Measurements and metrics are important at every step of the firm workflow, even during client development. Other than the unique ethical advertising considerations applicable to lawyers, we can borrow from small business development practices and technology. In the second of this five-part series on key performance indicators (KPIs), we’ll examine the calculations for client acquisition cost (CAC) to answer the question of how much is spent before the client’s matter begins.
Using the figures below, the IP firm has spent almost three thousand dollars attracting one client in the month of January. Whether that result is good or bad depends on the potential revenue from the matter. However, the IP firm has set a target of $250 per client, so being over ten times the target requires further analysis.
In addition, the $2,950 CAC result is a problem if the revenue from the client does not significantly exceed that $3,000 to allow the firm to make a profit. In other words, the firm may spend more to acquire and deliver services than the revenue they will see from the case. This will negatively impact the firm’s bottom line profits.
Looking at January’s costs for client acquisition, the IP firm spent $450 on advertising, sales, and marketing costs as reported by the accounting system. For the same month, the attorneys tracked the non-billable time spent with potential clients in free one-hour consultations. Those ten hours, at an average of $250 per hour, result in $2500 of time spent on client development and must be included in the CAC.
Some might challenge those hours by saying that the attorneys and associates are not being paid a salary of $250 for those ten hours. However, the attorneys are not able to bill for those hours, and therefore the true opportunity lost or cost is $2500, not the salary earned.
Results like this bring up questions around process and the use of technology. For example, this IP firm could use a questionnaire, like Traklight’s product for IP, to gather information or triage clients at a fraction of the cost of an attorney hour. Further, the firm could provide thirty-minute consultations to only those clients with IP legal needs and consider charging a reduced rate for those meetings. Not only would that improve the conversion rate by pre-qualifying clients, but the CAC would be significantly reduced.
KPIs are truly the starting point for streamlining your practice and improving your bottom line and it is important to consider measures that directly impact the firm’s cash balance.
If you would like assistance figuring out how to calculate your CAC and see the other KPIs in this series, here’s a free spreadsheet to get you started.
Read the next post in this series: "How to Use Aged A/R Reports."