Here’s a four-step process for increasing your legal fees, from how often to how much — and how to tell your clients.
I got an email from my insurance company yesterday. The company shall remain nameless to protect the greedy. I will share that they have enough money to purchase naming rights for stadiums, so they’re not exactly burning furniture to stay warm.
The email said — and I’m guessing many of you have received similar ones — that my home and auto insurance rates are going up by 50% this year. I’ve made no claims, and they gave no explanations. Such is life in America in 2024, I guess.
For over a year, we’ve all been watching prices rise around us at restaurants and grocery stores, to say nothing of rents and mortgages. We’ve become very familiar with the frog in the boiling pot metaphor. Feels like the price of everything has shot through the roof.
Lawyers aren’t immune from the need to consider price increases. Nor are they protected from annoying clients when they manage that process poorly.
Is It Time to Raise Your Fees?
The most common situation I come across when talking with lawyers is that they haven’t looked at or changed their fees in a long time. I completely understand their reluctance. A lot of lawyers are reluctant businesspeople. They are engaged in commerce because they must do it to practice law in private firms — not because they love running a business. As a result, some things that would benefit from more attention don’t get it. Fee setting is a perfect example; it’s always important but never urgent. It’s easy to ignore.
What’s past is prologue, as they say, and we find ourselves at the start of a new year and fresh start. It’s a perfect opportunity to review your fee-setting practices and decide whether to make some adjustments. If you do it carefully, you can handle it better than my insurance company did.
Here are four steps to guide you through your analysis.
Step 1: When to Move Rates Up
The first issue is to decide when to increase your fees. The best practice for most firms is to make it a systematic (timed) evaluation rather than an ad hoc or environmental one. Don’t wait for some external event to intrude on your firm finances (Joe and Mary down the street are now charging $550 per hour!) and force an evaluation. Schedule time in your calendar every December to discuss raising your fees with your team, with the goal of rolling out the changes in January.
This isn’t to say that you must adjust rates every year, just that you should run the analysis. For firms representing episodic (short-term) clients, fee increases are easier to manage regularly and can be done as often as needed — annually works fine. For firms that represent long-term clients with less turnover, fee increases can be a bit more challenging since they tend to vex existing clients. I suggest these firms consider rolling out increases every two years, with some additional considerations explored below.
Step 2: How Much to Increase Rates
I am an advocate for making modest increases and approaching them on a percentage basis rather than in round numbers. There are a few reasons for this.
- It’s easier to calibrate rate increases against increases in expenses to offset inflationary pressure. For example, if you see your staff costs are up 11% year over year, it gives you a point of reference for evaluating a rate increase.
- It helps to avoid increasing in increments too large to be tolerated well by the market. The impact of regular, modest fee increases can, and should, be almost unnoticeable everywhere except in your firm’s ledger.
- Last, it helps overcome rate increase resistance. I’ve found very few raise-resistant lawyers couldn’t accept applying a modest 2% or 3% increase.
The goal here is to be paid fairly for work well done. The goal is not to take your client’s last dollar or to slowly go out of business. There’s a lot of room between those poles for you to make systematic adjustments that provide value for clients and help your firm stay healthy. At a minimum, consider matching your rates to inflation adjustments — target 2% per year in average years. (No, these last two years have been anything but average.)
You may find that adjusting every other year for 5% is less of an administrative hassle for your team. If it is well tolerated by your market, there’s not much downside.
One word of caution: I’ve worked with far more lawyers whose rates have not been adjusted in many years than lawyers who have pressed hard on increasing fees. If you fall into the former camp, adjusting a notch more than the bare minimum each year may be wise until you catch up to the market.
Step 3: How to Know How the Increase Is Tolerated
As regular readers of this column know, I am a fan of lawyers making data-driven decisions around practice management issues. To do that, though, you must have the data, and not every small firm does.
It’s probably self-evident that the reason lawyers don’t raise their rates is they worry about crossing some invisible line into intolerably high fees, and clients will abandon them. That would certainly be possible at a substantial enough increase, but if you stick to modest, regular, percentage-based increases, you are unlikely to have that happen.
However, rate increases are, essentially, an experiment. You don’t know how it is going to be received by your firm’s clients in your market until you try (hence the reason for the conservative approach to increases). So that you can move this out of the realm of anecdotal and into data-driven, you are going to want to track and keep an eye on two numbers:
- The percentage of potential clients who schedule initial consults.
- The number of clients who come in for initial consultations and choose to retain your firm.
If your retention numbers for either of those metrics drop appreciably, the increase may be too large, or you may otherwise be at the top of what your market will bear. The strategy behind the regular, modest increases is to yield additional revenue without compromising these key conversion rates. Tracking the data is the way to be sure they are going well.
(Relating reading: “What Lawyers Can Learn From Apple When Setting Billing Rates“)
Step 4: How to Communicate the Increase to Existing Clients
The most challenging part of fee increases is communicating them to existing clients. Firms with long-standing clients and relatively little churn in their client rosters must be more sensitive to managing rate increases than those with episodic, short-term clients. The same pressures apply in each situation, but firms with short-term clients will completely turn over their client base in a shorter time frame and can, therefore, sidestep the issue of whether to increase the rates for existing clients.
I suggest that firms with long-term clients raise their rates regularly and modestly and communicate those increases to their existing clients. However, I also suggest that the lawyers inform some or all of their existing clients that they are being grandfathered in. If you do this once or twice, when it is time to increase rates on those clients, you can remind them of the favorable treatment they have received over the past two years.
That said, some clients’ work is too substantial, or their budgets too inflexible, for the firm to raise rates and keep the client. Mileage varies greatly and depends heavily on the facts. You will have to decide in which cases a rate increase bends a client relationship and which ones it breaks it. Don’t lose sight of the big picture.
A Few Words About Ethics
As you know, we have guardrails preventing us from charging clearly excessive fees. We have no such guardrails for charging clearly deficient fees. If you are concerned that a rate increase will launch you into “clearly excessive” territory, confer with a professional responsibility lawyer and get an informed opinion. I sincerely doubt that most lawyers who are trepidatious about increases in the first place will be anywhere near a clearly excessive fee structure. Still, I am a believer in being able to sleep at night. So, talk to a lawyer who does this kind of work and get some advice. It’s better to spend a little bit of money to find out than to assume you can’t ever raise your rates.
If you follow these steps and apply modest, regular increases, keep an eye on the data, and treat existing clients favorably, you should have no trouble adjusting your fees to keep pace with inflation and other market pressures.
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