Five Initial Steps to Raising Your Hourly Rates

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This is the first in a series of posts about one of the most important and impactful decisions a law firm can make: how to increase your hourly rates. Law firms and other professionals that charge by the hour often leave thousands if not millions of dollars on the table by not having a strategy for determining what hourly rate to charge and how and when to communicate them to clients. Too many professionals rely on “Happy New Year! We’ve raised our rates” notices. There is a better way.

Five Initial Steps to Increasing Hourly Rates

 

  1. Start With New Clients

The easiest way to think about increasing your fees is to focus first on what fees to quote to new clients. Raising fees for existing clients is more complicated because you must deal with their expectations, the history of how you’ve dealt with them in the past, and other factors. Thus, the fastest way to increase your fees is to quote a higher fee to the next new potential client with whom you communicate.

  1. Resistance to Your Fees is a Good Thing

Before delving into the details of how to increase fees it’s important to have the right mindset about your fees. Although lawyers tend to have a reputation for being confrontational, the reality is that many lawyers approach the process of talking to potential clients about fees with the attitude that they should avoid disagreement at all costs. Trying to minimize objections is not wise. If you spend a whole year or more without any potential clients objecting to the fees you quote, you are almost certainly not charging enough for your services. Your goal is to generate just enough objections to know that you are not leaving lots of money on the table. It is of course possible to have too much resistance. If, for example, half of your potential clients object to your fee or fail to sign a fee agreement it is certainly possible that you quoted too high a rate. But in our experience the opposite is much more likely to be the case.

  1. Quoting Higher Fees Can Make You More Attractive

Too many professionals assume that potential clients are looking above all to spend as little as possible on their services. That worldview is derived in many ways from notions of traditional economics in which humans are solely motivated by financial considerations. But the reality and psychology of how potential clients decide to retain lawyers and other professionals is much more complicated. Because professionals provide services that are perceived to be important, it is a mistake to assume that potential clients are always looking for the cheapest alternative. And the more what you do is perceived to be important, the more attractive it is to quote a higher fee. Consider the extreme example of the loved one who needs lifesaving brain surgery: Who is going to go home and report to their significant other that they found the cheapest surgeon in town? In general, the less the potential client can fully evaluate what a professional does, the more likely they are to conclude (not without justification) that someone who quotes a higher price might be a higher quality provider.

  1. The Psychology of Negotiations

There is an important additional factor that comes into play when deciding what initial hourly rate to quote to a potential client. Not only are higher fees potentially attractive in and of themselves, but most negotiations allow you to quote a higher initial rate and then reduce it if you must. Thus, for example you can start by quoting 695 an hour and then seal the deal by agreeing to reduce the rate to 675 an hour. But it’s very hard to start low and then substantially increase your fee during the course of a single negotiation. Thus, if you initially quote $325 an hour, and then find out that your potential client is used to paying much more, you will be stuck with the fee you first quoted.

  1. Resist Quoting a Rate Too Soon

The most common mistake that lawyers make is when communicating their fee is to disclose it before they collect enough information to put their fee in context. Every hourly fee that is quoted can sound pricey if devoid of context. Given that the federal minimum wage has for approximately 20 years been $7.25 an hour, every hourly rate quoted by every lawyer can sound ridiculously high. Is $500 an hour expensive for an experienced lawyer? Is $295 an hour a lot for a paralegal? These questions are unanswerable on their face. To know whether a fee or hourly rate is high or low you must be able to compare it to something. Moreover, it’s especially important that the potential client be put in a position where they can compare the quoted hourly fee to what is at stake for them or some other measure that they understand. Thus, if the CEO of a company looking to acquire a $10 million competitor is quoted $500 an hour that rate might sound like a bargain given what the lawyer is helping the client accomplish. There are differences in what different clients expect in terms of practice area and geographic location. But as a starting point, wait until you and the prospective client have discussed the context for what the lawyer will try to accomplish for the potential client.

The Importance of Mindset

What do all these steps have in common? They all relate to a mindset in which the lawyer has confidence and exhibits patience.  When a lawyer approaches the prospect of discussing a fee with anxiety and trepidation they tend to rush through the process, thereby undercutting their value. To be sure, it can be difficult to maintain calm especially when economic times are tough, and you feel desperate to obtain a new client. But if you want to raise your rates, slow down the process by collecting more information, and most of all trust that you are worth the rate that you quote.

There’s an old maxim in sales–that the first sale that you make is to yourself. And that is especially true when lawyers quote fees.  If you don’t believe you’re worth it, neither will your potential client.

