Marketing cost comparison for reaching $1 million

I recently released the 5th edition of my book about building a million dollar taxpayer representation firm, and one of the things I addressed in this edition is the concept of stepping up your marketing expenditures in logical increments.

As I was thinking about this, it dawned on me that many existing IRS representation practitioners probably think that it’s cost prohibitive to build a practice that size by using the kind of marketing that I advocate doing. Due to this line of thinking, they instead do what “tax resolution” firms do: Hire an army of telephone openers and closers to cold call tax liens.

Not only is this practice a violation of Treasury regulations, it’s also one of the practices that gives a black eye to all of us engaged in taxpayer representation. Companies use this boiler room telemarketing approach for an obvious reason, of course: It works.

This leads practitioners to think it’s more cost effective to do business this way. But is it really?

What does it take to hit $1 million in new client fees annually? Grab your calculator, folks…

Assuming an average fee of $3,500 per client (which is actually on the low side, but it never hurts to be conservative), we need 285 clients per year to hit the magic million mark.

Now, you’re going to have to take my word for it on these conversion numbers — but I can assure you they are based on real life experience in real tax firms, not just on conjecture. The average telemarketer (“opener”) must dial 60 tax liens in order to find one interested person, who is transferred to a 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 $3,500 new client also costs us $1,050 in commissions, for a total of $1,281 that we have to spend in order to get one new client.

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To hit 285 clients, that’s an annual hard cost of $365,000 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 industry model. Since I started my tax career at a firm that employed the boiler room telemarketing model, it’s also the source of why I consider a 3x ROI on my marketing and sales expenditures to be the baseline target.

However, note that under the standard industry model (I’m going to start calling this “SIM” from now on), 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.

Decades of data have confirmed over and over again a well known mantra in sales: The vast majority of sales are made after the 5th contact with a prospect. It therefore only makes sense to concentrate your marketing dollars on reaching ideal prospects that represent the kind of clients you want to work with, and contact them over and over and over and over and over…..

A long-term marketing effort, consisting of a 12 month cycle, only needs to cost between $5 and $50 per prospect per year. For lead generation purposes using tax lien mailing lists, we’re going to be on the cheap end of that spectrum, but the for the sake of argument, let’s just call it $10 per year, per lien.

The liens we’re mailing to are selected with specific criteria in mind. The list is even merge/purged against another database to select other demographic criteria to give us a better mailing list. Let’s also assume that as people drop off this list for any number of reasons, we insert a new name in their long-term mailing sequence to always keep the mailing list the same size (and keep our math easy for this example).

What kind of closing 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. Let’s say we only close 1% of all liens, though.

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To get 285 clients at a 1% closing rate on liens to clients, we need 28,500 liens in our marketing program. At $10 per year per lien, that’s $285,000 to generate $1 million in fees.

Hey, look at that… Even using LOW response and closing rates, we’re hitting $1 million for $80,000 less per year in marketing expenditure compared to a boiler room telemarketing operation that is breaking all kinds of laws and regulations.

Want to make the numbers look even better? Consider hitting a 1.5% closing rate, or consider an approach that gets the cost down from $10 per year to $5 (hint: email and social media integration via response widgets in your direct mail + retargeting via tracking pixels). All of a sudden we’re talking about making a million bucks a year in new client fees with a marketing expenditure less than half of what it costs to run a telemarketing sales floor.

If this sounds like a plan to you, stick around this blog for more information, and also grab a copy of the book if you haven’t already.