Comparing costs of client acquisition

Today I want to wax eloquent about one of the most important marketing metrics you should be tracking: Your cost of client acquisition.

Before I get into that, however, I just want to give you a quick reminder about the offer on the Tax Resolution Systems manual going on until tomorrow. Get your copy here.

Your cost of client acquisition is one of many metrics that you should be actively tracking in your business. It is one way to make apples to apples comparisons between marketing media and messages. Knowing the direct cost of acquiring a client from, say, direct mail versus your yellow pages ad, is a simple way to help you make smart marketing decisions.

Let’s take an in depth look at the cost of client acquisition across several marketing channels for tax resolution in particular. We’ll also examine improving closing ratios with a dedicated prospect follow up system, thus dropping the cost of client acquisition.

Straight Outbound Telemarketing

Let’s start with the straight cold calling approach utilized by the big, national tax resolution firms. For the sake of conversation, we’ll set aside the legal issues relevant to this approach. Let’s start with some ratios. A great sales telemarketer will call 30 liens, and get 1 prospect. An average telemarketer will call 70 or 80 liens and get 1 prospect. A typical unlicensed closer will close 1 in 11 prospects, good ones close 1:9. When running numbers I usually cut the difference, and call it 60 liens to 1 prospect for the telemarketer, and 10 prospects to 1 client for the closer.

A licensed tax professional will generally have a much higher closing ratio (usually about one in six), but will have longer consultations (30 to 45 minutes, versus 10 or 15 minute straight sales pitches).

Based on these assumptions, we have 60 liens, 1 prospect. 10 prospects, 1 new client. That’s 600 tax liens to get 1 client, at an average fee of $2750. Typically, a 10% commission is paid to the telemarketer, and 20% to closer, for a total of $825 in commission. Plus add about $200 in lien costs, and $3/hr for an autodialer for about 5 hours. All told, that’s $1040 (heh, that’s funny…) for one client.

For the best case scenario, it looks like this: 30 liens, 1 prospect; 6 prospects per client… 180 liens to get a client. Same fee and commission, a reduced lien cost ($60), and call it two hours on the auto-dialer ($6), for a total of $891 per client.

If you squint really hard, $891 and $1040 are not that different. So, even with very different ratios, the actual cost of client acquisition doesn’t decrease all that much. This is how the majority of tax resolution firms operate, by the way. The problem with this approach, of course, is that using unlicensed people to directly solicit licensed representation services is illegal (not that they care).

Most solo practitioners or small firms will operate such that the actual tax practitioner is closing their own sales, and thus you would think you need to take that 20% commission out of the equation. This structure gets closer to legal, especially if the telemarketer you hire is offering seats to a seminar or webinar instead of directly soliciting services. In this case, the cost to acquire a client would seem to decrease, but requires the trade off of the practitioner’s time. If you still pay 10% commission to your telemarketer, and it takes three hours to close one sale, and you bill out at $175/hr (typical for tax resolution), then the cost of client acquisition is $866.

In other words, even though you’re not paying a closing commission, the cost of client acquisition is actually the same once you account for the value of your own time (or even more).

Buying Inbound Leads From TV/Radio Commercials

There are a number of companies out there that run TV and radio commercials to solicit taxpayer representation. You’ve probably seen or heard them. These calls come into a call center, where the person is asked a few quick questions to qualify them, and then forwarded to several practitioners. Some companies allow you to pay extra per incoming call for exclusivity.

I have in hand a pricing sheet that’s about a year old from one such company that does this. The price is/was $85 per inbound call they transfer to you, with a 100 transfer minimum order ($8500 minimum purchase).

Since these are inbound calls, we can make an assumption that the closing ratio should be slightly higher. However, the sales rep for the company I got this price sheet from told me that their clients see about a 1 in 10 closing ratio, which is the same average as for outbound telemarketing. I’m presuming these companies are using unlicensed closers. With that ratio, it costs $850 for leads, plus $550 for the 20% commision to the closer, for a total of $1400 to acquire a client. This is the highest cost per client example we’ll see in our comparisons.

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As shown above, at $175/hr the time cost for a licensed person to close sales is about the same. However, the closing ratio should be significantly higher. At an assumed 6:1 closing ratio, then the cost of client acquisition falls to $1035.

Direct Mail

When I’m crunching numbers for direct mail, or making projections for a direct mail campaign, I still use a ratio of 600:1, liens to client, as an assumption. That’s 600 liens mailed to in order to generate 1 client. This is an extremely broad spectrum ratio, based on years of testing and crunching lots of data.

This is also what I call the low hanging fruit ratio. You’ll notice that it’s essentially the same number for outbound telemarketing using average openers and average closers in a telemarketing operation. So, if you send letters to 600 tax liens over $10,000 in tax debt, you’ll average 1 client coming in, at an average fee of $2750. Let’s assume we still pay a 20% closing commission, either directly or to reflect the value of your time to close the sale, and the low hanging fruit average client acquisition cost for direct mail works out to around $1,000 to $1,200, depending on how you prepare and send the letters. This is in the same range as using outbound telemarketing.

