What is a good return on your law firm’s marketing investment?
It is an easy enough question and one every business owner should ask and answer. How else are you supposed to decide which marketing efforts to keep and which to suspend? A straight-forward answer is rather elusive, but we have been able to gather enough information to give you a few different answers.
- What legal marketers claim.
- YOUR minimum goal.
- What big business gets from advertising.
Our Research Methodology
Unfortunately, private businesses typically do not publish their financials. So we had to look under a lot of rocks to find enough information to piece together. Here is where we looked:
- 44 Marketing Agency Blogs, Testimonials, and Case Studies
- 6 Nielsen Advertising Case Studies
- 1 Nielsen Survey
- Harvard Business Review
- Altman Weils Survery
- Hoover and IBIS World Industry Reports
- Publicly Traded Company Financials
- Reputable Small Business Advising Organizations
- Small Business Association
- Small Business Development Center
- A select few law firms with online financials.
Too Many Versions of ROI
It is rather frustrating that there isn’t a single, well-defined, and easily calculated version of ROI. It should come as no surprise that C-Level executives use a different metric for most of their daily decisions. Sure, ROI is a great metric, but it isn’t the simplest metric to calculate (accurately and consistently), and executives need a way to make big-picture decisions. With every business calculating ROI differently, it is not a metric you can easily compare across companies. Revenue-To-Cost Ratio is the answer. The difference between ROI and R:C is that ROI uses profit, which factors in costs; R:C uses gross revenue. What did you pay and what did you get? It doesn’t get any simpler than this.
R:C = Revenue / Costs
Example: If you spend $1,000 on marketing which directly results in an increase of $5,000 in Gross Revenue, then that is a 5X return. (5,000 ÷ 1,000)
- Gross Revenue = Attorney Fees (i.e., the total amount of money you bring in.)
This is opposed to the ROI calculation, in which you would need to factor out your other expenses, such as salaries and rent, from the $5,000 in revenue. So R:C is much simpler to use and more than enough to make decisions, provided you have your benchmarks set.
What does the Web say?
These general benchmarks are well accepted. The testimonial sections of marketing agency websites typically make claims in the 8-12 range. Assuming that agencies post their better performing clients on their own websites, this validates our generalized findings. And our own experience with clients backs up these figures as well.
If all you want is a general benchmark, you can stop reading here. Use 5X. If you want a deeper understanding about why some clients get less and others get more, keep reading.
Let’s customize your bare minimum. (This might shock you.)
These are the steps we are going to take to find out when you really start to lose money on your marketing.
- Average Value of a Case
- Contribution Margin (Probably 100%)
- Break-even Points
- Factoring in Opportunity Costs
- Other Investments
- Your Time
Given that every case is unique, it would be too much work to conduct these calculations for every case. So it is best to understand what your average case is and the metrics associated with that average case. If an average doesn’t make sense because the value of your cases are so spread out ($25K vs. $2M), then conduct these calculations for your most likely case.
Meet Young Cicero
To help by providing an example you can follow along with, meet Young Cicero. Since every firm is a little different, we have provided three versions of Young Cicero.
- Solo (SOLO)
- Partner with 1 associate (P+1)
- 2 Partner firm with zero associates (2P)
What attorney fees does the average case bring in?
Pretty simple… what is a case worth?
- (SOLO) After analyzing his in-takes, Cicero believes his average case is worth $10,000 in attorney fees.
- (P+1) This firm expects their average case to be $10,000 as well.
- (2P) In this instance, since the firm is a little more established, they prefer cases that average out to $25,000 each.
What is your contribution margin?
By definition, this is the revenue generated by one case minus all variable costs that can be attributed to that single case. Any expense that can be attributed to more than one case should not be considered. Some expenses that should not be in this calculation are fixed salaries, rent, marketing, software, utilities, computers, insurance, etc. Listed below are some variable costs that could be included:
- Filing Fees
- Private Investigator or Inspection Service (provided they are not on staff)
- Subject Matter Expert
- Forensic Analysis
- Commissions Tied to Hourly Rate (Example: Associate gets 20% of every billable hour)
- Referral Fees – These are technically a variable expense. However, since marketing-generated cases will not require a referral fee, we will exclude this in our calculations.
Contribution Margin = (Average Case Value) – (Variable Expenses)
If you are like some firms, these costs either get billed to the client or are taken out of the final settlement. In this case, the contribution margin is 100%. We recommend still using 95% to act as a buffer/safety net. For various reasons, not all variable costs get reimbursed. Using 95% will build in some margin for error.
Since lawyer services are heavy on labor, do not be surprised if your contribution margin is as little as 0% (Solo-Practitioner) or as high as 35%.
Young Cicero’s Contribution Margin
(SOLO) Cicero knows that most of his cases do not have significant variable expenses. He wants to be conservative and includes 5% variable costs in his calculations. This leaves a 95% contribution margin.
