Since the end of the recession, many law firms have welcomed increased business, including work for new clients. This sounds like the perfect environment in which to raise the rates you froze — or even reduced — when the economy was weak. On the other hand, the legal marketplace remains competitive and raising your rates may just provide clients with an incentive to shop around for lower-cost legal representation. Fortunately, this dilemma can be resolved if you focus on quality.
The rates you charge may be affected by many factors, including associates’ salaries, overhead costs, your local market and your firm’s reputation. Most firms use formulas, tying billing rates to salaries and projected billable hours, for example.
If it has been a few years since you have adjusted rates or if your profit margin is shrinking, potentially putting your firm’s future in jeopardy, start thinking about a rate increase. Keep in mind that smaller increases are easier for clients to swallow. Most won’t blink at a 2% to 5% rise, even if you increase rates by that amount several years in a row.
But a higher rate hike can cause even good clients to start comparison shopping, so handle such policy changes with delicacy. Your managing partner should send a letter to all clients providing a detailed explanation for the increase, and billing partners should follow up by personally calling clients to address their concerns and questions.
For many firms, the fear of alienating clients outweighs any potential benefits of raising rates. This is a legitimate concern. Depending on the market and your competitors, you will probably lose at least a few clients if you raise rates. However, that is not necessarily a bad thing.
The clients most sensitive to rate increases are likely your “C” clients — those that continually complain about fees, are slow in paying or even require collection efforts (see “Easy as A, B, C” below). Because these clients demand a disproportionate amount of time and attention, your firm may benefit by showing them the door. Attorneys will be able to spend more hours on those clients that value your services.
Market Rates Matter
National and individual metropolitan market billing surveys can give you an idea of what other firms are charging. You can also get a handle on current market rates by talking to attorney friends at other firms who may be willing to share their rates.
One way to test the market viability of your new billing rate structure is to present it to potential new clients. If they accept your rate structure without question, you may be charging too little. On the other hand, if potential clients balk at your rates, you may have overestimated the market.
Once you have determined that the proposed new rates are competitive, you can strategize how to present them to existing clients. Keep in mind that there is nothing wrong with being the market leader so long as this premium is supported by your reputation and the quality of the firm’s work product.
Be Careful with Your Message
Raising rates is a tricky business. But if your profit margin is narrowing, you must consider it. Even if your firm is in good financial health, below-market rates send a poor message to potential clients: For example, “We’re cheap, so don’t expect much.” Instead, communicate the quality you offer and price your services accordingly.
Sidebar: Easy as A, B, C
Every firm has clients that can be categorized into three broad categories — A, B and C. “A” clients are those you love working with and who pay their bills on time, listen to your advice and do not complain about reasonable fee hikes. These gems typically make up about 20% of a firm’s current client base.
“B” clients share many qualities of the “A” group, but they usually fall short in several respects or are too small to have much impact on your firm. This group represents about 60% of most client bases.
“C” clients usually compose 20% of your client list, but cause most of your malpractice suits, collection problems and headaches. For a more profitable practice, concentrate on expanding your “A” list by converting “Bs” to “As” and getting rid of “C” clients.
For more information, contact Jacqueline Janczewski at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Law Firm Group.