Setting a Law Firm Marketing Budget

Most law firms, especially smaller ones, market in an ad hoc manner. Every marketing decision is taken on a case-by-case basis and decided without any consistent rationale. Through planning law firms can improve the return they receive through marketing.

There are two basic approaches to setting a marketing budget: top-down and bottom-up. The difference in these two approaches is often seen as starting with strategy and then choosing one's tactics, or first selecting the best tactics and then devising a strategy around them. In practice, one often goes back and forth between the two.

Top Down Marketing
In the top-down approach, one first answers the question "how much do we want to spend on marketing" and then allocates the funds in the way they think will maximize return. To figure out how much, law firms might take last year's amount and adjust it up or down depending on whether they are willing to trade growth for current income, feel they are spending too much, think the competition is being more aggressive, etc.

Another approach is to take a percentage of last year's revenue. While many small businesses spend around 15% of revenues on marketing, law firms typically spend a lot less. A BTI Consulting Group survey found that large law firms spent 2.5 of revenue in 2005.

Some law firms base marketing budget on dollars per partner or dollars per all lawyers. This rule-of-thumb is most helpful in years when the staffing significantly increases or decreases.

Bottom-up Marketing
In the bottom-up approach, focus switches to first answering the question "what are the available marketing opportunities" and determining which ones have the best risk-weighted return on investment (ROI). For example, a law firm would invest in a profile listing on an online that directory that costs $3,000/year if they felt they could generate $15,000 in new revenue. Conversely, they would most likey not invest in a radio campaign that cost $25,000 that might result in $150,000 in revenue because the risks are too high. And,. they would definitely not invest in a $15,000 billboard placement that had no expectation of producing additional revenue.

Often simpler than estimating revenue from a marketing initiative is estimating number of new clients. For example, a referral directory might offer 50 new leads for $3,000. Using past data such as twenty-five percent of people contacting the office come in for a consultation, and thirty-five percent of those receiving a consultation retain, one would estimate that those 50 leads might result in about 4 and a third new clients (50 * .25 * .35). In other words, this firm is looking at a new client acquisition cost of about $686.

Client acquisition cost is a powerful number — with it one can easily choose their action. A firm that focuses on a large number of relatively straightforward cases might only have an average client revenue of $1,500. With the above example, they would clearly not market in the directory (though, we would hope they would be able to convert more than 4 clients from 50 leads). On the other hand, an aggressive firm that handles more complex cases with average revenue of $5,000 would likely accept the offer without a second thought.

Putting it all Together
I started this post by saying in reality people often combine top-down and bottom-up approaches, and that is exactly what I recommend. First, get an idea how much you are currently spending on marketing — last year, last 12 months, etc. Divide that number by total revenue over the same time period, so you know the percentage of revenue you are spending on marketing.

Percent marketing = (Marketing / Total Revenue) * 100

How does this number feel? If you are in a small market with little competition, you might be able to grow your business by spending less than 5% on marketing, but most small law firms will likely need to spend 10-15% to grow. An aggressive firm in a competitive market might even choose to spend 20% or more marketing (at least for a short time).

Let's look at it from the other side. Subtract total operating costs not counting your pay from total revenue and divide by number of clients to get average profit per client.

Avg profit per client = (Total Revenue — Total Costs) / Number of Clients

How does this number feel? Average profit per client is a lot different number in a small firm than a large one — it represents how much money goes into your pocket. Only the individual partner can decide what their time is worth. It could be the case there is no room to raise marketing and still make enough to justify your time. There might be room to raise rates, so a larger marketing budget can be accommodated.

Now that you have an idea of whether you are spending about the right amount on marketing, need to cut back, or can spend more, it is time to switch to a more tactical mode. As discussed above you should know know your average acquisition cost

Avg Acquisition Cost = Marketing / Number of Clients

Next, decide on a maximum acquisition cost you are willing to pay. If before, you determined you want to be more aggressive in your marketing, you can add a certain percentage to your average acquisition costs (e.g. 10%, 20%, 50%). Conversely, if you are currently spending too much, set a maximum acquisition cost below your average acquisition cost.

At this point, your marketing decisions should be simplified. You can evaluate all of your current and prospective marketing investments in light of your maximum acquisition cost. For each opportunity, you can ask yourself how many new clients am I likely to get, how does that cost per new client compare with my maximum acquisition cost.

Using these ideas, you can begin to address your marketing both strategically and tactically.