Rate-Raising Strategy, Increasing Your Fees
by Edward Poll
When expenses go up but the workload decreases, lawyers have four basic options if they want to operate at the same profit level: work longer hours, cut costs, become more efficient or be more creative with fee structures.
Option one already seems impossible. Option two can only be effected to a limited extent. Option three should be a goal for every lawyer anyway. That leaves door number four: Be more creative with fees. The focus here is how to raise them creatively.
What About the Type of Fee?
Raising fixed fees for predetermined tasks such as preparing a will or appearing at a criminal arraignment is easier than increasing hourly billing rates. Generally, a client needs only one will or one criminal defense. Once that is accomplished, the client won't return for a while. Therefore, an increase in fixed fees should not be a huge problem.
In a continuing lawyer-client relationship, however, you must consider increasing rates more carefully. In these circumstances, clients are more sensitive to change.
Contingency fee lawyers tend to be more locked in by competitive pressures. For example, if the current market rate for personal injury matters is one-third of settlement before trial, you will find that clients are reluctant to pay a higher percentage fee. You may benefit from generally larger settlements today, but still at the old rate.
Within that framework, let's explore the timing, level and marketing of billing rate increases.
When to Raise Fees
Although there is no perfect time to raise fees, there are several threshold tests you can consider.
It is a big-ticket or break-the-company case. In these cases, price doesn't seem to matter. The client's options are limited and the perception of need, and therefore value, is high. When litigator David Boies asks $750 per hour, major corporations aren't likely to balk--their matters are serious and precedent setting. They want whomever they perceive to be the best, and price typically is not a factor.
The economy is hot. When people are doing well financially, prices of goods and services are reviewed less carefully because additional income is always "just around the corner" to pay the bill.
You have more business than you can handle without expanding. And, at this time, you don't want to expand. You may lose a few clients, but you generally won't care because you are already at your desired maximum. Plus, you will likely increase your gross revenue and net profit.
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. Again, check the marketplace to determine if there is room to raise your fees.
You have found your comfort zone. In other words, you can stop laughing at the new fee you're contemplating.
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. This process, however, goes beyond the simple idea that you can afford to lose a few peas when your plate is full. You will set in motion a chain of events that will alter your practice.
Depending on your geographic location and practice area, accept the fact that some clients will leave if you raise fees. This, then, can create several opportunities:
With a reduction in your client base, you can work less at the same average revenue.
To replace defecting clients, you can take on new clients at the new, higher rate, which raises your average revenue per client.
You can generally receive, or only agree to take on, more interesting work at the higher rates.
You can have extra time to increase your marketing efforts for higher quality at higher rates.
In reality, of course, a combination of all four opportunities will come into play to forever change your practice. The bottom line is, like water flowing to fill a hole in the sand, a temporary loss in the total number of clients will soon restabilize. And it will do so at a higher level of income. Your economic situation will improve, your client quality will increase, and the nature of the matters before you will become more interesting and challenging.
When Not to Raise Fees
It is equally important to know when not to raise your fees. Again, there are threshold considerations.
The client says no. If the client resists a fee increase, and either the client or the matter being handled is important to you, think seriously about balancing your economic interests with your personal desire. If, after conscious deliberation, you want to continue the work with this client, first seek to obtain an agreement to a fee increase at a certain date in the future.
Time is of the essence. What if you are on the eve of trial or in the midst of a sensitive negotiation? Never use the sensitivity of time to raise fees. Your client will see it as attempted extortion and will accept it, if at all, only with great hostility. And that will lead inevitably to bad-mouthing.
You have already agreed to a retainer. Most retainers are intended to cover the entire cost of the matter, or to be a monthly retainer to cover services without reference to hours worked. In these circumstances, clients will be annoyed if you say you cannot work more this month because the hours already worked exceed your original estimate. That is the nature of a retainer; it is intended to be a fixed sum. You keep the difference when you work less than you estimated, and the client benefits when you work more than you estimated. Clients will be miffed if you seek to modify the arrangement in midstream. 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 Can You Raise Your Fees? Two Tests
Many jurisdictions have specific rules concerning fees. For example, in Rule 4-200, the California Rules of Professional Conduct provide 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:
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.
