For business owners, such as equity partners in law firms, customer acquisition cost (“CAC”) is a crucial piece of information, and one that not enough attorneys consider as they seek to build their books of business, especially given how simply it can be calculated and applied to business development initiatives.
Building a Calculation Foundation
First, catalog any and all activities and expenditures where at least a portion of the purpose is to generate leads, land a client or acquire additional business from existing clients. These tend to vary far more widely than you might think (entertainment, seminars, publishing, traditional advertising, referral fees, etc.), so be thorough. Regardless of your approach to business development, there are almost always costs associated—even where there is no expenditure, the cost of time spent by an attorney on non-billable activities should (at least) be estimated and factored in. Time spent building an exhaustive foundation will dramatically increase the utility of your CAC calculations, along with the odds that your initiatives will be profitable.
Using a Basic Formula for Determining CAC
CAC is the total amount of money spent (and opportunity cost incurred) on marketing and other business development activities, divided by the total number of new clients acquired in a certain period. For example, if you spend $50,000 on marketing efforts over a 12-month period, and acquired 5 new clients, your CAC would be $10,000 per client. It is also helpful to break down the individual costs associated with the acquisition of specific clients to gauge if the strategies and tactics you are employing suit your business model going forward.
Breaking Down CAC by Channel
Using the calculation above, examine your different communication channels and what the CAC per client looks like in each. Pay particular attention to high-leverage channels. Quite often a fairly high percentage of your success will be traceable to a relatively low percentage of your expenditures and/or activity types. This information is the jet fuel for future business growth (not to mention less biz dev hassle).
Translating CAC to Return on Investment
Calculating CAC helps firms understand the structure of their efforts, but return on investment is determined after you take into account the fees generated by each acquired client and the growth of those accounts over time. For instance, clients acquired primarily through a referral fee* may seem “expensive” to acquire, but when compared to clients acquired were primarily through more passive channels, the fees generated by referred clients far outweigh the added costs.
* Generally, referral fees cannot be paid to non-lawyers. Be sure to research and follow all applicable rules of professional conduct if you would like to implement a fee-based referral program.