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Evaluating Your Marketing Dollars
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.
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Unfortunately, private businesses typically do not publish their financials.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:
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?
An R:C of…
5X is good;
10X is outstanding;
And 20X is truly exceptional.
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.
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).
Business 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?
Minimum R:C = (Required # Of Cases x Average Case Value) / Marketing Costs
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.
Here we are adding the minimum return to the already established marketing break-even. This will tell you your final bare minimum needed to break even.
Minimum R:C = ((Minimum Return x Marketing Investment) + (Break Even Cases x Average Case Value)) / Marketing Cost
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?
An R:C of:
2 means you are probably at least getting your money back;
3 and it is worth your time, but you can do better;
4 it is doing OK, but there may be better options;
5 is a solid, good return;
6-10 is better than most;
10+ is exceptional, but likely unsustainable.
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.
Some things to note about the above graph:
- 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.
In The Beginning – Marketing campaigns that are just getting started will not instantly produce significant returns. How long it takes for a campaign to get off the ground will vary. SEO campaigns might take a full year, while a PPC campaign might take a couple of months.
Competition – Some markets are just over-saturated. PPC is a great example because of how easy it is for a law firm to start using AdWords. Occasionally we will see an influx of firms competing in AdWords, which drives up the cost-per-click. These are usually short-term fluctuations; when these new entrants don’t realize a return, they exit. This drives the costs down and the return up. Firms with large budgets tend to notice these fluctuations less.
Lower Prices – Some firms charge lower hourly rates. If the average firm spends $1,000 on marketing that brings in 20 hours at $250 per hour in revenue, their R:C is 5. If another firm brings in 20 hours at $200, their R:C is 4.
Practice Area Restrictions – Some practice areas do better than others in certain mediums. One area that we consistently hear issues from is debt relief, specifically attorneys who do only debt relief. We have seen some bankruptcy firms do debt relief in addition to their primary bankruptcy practice, and that can work. But debt relief by itself does not typically generate high returns because of the low average value of a client.
Poor Strategy – Not every marketing strategy will work. Take social media for instance: three years ago every marketer was preaching the value of social media. This was driven by the fear of falling behind the curve and was not substantiated with any results. The average small business social media campaign three years ago cost $2,500 per month, and social media marketing agencies were popping up left and right. Today, all of those agencies have turned into consultants, because social media just did not produce returns to warrant those fees. Is there value in social media? Yeah, but not at $2,500 per month.
Poor Conversion Rates – Sometimes there is a problem in the office. Here is a great real-world example:
A firm recently made an internal change and asked a seasoned employee to start doing in-takes. This employee hated it, which was extremely evident when she was answering the phones. It took conducting a few ghost calls to figure out what the problem was, but once it was identified, the firm moved her back to her old job, put someone more comfortable talking to people in charge of intakes, and they started to sign more cases.
Established Campaigns – Firms that are doing more things right than wrong. If your firm is seeing 5X on a regular basis, you should be asking what more can we be doing, rather than what can we do different.
Multi-Year Average – If most years you get an R:C of 5 and then one year have an R:C of 20, your average is going to be much higher.
You Are Equipped For Every Case – The best pricing strategy is one that allows you to serve all customers. It is why there are Toyota cars and Lexus cars. Or first class, business class, and economy. Firms that can handle every case (within their practice area) will convert more leads.
Referral Fees – A significant number of our clients do not charge for referrals. That can be a solid strategy for developing a strong and loyal network, and that network can send the types of cases you are looking for back to you. So it is not necessarily bad to not request a referral fee. But firms that are executing a plan to gain referral fees and factor those fees into their R:C are going to experience a higher R:C.
20X Returns or Higher
Your Firm Was First – When you are the only firm competing, you can do quite well. This is a strategy many mass tort firms utilize when trying to uncover cases before anyone else knows about it. Of course, the big pitfall here is all of the marketing efforts that didn’t result in any revenue.
You Got A Big One – Let’s say your annual SEO budget is $36,000 and you signed a truck accident case valued at $2M. Your one-third gets you ~$666k, which alone is an R:C of 18.5. Combine that with the other small cases you signed, and you are probably over an R:C of 20.
About The Author
Adam Draper is the CEO of Gladiator Law Marketing. After spending close to 8 years in the U.S. Air Force, he refocused his attention on obtaining an MBA from the University of Louisville. His current ambition is to contribute transparent business practices to the marketing industry and to share his knowledge about business, marketing, and the technological advancements shaping our future.