Allow me to be perhaps too transparent. I don’t care about money. I really don’t, mainly because I don’t care about stuff. I’m not motivated to make more so I can buy more so I can pay for a bigger place to store the more.
But I do care about experiences. Specifically, I want to travel. I lived overseas for a couple of years and did Middle East studies in college. I care about getting around the world, and that does take money.
I’m terrible at money, though. My wife and I both are. Being on the same page of money stupidity prevents a lot of fights, but creates so many more. So we are doing math with this (re)launch. I want to share that math with you. I hope the exercise is helpful, even if the specific figures are not.
To begin, I mapped out the costs associated with the product I’d designed. Having sold the product a few times, I knew the Pro Se Assistance (PSA) plan could get buyers at $1,500. Clients have loved that price point so far, especially if I can take payments on that and improve the product.
I divided the PSA into 6 stages: discovery, intake, forms, negotiation, training, and exit. I estimated the cost of acquisition ($200), attorney time ($300), staff time ($140), and ancillary costs to get to a total of $750. That’s a decent margin for this product, so I can confidently deliver it at a profit.
I then did the same for the other products I’ve planned to add as the year goes on. Start with the value to the client, calculate costs, then make sure the margin is enough that your revenue per project is at least two times the hard costs. (There are ways to improve that margin, but 2x is a minimum.)
I then designed a minimal staff based on how I want to operate. This piece is totally subjective and based on what work you should be doing. We’ll talk about your ninja work a different day, but for now let’s just agree that you’re not great at everything and should hire for the things you don’t want to do or shouldn’t be doing.
For me, that meant hiring for three roles:
- Associate attorney
- Intake person
And I’m the final member of that team. I’ll be doing some billable work in the short and middle term, but definitely not everything.
I estimated the cost of each role this year, knowing that each will probably be part time contract work until the firm grows.
- Associate: $60k/yr
- Intake person: $30k/yr
- Paralegal: $30k/yr
Each of these roles is not necessarily a single person, certainly not at first. And these costs can scale up or down, but I’m assuming these costs so I can arrive at how many cases I need per month.
I then multiplied the cost of each role by at least 3 to arrive at how much value they need to provide to the firm in order to justify the hire. This is based on a rule I’d heard from Dave Ramsey that an employee should bring 3x to 5x their cost. Make sure when you calculate the cost of an employee that you consider every related cost. You still need 3x that cost to make the hire worthwhile.
So, the associate role would need to generate some $200k per year in value, the intake person some $100k, and the paralegal some $100k. If I’m doing $100k per year in billable work (mostly supervising negotiations between parties), we’re at a total annual revenue of some $400k.
Before I sorted out whether that’s doable, I wanted to know if that would pay me enough to live on as owner.
For that, I relied on the percentages recommended in the book Profit First. Applying those percentages to a business with $400k in revenue…
- 10% profit = $40k
- 35% owner pay = $140k
- 15% tax = $60k
- 40% expenses = $160k
I’m doubtful given the team I described above that my expenses will be under $160k. It wouldn’t surprise me if I took lower owner pay, but I’m also not working in this business as much as I could so making a bit less is fine. Our monthly nut as a family is pretty low at this point so we have a good deal of room to let the business grow.
So, last thing, how many cases do I need to get each month to generate that kind of revenue?
$400k annual gross means some $35k billed each month. If I assume an average case value of $2,500 (halfway between the cost of my two case types right now), I’d need 14 new cases each month. Is that doable?
I’m sure I’ll revisit this later, but my marketing process will be pretty thorough, with an ebook and video email series before someone calls my intake person. We’re otherwise hiding the phone number and sending general calls to Ruby Receptionist. That means that by the time the prospect gets to the intake person, they’ve been vetted. So I’m assuming about a 25% close rate for those calls, which means I’d need about 60 qualified calls per month.
Taking my cost of acquisition number of $200 per client above and multiplying it by the 14 new clients I need each month, the question is whether I can spend $2,800 per month and get 60 calls. I honestly don’t know yet, but that’s a number I need to pay close attention to.
Looking back at the staff, I think we can handle this number. 60 monthly calls of one hour each is more than reasonable for my half time intake person. 14 new clients per month with a client life cycle of 3-6 months would mean we’d manage under 100 clients at a time between me, the associate, and the paralegal. And I expect to have tools that will automate or streamline a good portion of our work. I think that’s a good staff size for that workload.
This plan is full of estimates and guessing. Can I get 60 qualified calls per month from a small county? Will 60 calls become 14 clients? Will $200 be enough ad money to convert to one new client? Is a $2,500 per case value likely?
I have to estimate right now. I’m open to criticism on those numbers, but I believe they’re reasonable. They won’t be like this in month one, or maybe even year one, but they’re possible. I just need to invest in traffic and make sure it’s easy for prospects to get great information. We’ll obviously get better at that as time goes on.
I hope this math was helpful. I’ll let you know how things develop as we go along. I’m even tempted to publicize my numbers, but I’m thinking through the ethics of that as a law firm. I want to be transparent enough that it helps you.
Please sit and plot out your math. Not so obsessively that you don’t implement – nothing worse than analysis paralysis – but determine whether you can deliver an amazing product at a profit. If not, change things. Being blind to the math won’t make things easier, I promise.