Making a million bucks, by the numbers

One of the tasks I’ll be embarking on after settling down in Washington state next month is the updating, revision, expansion, and editing of all of my published books. Before the end of the year, I’ll have new editions of each book done.

The first of these to get the update treatment will be my book about building a million dollar taxpayer representation firm. A lot has changed in the 18 months or so since I last revised that particular work, and I need to update it to reflect the ever changing realities of doing tax resolution marketing.

One of those realities is that the cost of client acquisition has gone up a little bit. The primary reason for this has to do with the efficacy of small, cheap postcards. For years, these regular sized postcards were the workhorse of my direct mail lead generation efforts. Today, those same postcards just don’t yield the results they used to.

In general, we’re seeing about 1/4 of the response rate from SIMPLE direct mail compared to what we used to get. By “simple” direct mail, I’m referring to basic postcards and machine addressed letters with postage permits. What’s the reason?

Direct mail is still a great way to generate clients. In fact, since fewer companies use direct mail, there is less clutter in the mailbox to compete against. However, what I think is happening (and this is purely conjecture, by the way) is that mail recipients are more discerning when it comes to sorting there mail — in other words, they are more quick to discard anything that looks like “junk mail”.

My rationale behind this assumption is that dimensional mail and heavily personalized mail are working great. Most readers know by now that I heavily advocate sending 3-letter sequences in sync with the IRS notice cycle following a lien filing, and that these letters should be hand addressed and use real stamps.

Hand addressed? Real stamps? Geesh, that sounds like WORK! And yes…yes it is.

So with that said, what’s it going to take to hit the seven figure mark now?

One of the nice things is that, while marketing costs have increased, so have average fees. In fact, average tax resolution fees nationwide are up nearly $1,000 since I last wrote about this topic here on the blog over two years ago.

Assuming an average fee of $3,500 per client, we need 286 clients per year to hit the magic million dollar revenue number.

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As always, let me start with the SIM (Standard Industry Model), on which the fly-by-night tax resolution operates. The average telemarketer (“opener”) must dial 60 tax liens in order to find one interested person, who is transferred to an unlicensed sales closer in most boiler room operations. This closer will close, on average, 9% of these prospects. So, in order to get ONE new client, a company has to churn through 660 tax lien filings, at a typical cost of 35 cents per record to purchase. So, that’s $231 just in lead costs.

Now, the opener also typically gets a 10% commission at most companies, and the closers receive, on average, 20% to 30%. Lets’s again be conservative, and together give the sales guys 30%. Note here that we are also ignoring minimum wage laws and other costs for this sales staff, which most firms do ignore, believe it or not. So our $3500 new client also costs us $1050 in commissions, for a total of $1,281 that we have to spend in order to get one new client.

To hit 286 clients, that’s an annual hard cost of $366,366 in order to generate $1 million in revenue. All else being equal, that’s actually quite an acceptable number, which is why this model works so well within the “tax resolution” standard business model.

Note that under the SIM, all those purchased leads are literally trashed within a week or two, with no effort made at long term follow up.

Replace this instead with the business model I advocate in the book and everywhere else: Highly concentrated, long-term follow up marketing to a selective group of target prospects.

The entire approach, using 3-letter sequences in sync with the IRS notice cycle, hand addressed, live stamps, is going to cost some money. Letters typically cost 70 cents to send, including paper, toner, etc. Add in the manual labor component, and that goes up. If you have a $10 per hour assistant addressing envelopes (plus employee expenses, and he can do 50 per hour (let’s assume he also answers the phone), we can call it 25 cents to address an envelope and stick on a stamp. For the sake of ease, let’s round the whole thing up to $1 per letter.

For a 3-letter sequence, that becomes $3 per lien to mail these letters out.

Now, of course, prospects we generate are going to go into a long-term prospect follow up system. A long-term marketing effort to these prospects, consisting of a 12 month cycle, can cost anywhere from $5 per prospect to hundreds of dollars per prospect. For lead generation purposes using tax lien mailing lists, we’re going to be on the cheap end of that spectrum (to include email and social media touches), so let’s just call it $10 per year, per prospect.

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What kind of response rate can we achieve with this list? It’s possible to regularly maintain response rates in the mid-teens, and closing rates in the low single digits, with committed approaches. For the sake of discussion, let’s say that our anticipated closing conversion rate is 1% of all liens mailed to.

To get 286 clients at a 1% closing rate on liens to clients, we need 28,600 liens in our marketing program. At $3 per lien to send a 3-letter sequence, that’s $85,800 in lead generation direct mail costs. Since we also have a 12-month prospect follow up program that converts respondents (prospects) into clients, we need to figure in that cost as well. As licensed professionals, we should be hitting closing rates of at least 25% of all incoming contacts. That means we need 4x as many prospects as we need clients, or 1,144 people in our long-term follow up funnel. At $10 per year, that’s another $11,440 per year in lead follow up cost.

All together, that adds up to $97,420 in marketing costs to generate $1 million in revenue.

To summarize our assumptions:

-$3500 average client fee
-4% response rate aggregate across the entire 3-letter sequence
-$1 per letter, including live stamp and hand addressing
-25% closing ratio on prospects into clients

I don’t know about you, but spending a hundred grand to make a million sure sounds good to me. This approach costs less than 1/3 what it costs to run a boiler room telemarketing floor, AND without running afoul of Rev. Proc. 81-38, Circular 230 section 10 restrictions, DNC/TSR regulations and associated fines, etc.

Am I guaranteeing that you’re going to hit these response rates and see these kinds of results? Absolutely not. There are simply too many variables at play: Your follow up efforts, regional variations in receptiveness to the marketing message, regional variations in ability to pay those fees, etc. But based purely on national averages and some reasonable assumptions, here on a silver platter (in a free blog post, no less…) is a blueprint you can start with to see how to build a million dollar taxpayer representation practice.