Raising Your Rates for Existing Clients

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With a new year on the horizon, you may be thinking about how you can raise revenues. It’s common to consider upping your hourly rates or flat fees annually, but there are right and wrong ways to go about this. As we talked about last year, a simple “Happy New Year! We’ve raised your rates!” is not likely to go over well with clients.

Especially in circumstances where you’ve worked with a client for years without increasing their hourly rate, changing that unilaterally in January will likely lead to objections and may run afoul of the ethics rules. You don’t have to limit your fees even when it comes to your best clients, but you do have to communicate with them so that the change doesn’t come as a shock.

Clients need to be reminded of the value you have provided. When you’re looking to raise your rates on existing clients, it’s up to you to provide the context that lays the foundation for the price hike. Use the year end as a reason to schedule an informal (and free) call or meeting to discuss the relationship and review where things stand on various matters.

Compile success stories into a document that summarizes the progress you’ve made on matters for that client and showcases the value you have provided. This doesn’t need to be a glossy marketing piece. It can be a few paragraphs in a letter or a list in the body of an email. If you’re unsure about where to start, look over your invoices for that client to review what you’ve accomplished.

If you expect to continue working with this client for a good while, it’s worth taking the time to create a “year in review” summary and come to an understanding on how you want to move forward.

When it comes to actually asking for a higher rate, here are five specific guidelines to follow:

  1. Make sure your messaging is geared toward what matters to the client. Don’t try to justify your increase by citing higher costs. That is unlikely to be persuasive.
  2. Instead, discuss what you have done in the past and then suggest higher rates that appear reasonable in relation to what you have accomplished since the last time you increased rates.
  3. Consider suggesting an overall increase of at least ten percent.
  4. Be prepared to make a selective and targeted proposal. Suggest hourly rate increases on specific matters or on parts of a project that will arise in a few months. For example, suggest that the new rates kick in after the current discovery phase ends and dispositive motion practice begins.

Take a multi-year approach. The longer you have allowed rates to go unchanged, the more likely it is that you will need more than one year to get your rates to where you want them to be. Increasing rates the first year is the first step to increasing them again in subsequent years.

Business Law Firms Need R&D Departments to Increase Profits

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Many businesses formally invest in research and development (R&D) to improve products and services and to stay competitive. This is, in many ways, an unremarkable notion, but law firms have largely ignored it. This is even true for law firms that represent business clients and other entities where the potential for repeat business exists.

If you are wondering what a law firm’s R&D department would do, there is one great place to start: collecting and analyzing data about how much its services actually cost clients in the long-run.

Many business law firms that primarily charge by the hour assume that they can’t predict how many hours and resources a certain case might require. As we discussed in a prior post, it’s most effective to communicate your fees to prospective clients in terms of overall costs rather than hourly rates. This is especially true if your firm’s fees are higher than the market average.

While it may not be possible to predict the cost of a complex litigation case to the exact dollar, it is certainly possible to project the costs of various scenarios that might unfold.   Your R&D department should be able to tell you how much clients spent on average for various aspects of a representation. Fortune 500 companies have access to data aggregated by third parties which can tell them how much their outside counsel will likely charge, for example, to handle a summary judgment motion on a certain issue in a particular court.

There is no reason why a boutique firm couldn’t collect and otherwise analyze its own billing data in the same way. This would enable the firm to focus on total budgets for clients, not just hourly costs. Understanding this information would allow the firm to estimate fees more precisely, and it would provide a significant advantage in the sales process with new business clients.

The time has come for law firms to invest in R& D and to adopt the mindset that collecting information will help them innovate, stay ahead of their competitors, and increase profits.

The Right Way to Communicate High Hourly Rates

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When you charge higher hourly rates than most of your competitors, it’s important to understand how you can effectively justify this number to prospective clients.

The first rule of quoting fees to potential clients is not to mention a specific hourly rate until you and the client have discussed what is at stake for them. Your hourly rate might be fifty times the minimum wage, which could seem outrageous to a prospective client in the framework of money for time spent. For this reason, you need to discuss the context of the representation. If you charge $600/hour – or the equivalent of $10 per minute – that could sound unreasonable unless the client has a $10 million business deal or potential jail time on the line.

Secondly, reframe the discussion to focus on total cost and costs relative to the client’s exposure or potential upside. Lawyers have been conditioned to discuss their fees in terms of hourly rates, but this is counterproductive when your hourly rates are higher than your competitors’. Instead, educate the prospective client about their total cost, cost per phase of the representation, or cost per month. Any of these options will make a lot more sense to a client than the hourly rate alone. Discussing fees this way will also allow you to showcase that a higher hourly rate doesn’t necessarily translate to a higher overall cost.

