Setting your annual billable rate increase, and how to tell your clients is stressful for fear clients will switch providers.
Right around this time of the year, law firms send out a customary announcement informing their clients that their rates are about to increase. The process is stressful for those who fear that clients will react negatively and switch providers. Some lawyers dread their clients’ reaction so much that they procrastinate their communication long after the rest of their partners’ letters have gone out. But the exercise is much less daunting when you take a step back and analyze its key components.
Table of contents
Your Billable Rate Mindset
Before you embark on this path, remember the value of your expertise. A few minutes of strategic legal advice can yield an invaluable outcome for your client. But if your sense of self-worth is low, you signal that you have not fully bought into your own value proposition, and your clients will follow suit. So, practice saying the new number out loud a few times in advance of your next pitch so that your delivery is prepared and confident.
The Annual Increase
If you’ve been increasing your hourly rate consistently on a yearly basis, you should continue to do so at the industry standard of 3 to 6 percent. Take all factors into consideration, including the size of your firm, the size of your client, your geography, practice area, the state of the economy, and your competitors’ rates.
The Billable Rate Adjustment
If you haven’t increased your rates for a few years, you may need to right-size significantly. It’s important to do so as soon as possible. The longer you wait, the more difficult it will be to close the gap.
Communicating Your Billable Rate
Your prospects will take your new rate at face value. They have no expectations in relation to your prior fees. So even if you are making a significant jump upward you will mostly find them amenable, as long as your new rates are in line with the marketplace. As for existing clients, give them at least 60 days’ notice and keep the announcement of your new rate brief. There is no need to provide an extensive justification or apology for your increase. (You have nothing to apologize for, you are running a business.) A one-sentence explanation will suffice.
If appropriate, emphasize value-adds to the client (for example, the recent addition of new lawyers, investment in new technologies, a broader geographical footprint due to the new office in Dallas, a new client-facing initiative). These reasons are more palatable than citing general market inflation or the firm’s increased costs.
Also, do not send your communication to your most significant clients without first setting their expectations. If they engage you for high-volume work, an increased billable rate will amount to a meaningful sum for them. Pick up the phone and talk them through the news. If their reaction is concerning to you, work toward a compromise to keep them happy.
If you are unclear about your jurisdiction’s guidelines on informing existing clients of fee increases, do the necessary research so that you are compliant. You may be tempted to build an annual fee increase into your engagement agreement to avoid providing notice, but consider that it always makes for a better client relationship when you are communicative and forthcoming.
The Client’s Perspective
Make no mistake, regardless of whether your client is a small business or a major institution, they will be momentarily perturbed to learn that the very same services they engaged last year now cost more money. Savvy negotiators will likely push back and test your resolve on your new rate. But most clients have come to expect a customary annual increase and will get comfortable with your amended terms, especially when an urgent need for your counsel arises.
The Fallback Position
For key clients who cannot get comfortable with your proposed jump, consider smoothing their transition over time (e.g., an incremental increase over four quarters). If you have to negotiate a special rate for them, do so with the understanding that both parties will revisit the terms in six months. Whatever you do, try to avoid a situation where you quote your new rate, then acquiesce back to your old rate without caveat or consideration. It sets a poor precedent for next year’s conversation.
Losing a Client
It is highly unlikely that any clients will fire you as a result of this exercise. If you think back, you’ll recall that you’ve almost never lost a client (that you didn’t want to lose) after a reasonable fee increase. While the occasional super-rate-sensitive client may balk and switch to a lower-cost alternative, you’ll probably be relieved to see them go. Either way, your new rate will bolster your profit margin.
As you take these various elements into consideration, you will become more comfortable with the idea of communicating (and collecting) your new rate. Before long, you’ll be looking to the next billable horizon, and you’ll go through this exercise all over again. In the meantime, you have much easier communication to send to your clients: your annual holiday card.