Volume 19, Number 6
INCREASING YOUR FEES
By Edward Poll
When to raise fees. Although there is no perfect time to raise fees, use these tests to assess whether it's time you did.
- In big-ticket or break-the-company cases, price doesn't seem to matter. The client's options are limited and the perception of need, and therefore value, is high.
- You have more business than you can handle without expanding but do not want to expand. You may lose a few clients, but you generally won't care because you are already at your desired maximum.
- Clients say your rate or total fee is more than fair. At this point, you can conclude that your fee structure is at the lower end of the fee spectrum in comparison to your competitors. It seems there is room to raise your fees with minimal client resistance.
- Other lawyers send you business because the client won't pay their rates. These lawyers are unwilling to accept the lower fee that the client expects to pay them. Why do you?
Each of these scenarios involves a selection process by the client. Those clients who do not want to pay the higher fee will seek other counsel. Those who value your service regardless of higher fees will remain with you. Accept the fact that some clients will leave if you raise fees, which can create new opportunities:
- With a reduction in your client base, you can work less at the same average revenue.
- You can take on new clients at the higher rate, which raises your average revenue per client.
- You generally will receive or can agree to take only interesting work at the higher rates.
- You will have extra time to upgrade your marketing efforts.
Clearly, a temporary loss in the total number of clients often restabilizes within a short time-and at a higher income level. However, you may want to consider another set of indicators that forecast when raising rates is not the best idea:
- If a client resists a fee increase and the client or the matter being handled is important to you, you may want to obtain an agreement to a fee increase at a certain date in the future.
- If time is of the essence for resolving a particular matter. Your client will see it as attempted extortion.
- You already agreed to a retainer. Most retainers are intended to cover the entire cost of the matter or to cover services on a monthly basis without reference to actual hours. Clients will be annoyed if you say you cannot work any more this month because you have exceeded your original estimate. A retainer is a fixed sum-you keep the difference when you work less than the estimate, and the client benefits when you work more. If the work continues to be out of balance with the retainer for an extended time, raise the issue with your client before increasing the retainer.
How much should you raise fees? Many jurisdictions have specific rules concerning fees. Rule 4-2000 of the California Rules of Professional Conduct, for example, provides that "A member shall not enter into an agreement for, charge or collect an…unconscionable fee." The rule defines unconscionability by saying that all the facts and circumstances existing at the time are to be considered, including the following: amount of the fee in proportion to the value of the services performed; relative sophistication of the member and the client; novelty and difficulty of the questions involved and the skill requisite to perform the legal service properly; likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the member; amount involved and the results obtained; time limitations imposed by the client or by the circumstances; nature and length of the professional relationship with the client; experience, reputation, and ability of the member or members performing the services; whether the fee is fixed or contingent; time and labor required; and informed consent of the client to the fee.
Assuming your current fee structure passes the conscionability test, modest fee increases will not cause a disciplinary problem. The only remaining issue is whether your fee increase will pass the market test. Other things being equal, the smaller the fee increase, the easier it is for clients to accept. Therefore, a general plan is to increase your fees frequently in modest amounts. Additionally, consider the following factors:
- Growth pattern. As you continue to grow, you can afford to be more selective about clients. Raising fees is a way to let your clients self-select and determine who will get your services.
- Success. Success tends to build on itself, and the results of an ill-advised or unacceptable fee increase can be more easily overcome.
- Strategic plan. Do you want to be known as a low-priced volume leader or a top-of-the-line exclusive legal services provider?
- Nature of your practice and clientele. An economically sound client will be less burdened by increases and accept them more readily.
- Competition. What are the going rates in your geographic and practice areas?
Implementing the hike. The next step is to determine the best way to inform clients of the new fees.
- New clients. This is the safest client base for introducing new fee scales, because of course they have no comparison. It is also a good place to test the waters without being afraid of losing current clients. Do not tell them this is an increased rate-no explanation is required here.
- New matters for existing clients. Start by increasing rates on new matters for existing clients who are not your bread and butter. Be sure to adhere to your jurisdiction's rules covering fee increases for existing clients, which usually involve amending the engagement agreement.
- Major existing clients. After you feel confident with these preliminary forays, roll out your new fee structure to all remaining clients. Always talk personally with clients in advance of a fee increase. One strategy to consider with significant clients is to confirm that your fee increase will fit within their budget. If they say no, consider compromising by maintaining the current fee for a specified time and implementing the increase after that.
- Corporate clients. You may find that, in general, it is best to treat corporate clients differently than individual clients. You must be more sensitive to legal services budgets and more attuned to the politics of the organization and how you operate within it.
Edward Poll is a lawyer and certified management consultant in Los Angeles.
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This article is an abridged and edited version of one that originally appeared on page 36 of Law Practice Management, April 2002 (28:3).