Raising Your Rates: When And How to Do It
An age-old question for lawyers--all businesses in fact--is: when and how can prices be raised. Regardless of whether it is due to increasing associate salaries or rising costs, now is a good time to take a look at the hows and whys of raising your billing rates. (NOTE: While this discussion clearly applies to hourly and fixed-fee billing methods, it is also appropriate for contingency matters and for value billing.)
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; or (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 3-5 percent (roughly $10 or $15 for the average large-city attorney) 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; 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 think about going elsewhere. That's why testing the increase is always a good idea.
The corollary to the above rule of thumb is this: 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.
How to Market the Increase
- To New Clients-- 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. Since they're new, they won't know what the old rate was. This is what the rate is, period.
- To Newer Existing Clients-- 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; long explanations imply uncertainty and apology, when no apology is needed.
- To Major Existing Clients-- Finally, after you're 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 formal notice of a fee raise.
- Confirm with clients that a fee increase still fits within their budget. Doing this highlights your sensitivity to their economics and takes their opinion 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.
- An acceptable way to frame the increase is to say that they are due to increased costs, inflation, etc. This works well where costs are increasing in the general economy.
Price also impacts your profitability, and 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.
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