Third, and perhaps most importantly, emphasize your expertise and what makes you well positioned to solve the client’s problem. When lawyers focus too much on their hourly rates, it can have the unintended consequence of reinforcing the idea in the client’s mind that competing lawyers are essentially the same. If the client feels that they are choosing between apples, the lower-priced apple is likely to win out. That is why highlighting your specific expertise, in addition to focusing on total costs, is so important when your hourly rates are higher.

The Wrong Way to Raise Rates

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As the new year begins, you may be looking to increase fees for your legal services. All too often, lawyers who charge by the hour include the higher rates in an invoice at the beginning of February with no prior warning. Whether this strictly complies with the requirement to notify clients of material changes could be debated, but using this practice across the board is bad client relations regardless.

Your approach to raising rates for your existing clients should be individualized. If you have long-standing clients for whom you’ve raised rates in this way year after year with no complaints, you are probably on safe ground to continue doing so. But this should not be your default or automatic procedure. As consultants and business development coaches, we have seen the aftermath of this mistake too many times to count.

The following are a few recurring patterns to avoid. Most commonly, raising rates on already dissatisfied clients is risky at best and foolhardy at worst. If, for instance, you recently got a poor outcome in some aspect of a case or you haven’t adequately delivered on certain parts of a project, this is probably not a great time to charge more, especially without separate, explicit notice and consent from the client.

Second, if the work you do for an existing client is essentially unchanged from December to January, you are in danger of losing that client and future referrals by heightening fees without explanation. A classic example is the increasing of hourly rates for depositions, an especially unwelcome way to wish clients a happy New Year. The harder it is to differentiate the value of the work done before and after the new year, the more hesitant a firm should be to automatically raise rates effective January 1st.

In another familiar misstep, firms at times raise rates before having demonstrated any significant accomplishments for the client. When clients can’t point to tangible and positive differences made by the law firm, a fee increase is likely to engender some resentment.

Please don’t assume your client will immediately voice their displeasure at ill-timed and unexplained fee increases. This type of move can cause a fray in the relationship that becomes apparent down the line through passive aggressive behaviors and reluctance to pay future bills.

How to Avoid the Most Common Fee Setting Mistake Made by Lawyers

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A lawyer recently asked me whether she should accept an offer from a potential client to take on for $50,000 a lawsuit against a large entity that has a substantial and experienced in-house law department. When stated in these terms, one answer should become increasingly obvious. You don’t have enough information to answer this question intelligently.

There are dozens of things an attorney might need to know about the lawsuit and the client before deciding whether a flat fee of $50k is reasonable or appropriate. This includes everything from the procedural and substantive history of the case, the client’s potential success on the merits, the client’s ability to pay by the hour, and his prior history working with lawyers.

I know from my experience consulting about fee setting that many lawyers have a set way of setting and communicating fees. And they communicate that fee in almost all circumstances. Most commonly, this happens when the lawyer quotes a standard hourly rate.

It’s as if the governing rules forced lawyers either to refuse a representation or quote a single kind of fee. But those are not the rules. California, for example, permits lawyers in most circumstances to charge a variety of fee types including an hourly rate, a contingency fee, a flat fee, or a combination of these fee types. See California Business & Professions Code §§ 6147-48.

Too many lawyers cling to a single way of charging for their services, but this is not the most common fee setting mistake. Even more problematic and widespread is lawyers’ habit of quoting a fee before they have collected enough information from the potential client to assess the representation appropriately.

With respect to the lawyer who was asked to handle a law suit for a $50,000 flat fee, it took about 15 minutes to conclude that the lawyer should reject that offer. The lawyer shared public information that strongly suggested that this would be a high maintenance client. The lawyer was particularly concerned about the merits of the client’s position, and the potential that the lawsuit would be protracted and complex. I therefore advised the lawyer to offer to charge a flat fee to investigate the merits of the case and to give the client an assessment of his best options. This would have the added benefit of preventing the client from spending $50,000 needlessly, and would help both the lawyer and client determine if a flat fee was appropriate when they both had more information about the lawsuit and its potential risks and benefits.

Many cases present room for creativity in fee setting. Often there are a variety of ways that the fees for a single representation can be structured. But lawyers lose millions of dollars of fees and work with clients they should avoid because they don’t collect enough information from potential clients before quoting a fee. This is an expensive and avoidable mistake, which, in today’s competitive marketplace for legal services, is increasingly unforgivable.