Part One: Client Acquisition Cost & Client Lifetime Value
SaaS meet LaaS (Lawyering as a Service)
You may have heard of Software as a Service (SaaS for short). Notable SaaS companies are SalesForce, Yammer, Box, Dropbox, & DocuSign. Heck, you may be using a SaaS right now. But have you heard of LaaS (Lawyering as a Service)? Probably not. A Google search returns ~3k hits for LaaS, which is slightly less than KaaS (Kittens as a Service) at ~7k hits.
So why should you care about SaaS or LaaS or KaaS? Unless you're bullish on the Kitten market, you shouldn't care about them. What you should care about is knowing your firm's business metrics like a pro. And that's what the best SaaS companies do. They leverage their own data to fuel growth and build happier, longer-lasting clients that stick around for a very long time.
Below are a few SaaS-related tips that you can learn to make your law firm more competitive, and possibly more profitable.
This is part one of two. In part one we'll discuss Client Acquisition Cost (CAC) and Client Lifetime Value (CLTV) as it relates to your law firm. In part two, we'll discuss Client Retention (Churn) and Client Happiness (NPS).
In the world of SaaS we use a lot of acronyms to better understand our respective businesses. CAC, CLTV, Churn, and NPS to name a few. What are they and how can you use them to help your firm?
CAC stands for Customer Acquisition Cost, but in your case it will stand for Client Acquisition Cost because law firms mostly deal in clients, and not customers. CAC answers the question: How much did it cost me to acquire this new client anyway?
The way you determine your CAC is to add up all of your sales & marketing costs for a given period of time, like a quarter. This includes salaries and bonuses paid. You may not consider yourself a sales person, but if your job is to help bring in clients, than you're a cost of the sales process even if your title is Partner. When figuring out CAC it's best practice to include the expense if you're not sure about it. A networking conference in Vegas? Include it.
Here's an example
In Q1 you spend $100,000 on sales & marketing. You end up with 5 new clients. Your CAC is $20,000/client (i.e. $100k / 5). So there's your answer: you spent $20k to acquire your new client. Which could seem like a lot, but you can't know that until you know the expected lifetime value of your client, right? $20k could pale in comparison to $200k or $2m?
Which brings us to the second piece of CAC: the payback period. How long will it take for you to recoup your $20k? Well, this greatly depends on your business model. If it's a recurring retainer model, then you know your new client will be paying you X new dollars per-month as part of your retainer agreement. If your model is project-based billing or hourly-billing, then try and figure out what the average amount billed per-month is for a similarly sized client.
Let's say, regardless of your model, your Average Revenue Per Client, or ARPC for short (in SaaS, we usually refer to this as ARPA or Average MRR), is $5,000/month. How long till your Client Acquisition Cost (CAC) is covered? Answer: 4 months (i.e. $20k/$5k). That's not too bad! In fact, it could be really, really good. Maybe too good and a sign you're not spending enough to grow your firm.
But how do you know if that's a good or bad CAC payback period? You know, by knowing your Client Lifetime Value (CLTV for short).
Bessemer Venture Partners (a historic venture capital firm that invests in a lot of hot SaaS companies, e.g. Box, Clio, & LinkedIn to name a few) describes CLTV as "the net present value of the recurring profit streams of a given customer less the acquisition cost". In other words, it's the total amount of money you can expect to capture from a client over the life of your relationship minus your cost of acquiring the client.
Your CLTV could be as short as one month and as long as, well, forever. But who are you kidding. Clients come and clients go. Nothing is forever, so it's best to be conservative based on your particular industry. For this post, let's assume your average client will be with you for 4 years.
Your CLTV, not accounting for gross margins or your cost to acquire the customer, is $5,000 x 48 months (4 years) = $240,000. Taking out your $20k CAC reduces CLTV to $220,000. And to be a bit more realistic, let's factor in a fairly healthy/efficient gross profit margin of 70%, which gives you a final CTLV of $154,000.
Again, the assumptions we're using are:
- $20,000 = Average cost to acquire a new client (CAC)
- $5,000 = Average monthly client payment (ARPC)
- 4 = Number of years your client will be with you (CLTV)
- 70% = Your gross margin (GM)
If this is you, congrats! You have a healthy CLTV:CAC ratio of 7.7 to 1 (i.e. $154,000 / $20,000). It takes you 4 months to recover your initial client cost, but for every dollar you spend acquiring a new client, you're getting back almost $8 in profit!
Generally speaking, a CLTV to CAC ratio that is higher than 3 is a sign you have a very healthy business. And it could also mean that you should be spending more on sales & marketing to grow your firm, faster (if that's your goal). What that number is, is up to you. Based on the data above, it's perfectly reasonable to spend up to $50,000 per new client, because you'll be within healthy CLTV:CAC territory. But you'd only want to do that if you want to step on the gas and grow your firm, faster (assuming you have the cash to do so).
So that's CAC and CLTV as it relates to your law firm.
Looking at CAC and CLTV metrics in this way can give you new insight into your firm that may have been difficult to see before.
In our next post on LaaS as SaaS, we'll discuss Client Retention (Churn) and Client Happiness (NPS).