(P+1) Cicero, being conservative, includes 5% variable costs. But he also has an agreement to pay the associate attorney 20% of the associate’s billable hours on top of a salary. This means Cicero’s contribution margin is 95% for his cases and 75% for the associate’s cases. If we assume that they both bill the same number of hours each year, the average contribution margin for the firm is 85%. (95% + 75%) / 2 = 85%
(2P) Cicero has another partner. This means they share fixed expenses but their variable expenses are proportionally the same. They decide to be conservative and use 5%. This means their contribution margin is 95%.
What are your break-even points? (Business and Marketing)
Business break-even is how many cases you need for your business to not lose money. Marketing break-even is how many cases you need to get your money back from a marketing campaign.
Business Break-Even: Fixed Costs / Contribution Margin Per Case = # Of Cases
Young Cicero’s Business Break-Even Point
(SOLO) Cicero’s average contribution margin is $9,500 ($10,000 minus 5% variable costs). And his fixed expenses are $348,375. Thus, he needs to sign 36.7 cases per year to break even (rounded up).
(P+1) Cicero’s average contribution margin is $8,500 ($10,000 minus 15% variable costs). And his fixed expenses are $491,375. Thus he needs to sign 57.8 cases per year to break even (28.9 each, rounded up).
(2P) Cicero’s average contribution margin is $23,750 ($25,000 minus 5% variable costs). The firm has fixed costs of $731,325. This results in the firm needing 30.8 cases per year to break even (15.4 each, rounded up).
Marketing Break-Even: Marketing Costs / Contribution Margin Per Case = # Of Cases
Young Cicero’s Marketing Break-Even
(SOLO) Since Cicero’s average contribution margin is $9,500 and his marketing budget is $24,000 per year, his marketing break-even is a mere 2.6 cases per year (rounded up).
(P+1) Cicero’s average contribution margin is $8,500 and his marketing budget is $48,000 per year. This creates a marketing break-even of 5.7 cases per year (rounded up).
(2P) Cicero’s average contribution margin is $23,750 and his annual marketing budget is $36,000. This means his marketing break-even is 1.6 cases per year (rounded up).
Should we factor fixed costs into the marketing break-even?
There are a couple of lines of thought here.
- Yes – Marketing-generated leads should be assigned their share of the fixed expenses. After all, the firm must pay those fixed expenses and marketing contributes to the need for some of those expenses (for instance, someone to answer the phone).
- No – If the firm is operating below capacity but already has enough revenue to cover the fixed expenses, then each additional case’s contribution margin is going directly toward the bottom line.
Our take is that fixed expenses ordinarily should not be factored into the equation. You should understand that the profit in each new case is much higher once fixed expenses have been covered. So even if a marketing campaign is going to generate a lower R:C, if you have the budget for it, then it will still increase profits. But if you are trying to grow your firm and hire more people, you are going to need a higher return; once you make that next salaried hire, your fixed expenses are going to shoot up.
To give the most complete answer possible, we are going to provide three different calculations:
(i) Required R:C with the appropriate percent of fixed expenses calculated in.
(Fixed Expenses x % of Revenue Generated By Marketing) / Contribution Margin
(ii) Required R:C with the fixed expenses remaining after self-generated income.
Fixed Expenses Remaining / Contribution Margin
(iii) Required R:C not accounting for fixed expenses.
No additional calculation required. (See calculation in box above.)
Adding In Fixed Expenses
Relying solely on cases generated by word-of-mouth or referrals is a dangerous strategy. They can dry up with very little, if any, control on your part. But for the purpose of this article and generating a benchmark, we must estimate the gross income that is non-marketing-generated. We recommend a three-year average. While it is very likely that this amount will grow year over year as the firm develops more contacts, using a three-year average is a conservative approach to limit the risk of over-projection.
Young Cicero’s Marketing Break-Even, with Fixed Expenses Considered
(SOLO) His three-year average from word-of-mouth and referrals has ben $320,000. This means 36% of his sales came from marketing.
A. (348,375 x 36%) / 9500 = 13.2 Cases Required
He had $28,375 remaining fixed expenses after self generated income.
B. 28,375 / 9,500 = 3 Cases Required
(P+1) His three-year average is a little skewed because he has had an associate for only 1 year. His number of self-generated cases last year was marginally higher, but the associate still has not developed his own network yet. Cicero’s firm’s three-year average is $450,000 in self-generated income.
A. (491,375 x 33.3%) / 8,500 = 19.3 Cases Required
He had $41,375 fixed expenses left over.
B. 41,375 / 8500 = 4.9 Required Cases
(2P) Both partners are well-established and have a consistent and significant amount of self-generated cases. This firm generates $1,000,000 a year. This firm was able to pay all fixed expenses through self-generated revenue.