All other things being equal, the smaller the fee increase, the easier it is for clients to accept it. Adding 3 percent to 5 percent to an hourly fee won't turn off many clients. Remember, for the average client, there is little price sensitivity in choosing a lawyer. More than 60 percent of lawyer-client relationships result from referrals from trusted friends, or from other factors such as the perception of legal ability.
Large fee increases, however, will likely cause clients to pause. Again, assuming your increase does not make the fee "unconscionable," it must still pass the market test. If fees take a big jump, more clients will leave. If the rule is that clients are generally willing to understand and accept modest fee increases, here is the corollary: Increase your fees more frequently, but in modest amounts.
Here are other considerations in deciding how much to raise rates.
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 determine who will get your services, rather than you picking 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 wrong or market-unacceptable fee increase 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 a low-priced volume leader or a top-of-the-line, exclusive legal services provider?
The nature of your practice and clientele. An economically sound client will be less burdened by increases and accept them more readily.
The general economy. A robust economy will result in less resistance than a retreating economy.
The competition. Your rates must be competitive with others in your geographic and practice areas. You must know the current market conditions and the competitive pressures on legal fees. Each local market has its own characteristics. National trends are interesting, but they do not control your situation.
How to Market a Rate Increase
You have decided to raise your rates. Now you must determine the best way to sell the idea, that is, to inform clients of the new fees in the most advantageous way. Here are some ideas.
New clients. The safest way to introduce a fee increase is with new clients. Test the waters with clients you do not yet have and, therefore, are not as worried about losing. Do not tell them this is an increased rate. They will not know what the old rate was. No explanations are required.
New matters for existing clients. Move to the next level by increasing rates on new matters for existing clients who are not your bread and butter. Make sure you adhere to your jurisdiction's rules on informing existing clients of any fee increases. The appropriate way is to amend your engagement agreement. (Some engagement agreements provide for automatic annual fee increases and, implicitly, cause the client to waive further notice of fee increases in advance of the actual increased billing.) A short note is all that is needed. Long explanations imply uncertainty and apology, when no apology is needed.
Major existing clients. Lastly, after you are confident with these preliminary forays into higher fees, roll out your new fee structure to all remaining clients. With major clients, always talk personally with them in advance of any fee increase. Never surprise these clients.
More Food for Fee Thought
Here are additional tactical considerations for fee increases.
You should confirm with significant clients that your fee increase 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 agreeing to hold the fee at the current level for a specified time, after which they will accept the proposed increase. The agreed-on time frame could be three to six months or longer, depending on the circumstances.
You can soften the blow of a fee increase by adding value to your service. In other words, do more things--that cost less than the increase. If you handle estate planning, for example, 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 better-than-excellent service is all you need to justify a fee 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 it will be perceived as an example of your caring for and nurturing the client. Faster turnaround from engagement to completion is another way of adding value and exceeding expectations.
A traditional way to frame an increase in fee or price is to say that increased costs mandate the change. When costs are increasing in the general economy, this approach is typically accepted. Today, however, this approach may be less tolerable to more sophisticated clients. In fact, many such clients have told their counsel that they will not pay for firms' higher associate salaries. In the competitive legal marketplace, there is resistance to higher fees and demand for reduced legal costs, if not actual billing rates.
Finally, you generally need to treat corporate clients differently from individual clients. You must be more sensitive to legal services 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 within the organization--and to act accordingly.
What Really Determines Value
Price impacts profitability. The extent to which you make a profit depends on how much of what you get for your service exceeds your cost of providing the service. Prudent lawyers will address both sides of this equation.
The tips shared here relate most directly to hourly billing, but the principles apply to working with fixed or contingent fees as well. In the end, though, the client's perception of value really determines whether the price is reasonable for the service provided. Price is the marketplace's barometer for telling you how it values your service.