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LAW FIRM BUSINESS DEVELOPMENT & CLIENT ACQUISITION COST

By Biju 25 January 2021 Law Firm Business Development and Client Acquisition Cost

Law is a noble profession but running a Law Firm is purely a business function. At the end of the day, you need to have a positive P&L Statement. A steady flow for new clients and maintaining the existing clients are essential for the positive growth of a law firm. In this article, we deal with the former part.

What is CLIENT ACQUISITION COST (“CAC”)?

CAC gives you the amount of money spent to acquire a single client. CAC is derived by dividing the total amount of money spent on all the Business Development activities (including the operation costs incurred), divided by the total number of new clients acquired as a result of the aforesaid BD initiatives. For example, if you spend Rs.2,50,000/- on Business Development initiatives over a 6 month period, and acquired 10 new clients, your CAC would be Rs.25,000/- per client.

Why is CAC Important for Law Firms?

Law firms require a steady flow of clients who can pay a premium fees for obtaining legal services. Acquisition of clients will help law firms to thrive in their practice. Law Firms must acquire new clients to fundamentally: (1) Increase Revenue; (2) Increase their Market Share; (3) Starting Services to New Sectors; and (4) Replace any client(s) lost to other law firms (i.e. competitors). Before embarking on a client acquisition journey, law firms need to have an idea about the CAC. 

Understanding Client Acquisition Cost is an important factor in the Law Firm Business Development process, as CAC can enable the law firm to understand the effectiveness of each of the Business Development channels used for acquiring new clientele. Further, without knowing your CAC, you will not able to ascertain the Return on Investment (“ROI”), which will land your entire law firm business in a total soup. So, CAC is an important metric that law firms need to track for financial success.

Cost Factors involved in Calculating Law Firm Client Acquisition Cost

Every activity for acquiring a new client involves costs. Let us explore some of the basic cost factors involved while embarking on a client acquisition journey:

Market Research Costs - To identify your “ideal”, you need to carry out a preliminary market research. Market research can be carried out through an external market research agency or can be done through in-house resources. The use of a research agency will incur the costs of hiring a market research firm. Cost can be reduced by using internal resources who can carry out the research by reviewing business directories, purchasing mailing lists or searching the Internet for your target clients, however, external agencies can deliver results fastly.

Lead Generation Costs - For generating leads for your law firm, you need to start with a lead generation campaign. Lead generation campaigns will fill the top of your sales funnel with “potential” clients, who may require your services but at this point both the parties are unsure whether it is a good fit for each other. This sort of campaign will be a mix of various “in-bound” promotional activities like creating brochures, designer email templates, etc. Lead generation costs will involve multiple heads of spending. For e.g. if you have decided to create a new firm profile, you need to pay the designing charges to the creative agency. Further, costs will be incurred for printing the hard copy of the firm profile. If your law firm is partnering a conference, then cost is involved in designing appropriate “messages” for the conference along with the cost involved for “partnering” with the conference organizers.

Meeting Costs - Once the potential client expresses their intention for a face to face meeting, there will be several expenses involved like the cost incurred for traveling for the meeting, the costs involved for preparing the presentation including the lawyer’s time involved in research for the presentation & the meeting, etc. In most cases, we forgot to add the per hour charges of the lawyers involved before and during the meeting.

Follow-Up Costs - Follow up with the ‘leads’ you have received is essential for converting the ‘potential clients’ to ‘clients’. For e.g. you might have met a ‘potential client’ in a conference or in a ‘marriage function’ and they have asked you to contact them to further a business relationship. Here, you will make the initial contact by telephone to find out more about the requirements of the ‘potential clients’ and to arrange a date for face to face meeting. You will incur the internal costs for getting an employee to make such follow up on a regular basis plus the costs of the telephone calls involved. Follow-up is also done through providing educational content in the form email messages, newsletter, etc. to ‘potential clients’ which will also incur costs for its research & creation.

Direct Costs - You have to recruit professionals for carrying out your Business Development activities, which will incur costs such as salaries, equipment costs, software purchases, other infrastructure costs, etc. These are the direct costs involved in the Law Firm Business Development process. On a separate note, incentivizing the BD team will add to the direct cost but can help to generate more new business.

How to Calculate CLIENT ACQUISITION COST (CAC)

CAC is calculated by dividing “Business Development Costs associated with a specific campaign or initiative” by the “number of customers acquired from said campaign or initiative”.

CAC = (BD + DC + DS + TE) / CA

where:

  • CAC is Customer Acquisition Cost
  • BD is Business Development Costs
  • DC is Direct Costs (involves the salaries of the employees involved)
  • DS is Designing Services for website, collaterals, etc.
  • TE is Travel Expenses incurred
  • CA is Number of Clients Acquired based on the particular campaign

For example, if your law firm spends Rs. 100,000/- on client acquisition in Q1 of 2021 and acquired 10 clients, the CAC would be Rs. 100,000/10 which is Rs.10,000/-.

Conclusion

For Managing Partners of law firms, Client Acquisition Cost (CAC) is crucial information. This metric can help in understanding the Costs involved in getting a new client, which can help in future Law Firm Business Development Planning and Budget Allocations. Here also, if we can include all the costs involved in the acquisition of the client starting from the salaries of the staff to the buying of safety pins, an accurate CAC can be arrived at.

Further, CAC can help in understand which channel of promotion is more economical for client acquisitions. For e.g. You give 25% as referral fees. A friend referred a case who fees is Rs.500,000/- and as referral fees you paid Rs. 1.25,000/-. You can spend Rs.1,25,000/- for your Social Media promotions for 4-5 months and could have obtained clients worth Rs.50 Lakhs.

Further, once the client is acquired, one can evaluate whether the fees obtained from the client is more than the amount spent in acquiring the client. Sometimes, maintaining a client is more costly than the CAC involved. Further, after knowing the CAC, it is easy to run the Life Time Value of the client and ascertain whether the client is economical for your firm or not.

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