Marketing is anything that you do to draw in and retain customers at your firm. It’s the flowers in your entryway, the logo on your website, the talk you give at the local bar association—even that sharp new pair of glasses you bought before your conference presentation.
And there’s no way around it: all of these things cost money. In fact, by reading this blog, you’re investing in your marketing strategy right now.
So, since zero-spend isn’t an option, the operative question isn’t whether or not you should invest in marketing, but how much money you should spend.
We explain two metrics that can help guide you.
Setting your law firm’s marketing budget
Thankfully, unlike matters of the heart, matters of the budget can be decided using cool, calm numerical calculations.
Setting a marketing budget should be much easier than choosing a spouse or buying a sofa—and one handy place to start is with an understanding of ROI.
Understanding ROI
Marketers frequently talk about return on investment, or ROI. This number is an expression of how many dollars you’re able to bring in as a result of every dollar that you spend on your marketing budget.
A 100% ROI means that you’re breaking even, while a 300% ROI (also expressed as a 3x ROI) means that for every 10k you spend on marketing, you increase revenue by 40k (and profits by 30k).
The formula looks like this: (Sales Growth – Marketing Cost) / Marketing Cost = ROI
A strong ROI is anywhere in the neighborhood of 1.5 to over 20. Although any ROI over 100% is technically a good investment, it’s common for law firms (and marketing firms) to aim for an ROI of 200-300%.
Lifetime value of a customer
Although ROI is an incredibly useful metric to monitor, it doesn’t tell the whole story.
That’s because ROI is frequently expressed in annual terms, and the benefits of a marketing plan continue to accrue over the long term.
Instead, think about asking yourself this: what’s a new customer worth to you?
ROI is typically expressed annually, which is particularly problematic for businesses like law firms that tend to retain clients for years.
Here’s an example. Let’s say that you operate a midsize law firm, and your average customer generates 5k in revenue for the firm annually and stays with the firm for an average of five years. In this case, the average lifetime value of a customer is $25k.
If you rely on an annual ROI calculation alone, you’ll underestimate your return many times over.
To get around this, try evaluating your marketing budget by thinking in terms of the lifetime value of a client.
Let’s say that the above law firm spends $25k in marketing, and those efforts bring in five new clients. This firm’s cost per converted client is $5k, and their one-year ROI is 100%. In other words, they spent exactly what they brought in.
So did they make a bad investment? Not at all. Because the average client stays with the firm for five years, their projected five-year return on their initial investment is 400%—a much happier number.
If this law firm cuts their marketing budget back down to previous levels after the first year, they’ll see a $100k profit on their marketing spend after five years.
This doesn’t mean they should stop spending on marketing, however: if this firm keeps spending $25k annually on marketing for the next five years, they’ll see a total increase of $625k in revenue over the following decade, for a net gain of $500k.
As long as your cost per new customer is less than the total lifetime value of a customer, your marketing budget could theoretically be infinite and you’d still be making money—although you might want to hire a few people to help you out with your infinite client base.
Tracking, planning, & making decisions
Exciting stuff, right? And the fun doesn’t stop there: these measurements still don’t take into account all of the potential clients who learn of your law firm through these marketing efforts but don’t convert (or don’t convert just yet).
But after all of this, the question remains: how much should you spend?
According to a joint study put out by Bloomberg Law and the Legal Marketing Association, the average law firm spends around 6.7% of its gross revenue on marketing. The right answer for you, however, depends on your cash reserves, risk tolerance, size, and goals.
Keep this in mind: the percentage of your net operating budget spent on marketing is a much less important number than the return on that spend.
A $500k marketing campaign that nets you 2 million is a bargain. A $25 marketing campaign that nets you $15 is a waste.
Our recommendation? Calculate how much a new client is worth to you, balance that with your budget and risk tolerance, and partner with a marketing agency that’s committed to tracking your ROI and adjusting your marketing strategy on an ongoing basis to maximize your returns.
And once we’ve figured that out, we can move on to the thornier (and more fun!) question of how to spend it.
