The wrong way to up the fees is to think of a rate hike as a means of offsetting costs. Most firms do just that. The attorneys think “well, our salaries are increasing, so we have to recapture that.” So the rates go up a percentage across the board.
To get the most revenue out of a rate hike takes understanding the many and varied options available to the firm. It also takes an appreciation of what fee levels the different types of legal services can support as well as consideration of when and how the clients get told about the new prices.
When? January 1
First is the timing. Many firms miss the boat there. They hire new associates and maybe sign a lease for additional space at the same time and then tell the clients they’re raising the rates to cover the added costs. That may make sense to the firm, but not to the clients. They don’t care about the firm’s hard times. It’s irritating to be told they have to pay more to cover the firm’s new bills. The logical response is “that’s not my problem. You need to run your business better.”
It works best to raise the rates every year and do it in January. At the beginning of the year, an increase isn’t going to be a big shock. That’s the natural way of running a business. Clients, particularly corporate clients, understand that costs go up annually, and they halfway expect to see an increase.
It makes sense to everybody because it’s the beginning of a new year. People expect the 210 cars to cost more than the 2020 models. People are conditioned to accept that and no client is going to ask “why are you doing this now?”
How? Have we got a deal for you!
As to how to break the news, do that in person. And if that’s not possible, do it by phone. Afterwards, send a letter explaining it all again. Couch the conversation in positive terms and in light of what the client gets out of it. Also give as much as three or even four months’ lead time so the client has time to plan for the fee change.
It’s one thing to say, “Hello, Client. I hate to tell you this, but we’ve just raised our rates.” (Too bad for
you.)
It’s another to say, “Hello, Client. We’re going to raise our rates at the beginning of the year. I wanted to let you know, because if you have any new work coming up, we can start it now and lock you into the current rate.” (Good news for you.)
Besides giving the client the benefit of the lower rate, that can bring in work the firm might not otherwise have received for several months.
Or take a less salesy approach: “I wanted to let you know we are raising our rates at the beginning of the year. However, we will continue to represent you on the current matter at the agreed-to rate.”
Or this: “We’re having to raise our rates to cover cost increases. This year we thought we’d have to go up as much as 10%. However, we’ve been able to keep the costs down, so we’re only going up by 6%. I’m very pleased about that.”
How much? It depends
As to how much to raise the fees, start by looking at the value of the services the firm provides. If it does bread-and-butter, plain-Jane work that every other firm does, the rates have to be competitive. On the other hand, if it does specialized work such as hostile corporate takeovers or if it’s outstanding in a single industry, the rates can go through the roof.
The same is true for an attorney who specializes in an obscure area such as genetically altered crops or life science. No client is going to ask for a competitive rate, because there’s no competition. For firms looking to expand their revenues they should keep that in mind and look toward adding specialty work that is both out of the ordinary and attractive to clients who can pay high prices.
Client-specific, category-specific
From there, make the increases client-specific as well as category-specific instead of across the board. The marketplace is complicated and some clients – both current and potential – can and will pay more than others. A publicly held company, for example, will pay a much higher rate than a new business. And the new business will likely pay more than an individual having a will drawn up.
Similarly, an attorney who specializes in automobile industry matters might charge $500 an hour for the specialized work and $300 for the ordinary corporate work.
There’s nothing objectionable to applying different rates even to individual matters for one client. Just say, “This is my fee for routine work, and this is the rate for my specialty work.”
Most lawyers don’t set specific rates. Some don’t know how to manage the different fee schedules; others let their clients “bully them into” the lower rates. But without the differing rates, the only option is to charge the lowest amount to everybody.
The question of the fixed fee
Then there are the fixed fees. Attorneys tend to set those without thinking through the costs. The standard comment is “oh, we’ll never figure that out.” Yet if a firm does a certain type of case year in and year out, it very much knows that the cost is $X and the margin needs to be Y% and can come up with a valid raise amount. It’s just a matter of taking the time to plot it out.
With matters that can “unfold in too many different ways,” charge a fixed fee for each phase instead of for the entire matter. Then if the work turns out to be more complex than anticipated, set a higher fee for the difficult phases. Or if it’s lengthy, bill for segments.
Billing for a whole team
Another option is to charge a blended rate when a team of attorneys works on a matter. If there is a partner at $400 an hour, a senior associate at $200 an hour, and a first-year associate at $100 an hour, instead of billing each attorney’s time separately, tell the client “we will have a team of senior and junior attorneys working on this matter, so we will give you a blended rate.” Then bill an average rate of $250 for everybody.
Clients like the certainty of the fixed fee. And the firm can see a good profit if it works the matter efficiently. That gives the client certainty and at the same time gives the firm an opportunity to get full financial advantage from its newest associates.
Sharing the risk with the client
Yet another alternative is a fixed fee with a risk-sharing alternative. There the firm builds in a success factor. It charges a modest fixed fee with the agreement that the client will pay more if it achieves a specified goal. It might tell the client, for example, that the usual fee for that type of matter is $15,000, but it will charge only $10,000 if the client agrees to pay another $12,000 should the attorney be able to achieve a certain business objective. Clients like that idea because they know that if the problem is solved and the goal is met, they will be in a good financial position to afford the premium fee. What’s more, they know the attorney has an incentive to work harder on the matter.
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