Trust me when I say Marketing ROI can be extremely simple and then again extremely complicated. Everyone has a blog, article, book, opinion about the complicated. Today, let's focus on the simple.
Without looking up anything, quickly pencil down a ballpark estimate of the following:
- Your firm's Total Revenue last year.
- Your firm's Total Advertising Expense last year (if you are a traditional law firm, this will be a very small number).
- Your firm's Total Referral Fees paid last year (if you are a law firm that advertises, this will be a very small number).
A simple yet useful calculation of your marketing ROI
Add Total Advertising and Total Referral Fees together. Divide that number into your Total Revenue number. That is your Marketing ROI.
$10 million (Total Revenue)
$1 million (Advertising expenses) + $2 million (Referral fees paid)
= $3.33... which means you are generating $3.33 for every $1.00 you spend on advertising. To put it another way, this is an ROI ratio of 3.33 : 1.
Why referral fees are a marketing expense
Wait a minute, you say, everybody knows that referral fees are not a marketing or advertising expenditure. They're just part of the cost of running a law firm. You should take out referral fees from this calculation.
Now, removing referral fee costs changes things dramatically, from a ROI ratio of 3.33 : 1 to one of 10 : 1 increasing the efficiency of your marketing dollars (and your profits) by about ten-fold. Hey, this sounds like a great idea!
But it's baloney! Referral fees aren't a fixed cost like rent. They are what you pay to acquire clients, which clearly makes them a marketing expense. If you don't include referral fees in calculating your marketing ROI, you are artificially inflating your ROI and managing with flawed information. (Assuming, of course, that you rely on financial data to manage your firm, versus relying on anecdotal information or what feels right or on the way things are done in law which is how most law firms manage their marketing dollars, which is to say, how they don't manage them at all. See Improving your marketing ROI takes more than calculating it below.)
The inefficiency of referral fees
If law firms included referral fees in calculating their marketing ROI, they would find that these fees are a very expensive and inefficient use of their marketing dollars. Yet, most firms blissfully prefer to pay out 33% to 45% of their top line revenue as referral fees rather than consider paying out a much smaller percentage of their revenue as advertising. That is, they choose to accept a much lower return on their marketing investment.
Why is that? Well, first, most firms don't calculate their marketing ROI. They are flying blind, with no idea of how efficiently their marketing dollars are working. Second, the referral fee system is comfortable; it's the way things are done. Law firms who operate this way really aren't focused on financial success. And that's okay, money is not everything but if you don't care about making money, why are you reading an article about return on investment?
Here's a hypothetical self test:
You examine your theoretical financials carefully at year-end. You find that your firm collected $10 million in gross legal fees. (Congratulations!)
If you could choose one of the next two statements to be true, which would you prefer?
1. You find that your firm paid out $3 million in referral fees on those cases and your ad budget is very small for a marketing ROI ratio of 3.33 : 1.
2. You find that your firm spent $2 million on advertising in that same year and you have almost no referral fees paid out for a marketing ROI of 5 : 1.
Think about it.
Your specific preference will likely determine your Advertising ROI and your outlook on your practice.
Improving your marketing ROI takes more than calculating it
If you have not yet figured out your marketing ROI, it is probably not the highest and best use of your time to start working on it now. First, improve your personal ROI by committing to doing whatever it is you do best (lawyering, managing, leading, inspiring, or dreaming) and hire a serious marketing professional to manage your marketing. Give them KPI's (Key Performance Indicators) to obtain. Lose the ego, lose your fears, and manage by the numbers rather than by your gut. You'll be amazed by the results.
Time and time again during my 15 years in the business of marketing law firms, I've seen a financial transformation occur when firms decide to base their marketing decisions on real information versus intuition or tradition or simply hope.
For more information, visit Law Firm Marketing Solutions from FindLaw.