You can drastically improve the response rate to direct mail by sending direct mail sequences. It is very inadvisable to mail only once to somebody you are trying to sell services to. You may get the low hanging fruit, but you’re also leaving a lot of money on the table. At a bare minimum, I suggest contacting tax debtors no less than three times during the 60-day period during which most people make the decision to hire representation. This 60-day period commences with the filing of the tax lien, and goes through the CP-504 and Letter 1058 notices they receive 30 and 60 days after that. Those intent to levy notices tend to scare people into action, and it’s worthwhile to contact them during that time. Again, no less than 3 contacts during that 60-day window.

What does this do for response rate? Let’s say we send a three letter sequence, with each letter two weeks apart. The first letter will generate some response. The second letter will then generate additional response, as will the third. The overall response rate pyramids for the time period of the mailing campaign. If you also combine a 3-letter sequence with smart outbound telemarketing, your response rate can be astronomical – 3% to 8% is not unheard of. At a 3% response rate, you have 54 prospects out of 600 liens to work with. Close just 1 in 10 of those, and you’ve got 5 clients at $2750, for a total of $13,750 in revenue. Let’s call our mail costs 75 cents per letter, times 1800 letters, equals $1350 in printing and postage. Tack on that 20% cost of closing, and we’re at $4100 in costs for the campaign, and you’re at $820 for the average cost of acquiring the client. That average is the lowest average cost per client directly from initial lead generation that we’ll cover in this post.

Decreasing Cost of Client Acquisition Via Follow Up Programs

What I’m going to talk about next is the part that tends to lose a lot of people. This is the hardest thing to get my students and coaching clients to actually do.

Each of the tactics described above produces a substantial number of people that do NOT hire you. In fact, the vast majority of the money you spend on marketing is so that you can talk to people that don’t pay you. It cost money to get these people. Some methods, like the TV/radio commercial call transfers, are a fixed rate – $85 a pop no matter what. This cost to acquire a prospect is nearly as consistent as the cost to acquire a client. In our direct mail three letter sequence example, you’ll see $4100 to get 54 prospects – that’s $75 each. In the telemarketing example, the bottom end average was 11 prospects to get 1 client, for a cost of $95 per lead.

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For all intents and purposes, the cost of acquiring a prospect is fairly consistent across marketing channels. What you do with the prospects that don’t hire you up front can make the difference between a highly successful practice and going bankrupt.

I’m going to carry forward the direct mail example. If five hired you initially, that’s 49 that didn’t. If you engage with these prospects on a regular basis, over time a few of them are going to hire you. For the sake of argument, let’s stick with bad ratios and assume that only 1 in 10 will hire you later on. That’s an additional five clients, another $13,750 in average client fees.

Let’s say that you spend $25 per year (which is actually quite high) per prospect on your follow up system. This goes towards mailed monthly client newsletters, a summer client appreciation picnic (which prospects are also invited to), birthday and holiday cards, weekly emails, etc. $25 per person, times 49 prospects, is $1,225 in follow up cost. Let’s add this to the $4,100 for the initial mailing campaign, which included the cost of your time for closing those first five sales. Your time investment for closing sales on a follow up system is not nearly as high — nowhere near 20%. Really, it’s almost zero, but for the sake of conservative number crunching let’s say it’s 5% of the fee, or $688.

Add all that up, and you get $6,013. For ten new clients, that’s an average client acquisition cost of just over $600.

The real beauty of this whole system is that so far we’re only talking about the tax resolution side. Out of the 44 prospects that end up never hiring you for full service tax resolution, how many of those will hire you for tax return preparation? If you’re doing your follow up marketing properly, damn near every one of those folks should hire you for at least tax prep. Even if only 20 of them do, what does that work out to? That’s at least $5,000 in 1040 fees in the first year alone, even more if you’re marketing to businesses. Plus there’s tax planning, payroll, bookkeeping, asset protection, estate planning, wealth management…. Multiply that out over a years-long working relationship, and the ROI goes through the roof.

The Two Principal Rules of Marketing

I hope that this article, while long, has been enlightening. You can see real numbers for the real cost of client acquisition. From this analysis, you can easily see that marketing really is a numbers game, and numbers is what we do, so this should all be fun stuff.

From the numbers, you’ll also see that there are really only two principle rules that govern our marketing efforts:

Rule 1: The real purpose of lead generation marketing is to find prospects to place in our follow up program.
Rule 2: A high-frequency follow up contact program is the key to converting prospects into paying clients.

Those two rules basically sum up the entirety of sales and marketing in two sentences. Every tactic and strategy you use is to achieve one of these two aims, either getting prospects, or converting prospects. That’s the whole name of the game.

The corollary to rule two is that the more frequently you contact prospects (in the right way, of course), the lower your cost of client acquisition. On top of that, this sort of high frequency contact program builds stronger relationships with your prospects, resulting in longer client engagements. The longer a client stays with you, the more they spend, further driving down the cost of client acquisition (we call this Lifetime Customer Value).

Have you ever sat down and calculated your own cost of client acquisition? If you haven’t, you need to. Today. This is one of the most important metrics you can track in your entire practice.

Do you have an active prospect follow up system? If not, why not? If you change nothing else in your practice, do this one thing. It’s inexpensive, simple, not time consuming, and will drastically improve your closing ratio and increase your Lifetime Customer Value.