Keeping Cash Flowing: How to Calculate Your Customer Lifetime Value for Law Firms

Law firms, like all B2B businesses, live and die by their cash flow. That cash flow comes from the clients they’re able to win and, more importantly, keep happy. A healthy cash flow equals a healthy business, and we’d all like that, wouldn’t we? So, the question remains: how can you make sure you’re keeping your business’ cash flow flowin’? The best way to keep up is by keeping a close eye on your law firm’s key performance indicators. Primarily, we’d recommend monitoring one key performance indicator in particular: customer lifetime value for law firms. 

What is Customer Lifetime Value for Law Firms?

But really, what is customer lifetime value? It’s pretty simple really! It’s the total numerical value of a customer throughout their whole relationship with your law firm. The value might vary depending on your hourly rate, the frequency of which they engage with your firm, and the length of time they’re with your firm. Overall, it measures how valuable a single customer is to your firm. You’ll always be striving to increase your customer lifetime value.

Why Does Customer Lifetime Value for Law Firms Matter?

Customer lifetime value for law firms is definitely one of the most important KPIs to keep track of and thoroughly understand. It’s one of the best ways to keep that cash flow coming in continually. This essential statistic measures the ultimate expenditures that can be assigned to one client during each stage of your delivery process – from first contact all the way to final delivery. It’s a great way to keep track of how much (or how little) you can spend to win the loyalty of a client. Essential for mapping out your customer journey! 

Basically, when all your law firm’s income stems from a client (your customer lifetime value) is more than the cost of your services, that’s when you’re in the green! Cha-ching.

cash flow for law firms

How to Calculate the Customer Lifetime Value for Law Firms

All sounds great, right? Let’s get to calculating then. In just four easy steps! First, calculate the average customer lifetime – aka how long on average clients stay with your firm. Second, calculate the total future value with average purchases and service prices. Third, come up with the average cost of services and the entire customer journey. Finally, work out the total value. 

Seems tricky, but we swear it’s not! We’ll walk you through each step. Let’s get started.

Step 1: Estimate the Lifetime of an Average Client

During our first step, we’re estimating the average lifetime of a client. How long does a client relationship last? This varies from law firm to law firm, as some clients will need to continually use your services, whereas others will only need them once. It also depends on what discipline of law you practice too! 

For example, if you’re a family lawyer that specialises in divorce, you’d likely (hopefully!) only be assisting a client once. However, if you’re a transactional finance lawyer that specialises in small businesses, you’re going to have a much longer relationship with a client. 

Keep track of every relationship with your client (noting the date you onboarded them and the date they left) and work out the average by adding the amount of time together (whether it’s days, months or years) and dividing by the number of clients. 

Step 2: Estimate the Average Revenue Per Client

The average revenue per client is pretty similar to your average client lifetime as it’ll be hugely dependent on your firm and your specialisation. To work out this number, you’ll want to sum up the amount of work for each client, estimate the amount billed to the client and multiply those two numbers together. 

This is a tricky calculation because it’s so hard to nail down for professional service firms. The best way to calculate it is by keeping a firm hold on your data and looking back at historical transactions. Look at how many services they required on average and the total fees accrued. 

cost for law firms

Step 3: Calculate the Cost of Onboarding and Maintaining a Client

These will be two different calculations that you’re bringing together. 

First, the cost of onboarding a client: This cost will likely have a lot to do with your marketing as you’re looking for how and where you acquire your clients. Is it from word of mouth? (Essentially, free.) Referrals from other firms? (Again, pretty cost-free.) Your website? (Pricier.) From pay per click advertising? (Pricier again.) Online digital marketing? (Cheaper, but still more expensive than free.) When you can determine where your leads come from, you can start working out how much each method is costing you. 

Maintaining a client has its own set of hidden costs. You’ll have a fixed cost for your services, but there’s also likely plenty of spots along your customer journey that have their own additional costs to help keep a client happy. If you’re keeping tabs on every cost, you’ll have an easy time totting up the total. Get together all the expenses of running the firm for a certain time period, and divide that by the number of client matters serviced over the same time period, and you’ll have the average cost to service a client.

Step 4: Calculate the Net Total to Determine Lifetime Value of a Client

To calculate your firm’s customer lifetime value, you need to get together the average purchase value of your services and then multiply that number by the average purchases to come up with the customer value. So, to recap that’s this sum: (Average purchase price x Average number of purchases = Customer value.)

Then, once you’ve worked the customer value, you come up with the customer life span and you multiply them together. Which goes a little something like this: (Customer value x average customer lifespan = Customer lifetime value.) 

customer lifetime value for law firms

There you have it! You’ve now got that all-important number that helps you keep your cash flow coming in strong. If you’re ever lacking in leads, we’ve got you covered. Boss Digital are experts in digital marketing for the legal space. Contact us today for a free consultation.