law firm. Two of the most important KPIs that every law firm should be tracking are your cost per lead (CPL) and your cost per client (CPC). If you don’t know these numbers then you will not be able to estimate whether your marketing and business development efforts are giving you a good return on investment. Below is a simple way you can quickly calculate these KPIs to help you maximize your marketing efforts. MEASURING YOUR AVERAGE COST PER LEAD The first step is to create a universal definition of what a “lead” is. I have been in far too many firms where the partners had one definition of a “lead,” the associates had another definition, both of which were completely different from how staff people described a lead. Everyone in the firm must all have the same clear definition of what a lead is. HERE ARE THE 3 CRITERIA WE TEACH AT THE RAINMAKER INSTITUTE® THAT DEFINE A “LEAD”: 1. Someone who has never done business with you before. Regardless of whether you handled a matter for them six weeks, six months ago, or six years ago, that person or company is not a “lead,” they are a repeat client and you should treat your repeat clients differently than you do a new lead. 2. They express an interest in your services. If you practice workers’ compensation and SSDI and someone comes in asking about a divorce they are not considered a “lead” for your law firm. 3. Everyone who contacts your firm (and I do mean every single person), whether they connect with you by phone, email, a referral, live chat on your website, showing up at a seminar you are giving, filling out a form on your website, being sent to you by a pay per lead company, or any other way. A lead is counted upon the initial contact with the firm, not aft er an appointment is set, not aft er their appointment is kept and certainly not aft er they sign up to be a new client. At the very least, every person who answers the phone in your office should have a lead-tracking sheet in order to keep track of all the leads your firm receives in a month. ONCE YOU HAVE A GOOD HANDLE ON TRULY HOW MANY LEADS YOUR FIRM IS ALREADY GENERATING IN A MONTH (FROM ALL SOURCES) YOU CAN ESTIMATE YOUR COST PER LEAD (CPL) BY USING THE FOLLOWING FORMULA: 1. Select a time frame (I recommend at least 3-6 months to establish a good baseline, but a year is much better). 2. Using the above definition, determine how many “leads” were generated during that time frame. Be sure to count everyone who contacted your office, not just how many showed up for an appointment or signed a retainer agreement. 3. Add up how much money the firm invested in marketing and business development during that same time frame. For now, just count your hard costs like: your website, SEO, pay-per-click, yellow page ads, radio/TV, networking events, seminars you attended or presentations you made, direct mail, etc. You should count your staff’s salary as long as they are either entirely devoted to marketing or a percent of their time is spent in business development. I do not recommend counting your hourly billable rate in this number. As the owner or partner in the law firm there are certain things you spend your time on (such as business development) that you aren’t directly compensated for. 4. Divide the amount of money invested by the number of new leads produced. For example, if you invested $20,000 in marketing and business development over the course of three months and generated 100 leads than your average CPL would be $200. The question you want to ask yourself is, is that good or bad? Your answer should depend on two things: what your average client value (ACV) is and how good your lead conversion system is. If you’re a Chapter 7 bankruptcy attorney with an ACV of $1,500, then spending $200 per lead is acceptable, as long as you have a decent conversion rate. However, if you’re a commercial litigation attorney and your ACV is $20,000, then paying $200 for a lead is a no-brainer. The average law firm’s conversion rate of leads to clients is 5-15%. In other words, for every 100 leads they generate they sign up 5 to 15 clients. I know this doesn’t sound very high, but after analyzing hundreds of law firms across the nation I will tell you it is very typical. Once you have a solid estimate of your average cost per lead you should measure it monthly, quarterly, and annually. Some marketing expenses may only come once per year (like a big ad campaign or a new website) while others can incur a monthly investment. Comparing them month over month, quarter over quarter, and year over year will give you great insight into how effective your lead generation efforts are. MEASURING YOUR AVERAGE COST PER CLIENT The next number you need to know for your law firm is your average cost per client (CPC) – i.e., how much does it actually cost your business to produce one new client? Not how much it costs you to perform the work, but just to get a new client to sign up or retain your firm. Similar to CPL, you first need to define what a “new client” is for your law firm. This is much more straightforward for most firms. We define a new client as someone who pays you money or signs a retainer agreement if you are a contingency-based law firm. TO ESTIMATE YOUR AVERAGE CPC USE THE FOLLOWING THREE STEPS: 1. Select a time frame (longer will give you a more accurate estimate). 2. Determine how many “new clients” were produced during that time frame. 3. Add up how much money the firm invested in marketing and business development during that same time frame then divide the amount of money invested by the number of new clients. For example, if you invested $20,000 in marketing and business development over the course of three months and generated 100 leads, then your average CPL is $200. If those 100 leads turned into 10 new clients, then your average cost per client is $2,000. The question you need to ask is, is that good or bad? If you’ve been paying attention you will remember that it all goes back to your average client value (ACV). If you practice estate planning law with an ACV of $3,000 then paying $2,000 for a new client is untenable. However, if you focus almost exclusively on asset protection and your ACV is $10,000 to $20,000, then paying $2,000 for a new client is very acceptable. It still leaves you enough money to perform the work and have a healthy profit margin. As you review your efforts and results from this past year and consider the changes you need to make next year in order to achieve your goals, I invite you to make a commitment to yourself and to your business that you will get a handle on these two critical numbers: cost per lead and cost per client. Based on our experience of working with over 10,000 attorneys, without these two numbers you will continue to struggle and fall short of building a “lifestyle law firm”®—a firm that produces enough money to give you the ability to lead the life you want to lead along with sufficient freedom to enjoy it, while increasing the legacy you leave behind. If you’re ready to take your law firm to the next level and would like some assistance in achieving your financial goals, I invite you to sign up for a complimentary strategy session with one of our trained Rainmaker law marketing consultants. Over the last decade we have helped over 10,000 attorneys across the nation discover the secrets in building a financially successful and personally satisfying legal practice and we would love to help your law firm be our next success story! Please give us a call at 888-588-5891 or email me at Stephen@TheRainmakerInstitute.com and put “Strategy Session” in the subject line. Stephen Fairley is CEO of The rainmaker Institute, LLC, the nation’s largest law fi rm marketing company specializing in small law fi rms. Over 8,000 attorneys have benefi ted from applying their proven rainmaker Marketing System. Stephen is a best-selling author of 10 books and a nationally recognized law fi rm marketing expert. He has appeared in the American Bar Association’s Journal, Harvard Management Update, Inc and Entrepreneur. To receive your free copy of his book “Top 10 Marketing Mistakes Attorneys Make” visit www.TherainmakerInstitute.com or call 888- 588-5891.
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