How much is a new client worth to you? Probably more than you think.
A client is worth the sum of everything they pay you over their lifetime as your client — all of the business they bring you, all of the fees generated over the ensuing years.
But that’s not all.
They are ALSO worth the value of all of their referrals during that lifetime.
This can be a very large number. Even if yours is the kind of practice that does not see clients again after their initial engagement, their referrals could represent many time the value of what they paid you.
And when you think about it, they are also worth the value of all of their referrals’ referrals.
So the client who pays you $1000 today may be worth $100,000 over his or her lifetime. Maybe more.
That means that the client who pays you $1,000 today could be as valuable to you as the client who pays you $20,000 today, or even more valuable. You should treat them accordingly.
When you understand lifetime value, you can better calculate how much you can "spend" to acquire a new client. You also realize that any marketing activity you engage in that "only" breaks even actually puts you ahead. You understand that even if you LOSE money on the first engagement, you will still make a profit.
This gives you a competitive edge over other lawyers.
For example, suppose you have a yellow pages ad that is breaking even, and so does one of your competitors. He is not enlightened, and in looking at his numbers, decides that his ad is not profitable, so he pulls it.
You, on the other hand, understand that if your costs to acquire a new client through the yellow pages are covered by that ad, your profits come on the "back end," i.e., the lifetime of that client’s business and referrals.
In marketing anything, the "back end" is where most of the profits are made.
A bankruptcy lawyer told me he had previously been a member of a ad network that cost him $3,000 per month. He said it generated an average of ten appointments per month (so the cost was $300 per sit-down appointment), and resulted in eight clients (not a bad closing ratio). Therefore, the net cost of acquisition was $375 per client.
Although his fees averaged $1,200/client, he felt that the cost of the program was too high.
Let’s assume the cost of delivering his services is $800 per client. (Overhead, PLUS the value of the responsible attorney’s services.) $800 plus the $375 acquisition cost means that each new client resulted in a net profit of $25. You can see how one might conclude that the return on investment wasn’t worth it. And for many attorneys, this conclusion would be correct.
But it’s a different equation for the attorney who knows how to consistently generate referrals. That attorney understands "lifetime value" and that the big profits are made on the BACK END. Once a new client is “acquired,” there are no additional acquisition costs. Everything else beyond that is pure profit.
The attorney who knows how to generate referrals looks at the lifetime value that awaits him beyond the initial engagement, and when he does, he wants as many of these clients as he can get. For every $3,000 he spends with a referral network, ad, or any marketing vehicle, he gets back his $3,000, earns a profit of $200, and looks forward to perhaps $25,000 in future revenue.
How do I come up with a $25,000 back end? I don’t have a crystal ball, but I think this figure is reasonable. Here’s why.
First, let’s ignore any repeat business. Although a certain percentage of consumer bankruptcy clients come back to file again, their numbers are probably not significant.
Assuming an average fee of $1,200 (and assuming that over the coming years, any increased fees are matched by increased overhead, attorney time, and cost of acquisition), to earn $25,000 in fees, you need a shade under 21 referrals.
Let’s further assume that the average client, over the lifetime of his relationship with you, refers two additional clients. (If you can’t generate an average of two referrals from your clients (yes, even bankruptcy clients) in the next twenty years, something is terribly wrong.)
So, client one refers two clients. Those two clients each refer two clients. Those four clients each refer two clients. And so on. Here’s how this plays out:
|1||(The First client; we don’t count him)|
|2||(The two clients he refers)|
|4||(Two clients who are referred by each of the two clients above; total referrals so far are 4 + 2 = 6)|
|8||(Each of the four clients above refers two clients; total referrals are now 12 (8 + 4 + 2))|
(Each of the eight clients above refers two clients. Total referrals are now 30 (16 + 8 + 4 + 2
These are very realistic numbers. Many clients will not refer anyone, but others will refer more than their “share.” Even though you essentially broke even on the “front end,” over the lifetime of your relationship with these people, you will earn thousands and thousands of dollars on the “back end.” Keep that in mind when you evaluate the potential profit of any marketing investment.
Always consider lifetime value. Think "clients" not "cases". Consider the back end; that’s where most of your profits are.