I’ve said it before: Cash is king because your firm can’t survive without it. But clients create the cash and marketing brings you clients, so we have a chicken-and-egg situation. You need cash to pay for marketing to get clients and clients to create cash to pay for marketing. And in this symbiotic, delicate dance, you want to make sure every dollar of your law firm’s marketing spend is working.
Otherwise, how will you continue to make a profit?
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So, How Can You Tell If Your Marketing Is Working?
You want to spend no more than 10% of your revenue on marketing. Said a different way, for every $1 you spend on marketing, you want to see $10 in revenue.
You are looking for a 10 times (10x) return on your law firm’s marketing spend.
So how do you tell if it is working? It’s actually a simple math formula to calculate the Return on Investment (ROI):
Divide your revenue by everything you are spending on marketing.
Is that number bigger or smaller than 10? This is your starting point. If you are over 10, your marketing is working. If you are under 10, it’s not.
Either way, it’s time to get more granular.
How to Identify Nonperformers
Knowing if your marketing is working or not as a whole isn’t very helpful because you don’t know how to make it better. Not everything you do is going to produce at 10x or above. And many things are going to produce significantly above 10x. What you want to do is identify and eliminate the underperforming activities.
Here’s the next level:
- Separate your law firm’s marketing spend by the way you try to get clients. If you spend money on Facebook ads, group all your Facebook expenses together. If you spend money trying to get referrals, group all your referral expenses, such as lunches and dues for networking groups.
- Next, split up your clients (revenue) by acquisition source. If the client came from Facebook, then label the revenue as Facebook. If they came from a professional referral, label them a professional referral.
- Now comes the math. It’s not that hard. Divide the revenue for each revenue source by its marketing expense. (And before some of you say you are PI and your cases last 18 months, you can divide this month’s revenue by your law firm’s marketing spend 18 months ago if that helps.)
Look at the Numbers and Get Curious
First, where is most of your revenue coming from? Is that where you spend most of your effort? Remember the 80/20 Rule. The Pareto Principal says 20% of your efforts will create 80% of your results. If you look at it the other way, you spend 80% of your time working on things that generate only 20% of your results.
Where are you spending time and effort that isn’t paying off for you?
Now Let’s Look at Those Multiples and Make Decisions
At CathCap, we believe in running a law firm on the Rule of Thirds:
- 1/3 of revenue goes to payroll
- 1/3 of revenue goes to overhead (which includes marketing)
- 1/3 of revenue goes to profit.
If you are spending a third (or more) just to get the case, you aren’t ever going to make your multiples. If something you are doing has a multiple of three or below, cut it.
Whenever you cut something, you need to decide what to do with the cash allocated for that activity. Should you reallocate that money to another campaign or activity that is a very high performer? Or should you not spend the money on marketing and aim to bring your overall marketing spend back within the 10% of revenue limit?
The numbers give you the no-BS information. They tell you what is working and what isn’t. However, there is some art to this science.
The Art of Calculating Your Marketing Spend
Should a law firm ever spend more than 10% on marketing?
I’ll give you the typical lawyer answer: “It depends.” If you want to grow, yes. If you can afford it, yes. If you have a plan with stated objectives and cutoffs, yes.
A few days ago, I spoke with a lawyer who is tripling his law firm’s marketing spend this year. The firm will forgo almost all of its profit in the process. However, he knows that if he does this, in 16 months he will reap the benefits of significantly more revenue. He knows this because he gets much more than a 10x return on those marketing dollars.
- Is it a risk? Yes.
- Does he want to grow? Yes.
- Can the firm afford it? Yes.
- Do they have a plan with stated objectives and cutoffs? Yes.
And he has all the numbers to back up his decisions.
Being an Entrepreneur Is About Taking Risks
Calculated risks. And to do that, you need the data. Calculating and consistently tracking the ROI of your various marketing activities and campaigns and using that data to make decisions is what will grow your firm, make it profitable, and allow you to sleep at night.
Image © iStockPhoto.com.
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