If you don't know what it costs to get a client, you'll waste a lot of time, effort and money drilling dry- or low-yield wells. It's important to track your sales activity so you can
discern real opportunities vs. mirages,
invest properly in the former, disinvest in the latter, and
recognize when your sales process isn't working and needs to change.
I'm not referring to broad marketing activity intended to raise firms' or lawyers' visibility or associate either with particular industries or issues. This is about individual lawyers investing in individual prospects, from whom they aspire to get business.
Perception vs. Reality
The perception that sales efforts are more successful than they really are is widespread. Humans have selective memories. We only remember the successes. Since law firms don't typically track wins, losses and conversion rates, there's no data to rebut lawyers’ inflated beliefs about their closing ratios. Calculating cost-of-sales? No chance. Forget it.
Here are the relevant sales inputs and ratios, e.g.,
number of outreach attempts, e.g., calls, emails, and voicemails required before actually speaking with a Suspect;
number of conversations, lunches, visits, etc. required to engage on a decision-worthy issue;
number of calls, meetings, email, etc., required to identify and engage all the decision stakeholders and facilitate a decision;
number of such sales investments that turn into clients;
actual Year One fees paid by those clients; and, finally,
rate of year-to-year revenue growth within those clients.
If firms tracked and analyzed such data, they'd likely learn that much of the groundless sales activity and cost that they sanction as "relationship-building," is actually wasted or, worse, counter-productive in the sense that, while the lawyers continue to drill deeper into that relationship dry hole, they're not drilling elsewhere.
A simple model
A lawyer who bills $500/hour develops a relationship with someone over three years. Let's say that her calls, emails, lunches, office visits, social events, etc. total 2 hours/month, for a total of 72 hours. The lawyer's opportunity cost at that point is $36,000, which means that, at representative gross profit levels, that client will have to pay your firm $100,000 in legal fees for you just to break even on cost-of-sales.
Even if lawyers had this calculation in front of them, many would still justify the investment based on their belief that the $20,000 initial matter would serve as a beachhead from which they'd grow the client into a sizable one. If the firm reliably knew what percentage of new clients actually grew to an annual run-rate of 5x or 10x the original sale, how long it took to happen, and what additional cost of sales would be required, they'd likely discover that it was a small percentage.
It's almost as if law firms operated like venture capitalists, i.e., they're betting on the one big winner in ten that becomes a home run, and offsets the 9 losers. The difference is that VCs have actual data to support their conclusion that a 9:1 losers:winners ratio yields a sufficient return from the one winner.
Begin tracking your activity and results so you can sharpen your focus and allocate scarce time and money where it actually produces sufficient results relative to the investment.