Wednesday, March 5, 2014

Measuring Return on Legal Marketing Investment: Understanding Direct Revenue, Aggregate Revenue and Revenue Generated Through Word-of-Mouth

As the last handful of blog postings have outlined what we see as some of the problems with current ROI models, allow me now to describe a real world implications of the assumptions made in utilizing some of these more traditional approaches. They can be seen in what I would consider to be in the fairly typical scenario in which a law firm decides to hold a seminar for the purpose of attracting new business. For this example, let us say that the total expense for all aspects of the seminar comes to $15,000.

Unfortunately, much to the firm’s chagrin, “only” 20 people show up of which three become actual clients of the firm.  Client A generates revenue of $2,500, Client B’s revenue is $4,000 and Client C represents $3,500 of new revenue for the firm.  Hence, the total revenue generated by the seminar is $10,000.  Utilizing the standard ROI formula {(Revenue – Expense)/Expense}, we would state that the ROI for this effort is negative 50%. If this firm is like most, the result of this effort is then reported to management who determine that the seminar was a “failure,” because the revenue generated did not cover the investment costs. 

But would this be correct ?  

The truth is that we don’t know.  And we don’t know because we cannot yet fully realize what the impact of obtaining clients A, B and C really is. 

For example, we all understand the role that word-of-mouth plays in the building of a law practice. So if even one of the clients (Client C) refers another client (D) to the firm, additional revenue is realized. If Client D generates an additional $15,000 in new revenue, the seminar’s ROI is now a positive 67%!  What’s more, what originally amounted to just $10,000 in new revenue is now $25,000. Had Client C not attended the seminar, Client D would have never entered the fold.  Taken even a step further, it’s certainly within the realm of possibility that Client D now refers yet another new client to the firm. That revenue must, in some way also be credited to the investment the firm made in the seminar.

Most ROI models and calculations take none of this into account.  This is because they are only measuring the direct return on the marketing investment – that revenue that can be directly attributed to the seminar.  What they fail to measure is the word-of-mouth revenue that was also generated as a result of the seminar. Over time, this revenue may actually far exceed that which was garnered directly.

The fact that there are two types of revenue (Direct and Word-of-Mouth) leads to a third – Aggregate Revenue or the total of both direct and word-of-mouth revenue.  This is the full result of the marketing effort and reflects both the effectiveness of the original marketing initiative as well as the perceived quality of the work the firm has performed.

As we will see in ensuing posts, these are powerful metrics that offer enormous insight into how each law firm might improve the ways in which it goes about business generation at the firm, practice group and even individual attorney levels.

Next Week:  The Relative Levels of Influence of Different Marketing Vehicles

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