2 Critical Numbers Every Law Firm Must Know This post was originally published on Dec. 18, 2018, and updated on Sept. 24, 2019:

Do you know how much money each lead is really costing you? How much does it cost you to get a new client? Knowing the answers to these questions can mean the difference between a profitable firm and a struggling one.  These numbers are known as “KPIs” — Key Performance Indicators. They are the critical numbers or metrics that run your law firm.

Two of the most important KPIs that every law firm should be tracking include: (1) your Cost Per Lead (CPL) and (2) your Cost Per Client (CPC). 

There are some simple ways to calculate your KPIs to help you maximize your marketing efforts:

Measuring Your Average Cost Per Lead 

Every law firm must have a solid grasp on how much it costs their company to generate a lead. I’m going to share with you how you can quickly estimate your CPL. Notice I said “estimate” as this is not a perfect calculation, but it will give you a pretty good indication and it’s a lot better than what most of you are currently doing to find out… which is nothing.

The first step is to create a clear definition of what a “lead” is. I have been in far too many firms where the partners had one definition of a “lead,” which was completely different from the definition the associates and staff had. Everyone in the firm must all have the same clear definition of what a lead is.

Here are the 3 criteria we use at The Rainmaker Institute to define a “lead”: 

  1. Someone who has never done business with you before. Regardless of whether you handled a matter for them six months ago or six years ago, that person or company is not a “lead;” they are a repeat client.
  2. They express an interest in your services.
  3. Everyone who contacts your firm, whether it’s by phone, email, a referral, showing up at a seminar you are giving, filling out a form on your website, being sent to you by a pay per lead company, or any other way.

A lead is counted upon the initial contact with the firm, not after an appointment is set, not after their appointment is kept and certainly not after they sign up to be a new client. At the very least, every person who answers the phone in your office should have a lead-tracking sheet in order to keep track of all the leads your firm receives in a month.

Once you have a good handle on truly how many leads your firm is already generating in a month (from all sources) you can estimate your Cost Per Lead (CPL) by using the following formula:

  1. Select a time frame (a month, a quarter or a year).
  2. Determine how many “leads” were produced during that time frame.
  3. Add up how much money the firm invested in marketing and business development during that same time frame.
  4. Divide the amount of money by the number of new leads produced.

For example, if you invested $20,000 in marketing and business development over the course of three months and generated 100 leads, then your average CPL is $200. The question you want to ask yourself is, is that good or bad?

Well, it depends on two things: what your average client value (ACV) is and how good your lead conversion system is. If your ACV is only $1,500, like for a Chapter 7 bankruptcy attorney, then $200 per lead may be acceptable, but it’s not fantastic.

However, if you’re a commercial litigation attorney and your ACV is $20,000, then paying $200 for a lead is a no-brainer.

If you have a very low conversion rate of 5-15% (measured by how many new clients you sign up/retain for every 100 leads you produce) and a low ACV, then you likely cannot afford to pay $200 per lead. But if you have a high lead conversion rate of 30-50%, then paying $200 per lead will work even if your ACV is on the low end.

Once you have a solid estimate of your average Cost Per Lead you should measure it monthly, quarterly, and annually. Some marketing expenses may only come once per year (like a big ad campaign or a new website) while others can be a monthly investment. Comparing them month over month, quarter over quarter, and year over year will give you great insight into how effective your lead generation efforts are.

Measuring Your Average Cost Per Client

The next number you need to know for your law firm is your average Cost Per Client (CPC) – i.e., how much does it actually cost your business to produce one new client? Not how much it costs you to perform the work, but just to get a new client to sign up or retain your firm.

Similar to CPL, you first need to define what a “new client” is for your law firm. This is much more straightforward for most firms. We define a new client as someone who pays you money or signs a retainer agreement if you are a contingency-based law firm.

To estimate your average CPC use the following four steps:  

  1. Select a time frame (a month, a quarter or a year).
  2. Determine how many “new clients” were produced during that time frame.
  3. Add up how much money the firm invested in marketing and business development during that same time frame.
  4. Divide the amount of money by the number of new clients.

For example, if you invested $20,000 in marketing and business development over the course of three months and generated 100 leads, then your average CPL is $200. If those 100 leads turned into 10 new clients, then your average Cost Per Client is $2,000. The question you should be asking again is, is that good or bad?

It depends upon your Average Client Value (ACV). If you practice estate planning law, paying $2,000 for a new client is untenable. However, if you focus almost exclusively on asset protection and your ACV is $10,000 to $20,000, then paying $2,000 for a new client is very acceptable. It still leaves you enough money to perform the work and have a healthy profit margin.

As you review your efforts and results from this past year and consider the changes you need to make next year in order to achieve your goals, I invite you to make a commitment to yourself and to your business that you will get a handle on these two critical numbers: Cost Per Lead and Cost Per Client.

Based on our experience of working with over 20,000 attorneys, without these two numbers you will continue to struggle and fall short of building a lifestyle law firm — a firm that produces enough money to give you the ability to lead the life you want to lead, enjoying your friends and family, taking more vacations, and eventually to leave the legacy you want to leave.

If you’re ready to take your firm to the next level and would like some assistance in achieving your financial goals, I invite you to sign up for a complimentary strategy session with one of our trained Rainmaker Advisors. We have helped attorneys across the country discover the secrets in building a financially successful and personally satisfying legal practice and we would love to have your law firm be our next success story!

I also invite you to check out this blog post on 8 Things You Need to Do to Run Your Law Firm Like a Business.  It’s over on our new blog, which has even more law firm marketing and management information I know you can use to promote your law firm.