A. (1,000,000 x 16.7%) / 23,750 = 7.1 Required Cases
What is your marketing break-even in terms of R:C?
Young Cicero’s Revenue-to-Cost (R:C)
b) R:C = (3 x $10,000) / $24,000 = 1.25 required with fixed expenses remaining.
c) R:C = (2.6 x $10,000) / $24,000 = 1.09 required with no fixed expenses.
b) R:C = (4.9 x $10,000) / $48,000 = 2.21 required with fixed expenses remaining.
c) R:C = (5.7 x $10,000) / $48,000 = 1.19 required with no fixed expenses.
b) Fixed expenses were entirely covered by self-generated revenue.
c) R:C = (1.6 x $25,000) / $36,000 = 1.12 required with no fixed expenses.
Marketing vs. The Stock Market vs. Rental Properties
Opportunity cost is defined as a benefit that could have been received but was given up in favor of another benefit. Thus, if you choose to invest in marketing, then you are giving up on other investments such as the stock market or real estate. Below is a chart of some other investments and their potential returns.
Ultimately, this is a risk vs. reward calculation. Stocks and real estate are more liquid than a business (turned to cash quicker), therefore a business is riskier and you should require a higher minimum return to be satisfied. For our continued calculations, we will use 35% as our required return which is 10% higher than the real estate alternative.
How do these returns stack up to what big brands receive?
According to Nielsen, “marquee” brands see an average return of 3.6, while midsize brands see a return of 2.8. “Infrequent-use brands, small brands whose customers have longer purchasing cycles with fixed long-term usage, see a return of 2.18. Given that Nielsen’s study is for mass media advertising, it should be expected that the return is going to be on the lower end of available marketing options. This is especially true if compared to a medium like SEO, that is targeted to people looking for your services and has proven to have higher returns than mass advertising methods, such as television or some forms of PPC.
Ultimately, the required R:C to ensure the firm is not losing money is quite low. But that level of R:C certainly will not help move their firm forward and will not likely be worth pursuing, especially once the attorney’s time is factored in.
When is the additional work actually worth my time?
At first it might seem as if your hourly rate would be the same, but poor returns can take a toll on your rate. See below.
The above chart shows us that as the R:C declines, the effective hourly rate declines as well. If a referral brings you 1/3 the fees, then referred cases have an R:C of 3, which is 66.7% of the base hourly rate. So you might decide that marketing isn’t worth it unless you can beat the attorney referral fee, in which case an R:C greater than 3 is required.
OK, I read the above. It makes sense, but can you simplify it?
What if every sale came from marketing?
To provide a different perspective, we are going to examine two hypothetical situations. In the first situation, we are assuming that every sale originated from marketing. All else remained the same. Thus, total income is entirely a factor of marketing budget and R:C (Income = Marketing Budget x R:C). The second situation is very similar, but for a young attorney who is branching out on their own for the first time. We have thus cut costs in as many places as possible, as it is unlikely this person will have a fancy car or receptionist. This is to prove that marketing can help grow a small company, provided unnecessary expenses are drastically reduced.
- You might be able to buy your way out of a mediocre R:C, but not a poor one. At an R:C of 3 or less, you won’t be able to cover expenses. Above that, it is possible to buy your way out, but it is going to be expensive. At an R:C of 4 with a marketing budget of $130,000, the attorney can generate over $100,000 for himself.
- If you add in the opportunity cost of working for another firm and investing the marketing budget in the stock market, it would take an R:C of 6 with a $130,000 budget to begin to make it worth the risk.
- Higher marketing budgets have more room for error. This graph highlights our previous statement that so long as fixed expenses remain constant, increasing the marketing budget will produce a higher profit.
- It is possible to return the same results as Young Cicero SOLO ($10,000 marketing budget with the firm generating $500,000 in attorney fees). At an R:C of 5, which is the return that is generally accepted as ‘scalable’, the firm can generate the same with a $130,000 budget.
- An R:C of 10 is very difficult to sustain year over year; but if it was possible, the firm would still need a budget of ~$55,000 to run the firm entirely off of marketing.
It is possible to generate income as a new attorney if your only source of leads is coming from marketing. But this does require a significant commitment to marketing, with little room for error. The difference between an R:C of 3 and 4 is making money vs. losing money. If the young attorney can afford a $36,000 budget, keep expenses in check, and get an R:C of 5 from marketing, she can generate $77,250 for herself. It isn’t a great income, but for an attorney just starting out on their own, it is a good first start.
Why do firms get different returns from their marketing?
As a conclusion to our study, we wanted to provide some reference as to why firms generated different returns. While each law firm’s situation is unique, it is likely that some of the factors below are what is causing your firm to experience the marketing return it is receiving.