General Practice, Solo & Small Firm DivisionMagazine
Volume 17, Number 7
The Business of Law
Raising Your Billing Rates
By Edward Poll
Everyone in the legal profession knows by now that annual salaries for first-year associates have recently shot up from $80,000 on average to more than $125,000—a whopping 50 percent increase in one big jump. Although that may be great news for the new lawyers, how are the law firms going to pay for these increased costs? The earlier panic seems to have settled into mere bewilderment at this point, but firm managers are still shaking their heads, and clients are reacting with cries of "Don’t increase our fees!" and "We don’t want to pay to educate your associates; we’ll deal only with partners!"
All of this turmoil raises an age-old question for lawyers, and in fact for all businesspeople: When and how can prices be raised? Regardless of whether increasing associate salaries affects you directly, now is good time to take a look at the particulars of raising your billing rates. While this discussion clearly applies to hourly and fixed-fee billing methods, it is also appropriate for contingency matters and for value billing.
The best time to raise your fees is when the economy is hot, you’re busy, and you have a lot of work. This goes beyond the simple idea that you can afford to lose a few peas when the plate is full. What will happen is that you will set a chain of events in motion that will alter and hopefully improve your practice.
Depending on your geographic location and your practice area, accept the fact that some clients will leave if fees are raised. This can create several opportunities: (1) With a reduction in client base, you will be able to work less at the same average revenue; (2) to replace the defecting clients, you can take on new clients at the new, higher rate, which raises your average revenue per client; and (3) you will generally receive—or only agree to take on—more interesting work at the higher rates.
In reality, of course, a combination of all three scenarios will come into play and forever change your practice. The bottom line is that, like water flowing in to fill a hole in the sand, a temporary loss in the total number of clients will soon restabilize, and at a higher level of income.
All other things being equal, the smaller the fee increase, the easier it is to accept. Adding 3 to 5 percent (roughly $10 or $15 for the average large-city lawyer) to an hourly fee is not going to turn off many clients. Don’t forget: to the average client, there is little price sensitivity in choosing a lawyer. That is, the choice is made not because of the fee being charged, but because of other factors, such as the perception of your legal ability. Usually the client is in your office because of a referral from a trusted source. Only if the fee difference is very significant (e.g., $50 per hour or more) will the client decide to go elsewhere. That’s why testing the increase is always a good idea.
The corollary to the above rule of thumb is: increase fees more frequently by a smaller amount. The last thing you want to do is be panicked into making a big jump in your fees. Plan ahead to raise fees in small increments.
Other factors to consider in deciding how much to raise rates include:
• Your growth pattern. As you continue to grow, you can afford to be more selective about your clients. Raising fees is a way to let your clients self-select and to determine who will get your services rather than deciding whom to serve.
• Your success. When you are successful, achieving more success is easier and less risky. Success tends to build on itself, and the results of a poor decision can be more easily overcome.
• Your strategic plan. How much you raise rates is partly a function of your strategic plan and your desired position in the market. Do you want to be known as the low-priced volume leader or a top-of-the-line, exclusive provider?
• The nature of your practice and clientele. Economically sound clients will accept increases more readily and will be less burdened by them.
• The general economy. A strong, robust economy—like we’re experiencing now—will see less resistance than a retreating economy.
• The competition. Your rates must be competitive with others in your geographic or practice area. You must know the current market conditions and the competitive pressures on legal fees. Each market is local and has its own characteristics. National trends are interesting, but not necessarily relevant to your local situation.
How to Market the Increase
You have decided to raise your rates. Now you have to figure out the best way to market the idea, that is, to inform clients of the new fees in the most advantageous way. The safest way to introduce an increase in fees is with new clients. Test the waters with clients you don’t yet have and therefore aren’t as worried about losing. Don’t tell them it’s an increased rate. Because they’re new, they won’t know what the old rate was. This is what the rate is, period. No explanations are required.
If you continue to be busy, move to the next level by increasing rates on new matters for existing clients who are not your bread and butter. You are required to inform existing clients of any fee increases, and the appropriate way is to amend your engagement agreement. A short note is all that’s required and is probably the best way to accomplish this. Long explanations imply uncertainty and apology, when no apology is needed. You can also strengthen your position by using technology to lower costs and increase profits before raising your rates.
Finally, when you’re confident about these preliminary forays into higher fees, roll out your new fee structure to all remaining clients. Always talk personally with major clients in advance of any formal notice of a fee raise.
Confirm with clients that a fee increase still fits within their budget for legal services. Doing this highlights your sensitivity to their economics and takes their opinions into account. If they say no, consider compromising by getting their agreement that you will retain the fee at the current level for a specified time, after which they will accept the increase. The time frame could be three or six months or longer, depending on the circumstances. In any case, get their agreement to accept a fee increase at a certain date.
A good way to soften the blow of a fee increase is to add value to your service. In other words, do more things—that cost less than the increase—for the increased fee. For example, if you do estate planning, you could add financial planning as a service, either as part of the fee package or for a designated added fee. Sometimes, showing that you provide excellent service is all that is needed to justify an increase. For example, consider packaging final documents in an attractive folder and hand-delivering them to the client. This improved presentation adds only pennies to your costs, but will be perceived as an example of your caring for and nurturing the client.
Another way to frame the increase is to say that it is due to increased costs, inflation, etc. This works well where costs are increasing in the general economy. Today, this approach may be less acceptable to most clients.
Corporate clients are generally treated differently from individual clients. You must be more sensitive to legal service budgets, and you must be attuned to the politics of the organization and the relationship among you, general counsel, and other management executives. You need to understand where your power base is in the organization and act accordingly.
Ultimately, it is the client’s perception of value that determines whether the price is reasonable for the service provided. The value of your service is determined by the client. In other words, price is the marketplace’s barometer for telling you how it values your service. Price also affects your profitability. The extent to which you make a profit depends on how much of what you get for your service exceeds your costs of providing that service. If costs have gone up, it’s probably time to consider raising your fees.
Edward Poll, J.D., M.B.A., CMC, is a certified management consultant in Los Angeles who advises attorneys and law firms on how to deliver their services more effectively while increasing their profits at the same time. He is the author of Secrets of the Business of Law: Successful Practices for Increasing Your Profits. To make suggestions about this article, call 800/837-5880 or send e-mail to firstname.lastname@example.org.