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Most attorneys, from solos to big law, speak qualitatively about how they market and attract clients, and measuring the actual cost to attract and sign up a new client is uncommon. But understanding and monitoring this practice cost is critical.
Cost of Client Acquisition
Client or Customer Acquisition Cost (CAC) is commonly calculated for Software-as-a-Service (SaaS) companies, but it also belongs in professional services and the law. The concept is to capture the amount of money it takes to attract each customer or client. The purpose is to compare the CAC to the average lifetime value of the client as a means to ensure you are not spending more money attracting clients than they are paying you.
Normally, the formula involves adding up all the research, sales, and marketing costs and then dividing those costs by the number of new clients in the same period. Those costs are the sponsorships, lunches, dinners, advertising, website costs, and so on, plus the salaries of dedicated sales and marketing staff.
It sounds simple but in fact is quite complicated: in the professional services, most calculations ignore the time spent by the attorney in advance of securing the client.
Time is Money
Although this cliché sounds obvious, many attorneys do not include their non-billable time in the CAC calculation. There is a common notion that writing off billable time or recording non-billable time does not have the same impact on the business as a cost like marketing.
I have had several conversations with attorneys that went something like this:
Me: How much time do you give away for prospective clients?
Them: An hour or in rare cases over two hours.
Me: How much is your billing rate?
Them: From $275 to $700 per hour.
Me: Do you take every client?
Them: No.
Me: Do you track this time to see how much you are giving away to gain your new clients? (to which there are a few different replies)
Them: (1) No, it’s not the same as marketing expenses or costs that I actually pay, (2) I am not paid my billing rate, (3) I do not pay my associate the same as the billing rate.
Opportunity Costs
Attorneys have argued it is incorrect to include an initial free hour at their full billing rate as an opportunity cost. Instead, they say what should be included is the amount that they or the other attorney is paid for that hour. For example, when looking at the cost of giving away an hour, if the billing rate is $300, and the attorney/associate is paid $75 per hour, the attorney would argue that the opportunity cost is $75. That makes a big assumption that the initial free hour couldn’t instead have been billed to someone else for $300. Instead, what should be included in the CAC is the opportunity cost of giving up that hour for free.
In other words, there is a cost to deciding to spend one or two hours talking to a prospective client without any intention of billing. I am not saying that giving away time is not a good business practice. Rather that not tracking and counting it, as a cost of acquiring that client, is a mistake.
Calculation Tips
Does these three things:
- Include everything – To truly calculate the CAC, you have to take all the attorney time that you put in before signing an engagement letter, and all the identifiable expenses and staff salaries.
- Measure regularly – If you are doing your time monthly or weekly, it is best to run these numbers on the same basis so that you can start to track the trends and see if there are interesting results in terms of fluctuations.
- Compare the CAC to the total billing for the client – Once you have the average CAC for your practice, you need to compare that to the average amount you are billing per client. If CAC is more than the average billing per client, you need to dig deeper.
We will talk about this comparison and more next time. Any burning business questions for your practice? Do not hesitate to reach out to me at mejuetten@traklight.com and perhaps I can feature your questions in a future article.
