The Shark Tank Metric

One of the most common questions I get from Managing Partners and COO’s is, “How much should our firm be spending on marketing?”  Most firms find it hard to wrap their arms around the marketing budget, little less effectively manage it.  Now, the same could probably also be said about the technology budget but at least with computers there is a benchmark – either the stuff works or it doesn’t.  But there is an endless demand for marketing and business development expenditures and its tough to tie down anything approaching a calculated return on investment.

So everybody’s suspicious of marketing budgets.  As one managing partner said, “I’m pretty sure half of what we spend on business development is wasted.  I just don’t know which half.”  Surveys tell us that the median marketing spend as a proportion of gross revenues for Amlaw 200 firms is around 2.3 percent.  But a lot depends what gets loaded into marketing and I’m hearing Chief Marketing Officers talking about numbers approaching 3 percent.  The difficulty is not being sure whether law firm leaders should be happier if their number is higher than average indicated their firm is more aggressively marketing than competitors, or happier if the percentage is lower indicating the firm is being frugal.

Then last week I watched Shark Tank, a U.S. television show (actually, its copied from a BBC show) where a panel of venture capitalists listen to pitches by entrepreneurs and then decide if they want to invest.  One of the Sharks’ most frequent questions of the presenters is, “What is your cost of acquiring a new customer?”

That hits me as a rational way of looking at marketing and business development expenses.  It’s results oriented in that; presumably, the more successful a firm is in generating new clients, the higher the divisor and the lower the cost. Of course, one could argue that not all marketing and business development costs are directed to new clients. Certainly we devote some effort to trying to hang onto our existing clients and getting more work out of them.  But while we talk a good game in that regard, it seems to me that most firms put the bulk of their bucks on the shiny new potential clients.

So how much should a firm be spending on new client acquisition?  In my experience, it is usually around $3,500.  Here’s how it works out – lets say a 100 lawyer firm has gross revenues of $50 million annually (that’s an RPL of $500K).  If we accept two percent as being the norm for marketing and business development, the firm’s budget would be a million dollars.  A healthy average revenue per client is around $30,000 which would mean our 100 lawyer firm would have about 1,650 active clients.  In my experience most firms see a 15 to 20 percent turnover in clients annually, so that means about 300 new clients annually or a client acquisition cost of around $3,300.

Of course a real firm’s actual calculation would involve simply dividing the marketing budget by the number of new clients.  But the cost of new client acquisition raises some other interesting and important issues.  First, it forces firms to get a handle on what percentage of its client base has to be replaced each year.  When a 100 lawyer firm, like the one in the example above, sees that it has to bring in an average of 20 or so $30,000 clients each month, it puts an edge on the priority of business development.

Secondly, I’m constantly amazed at how many law firms have a median client size of around $5,000 or less.  If the cost of acquiring a new client is more than $3,000 (not including the cost of conflicts checks and file and accounting setup) and half of those new clients are going to pay less than $5,000 per year in fees, a fiscal issue becomes quickly apparent.

So, thank you Shark Tank for giving us a different way of looking at what we are spending on business development and the results those dollars are achieving.