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Market and Communicate to Grow Your Firm

Getting Wind of Your Existing Clients' Value
by Barbara Lewis MBA and Dan Otto MBA

Many attorneys target new clients in their marketing efforts, rather than enhancing relationships with existing ones. Yet, the cost of retaining a current client is far less than prospecting for a new one. Moreover, the value of an existing client may be worth more than the value of a potential client.

How can you determine the value of your current clients? The client lifetime value (CLV) model is a methodology used by businesses that determines the worth of the client – not only of the initial work, but of the work throughout the entire relationship.

Most attorneys know their top 10 revenue generating clients in a specific year. However, many may not track that data over the course of the entire relationship since inception. Do you know your ten largest clients in the history of your firm?

Why is this important?…because the $20,000 client with one matter in 10 years is not as valuable as the client who pays you $6,000 every year. Over the course of 10 years, the $6,000 a year client is worth $40,554. (Discounted at 10 percent annual.)

If the client only spends $6,000 every other year, the value is still more at $21,243 over the 10-year period. By analyzing your clients’ average annual fees and multiplying by the total number of years of a relationship (20 to 30 or more), you can determine the CLV. And by calculating a typical client cash flow in the future, you can determine your new clients’ lifetime values.

You can further analyze the CLV by matter, referral source, etc. For example, a company that comes to you for an incorporation, will probably have on-going work over the course of many years. Over 20 or 30 years, let’s say that amount is $100,000. Although the fee for the incorporation may be only $2,500, there is a high CLV. This is a better client than the one that may pay you $10,000 for a matter where the probability of follow-on work has proved low in the past.

You may find that a specific referral source, for example a CPA, refers you clients who are with you for many years. The CLVs of his or her referrals are high. Although the referral from this person may not generate a large one-time fee; however, over the lifetime the client may pay a lot of fees.

The client lifetime value analysis emphasizes the necessity of paying attention to current clients with high CLVs, even though the annual fee may not be near the realm of your top 10 revenue generators in a given year.

You can retain clients in variety ways: visiting their premises at least once or twice year, inviting them to sporting or cultural events, taking an interest in their personal lives – their families and hobbies, and sending them FYI messages in which they have a personal or professional interest. All of this is done off the clock with no fee generation. You are incurring costs – your time and the opportunity cost of not bringing in a new client.

Although focusing on retention gives you the best return on your investment, the clients have to be acquired before they can be retained. Acquisition or marketing has several important benchmarks for measuring success. One of the most important is determining which techniques yield the highest return on your investments.

Unless you are tracking how your clients originate, you probably don’t know. Do your clients come from speeches that you give, articles that you write, networking, referrals from other clients, etc.? If you obtain one client from every speech, but the CLVs are low for those clients, and you generate only one client in five articles that your write, but the CLVs are always very high, then writing is a good return on your investment of time.

The marketing budget is usually from one to five percent of revenues in a law firm. To determine how successful your marketing budget is, take your 1999 marketing expenses (hard costs and soft costs, such as time) and segment by the amount that you spent for new client acquisition and the amount spent for current client retention. Then divide the new client expenses by the number of new clients that you generated during 1999. This amount will give you the average cost of bringing in a new client. Compare this cost to the average lifetime value of your clients and you can decide if your dollars were well spent.

For example, if your new client development budget was $100,000 and you brought in 100 clients, your average client acquisition cost is $1,000. If your average client lifetime value over 20 years is $10,000 or a total of $1 million for the 100 clients (less discounted amount and percentage of lost clients), your investment of $100,000 is worth it. On the other hand, if you only bring in 10 clients and the total CLV is $100,000, it’s not worth it.

On the retention side, calculate your retention rate by determining the clients that were with you at the beginning of 1999. Take those same clients and determine the number that were with you at the beginning of 2000. Divide the number of clients in year 2000 by the number from year 1999. That is your retention rate. To determine your retention costs per client, divide your marketing allocation by the total number of clients that you retained over the two yearsin 1999. This will be the amount of money you spent to retain each client divided by number of clients. For example, if you spent $50,000 on retaining clients and you have 100 clients but only retain 50 you have a 50 percent retention rate or 50 of a total of 100 clients, and you are spending and average of $1,000500 per client for retention. If your CLV is $10,000 per client, you should consider spending more to increase the retention rate, since 50 clients represent $500,000 in future fees. If you spent $100,000 in retention and your retention rate increased to 75 percent, your future fees could increase $250,000, well worth the additional $50,000.

When developing your marketing budget, consider segmenting your expenses between the acquisition of new clients and the retention of current clients. A good mix can yield substantial returns on your marketing dollar.

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