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As part of your law firm’s strategy, you want (ideally) to align your pricing methods, metrics and communications with your clients’ value proposition. That, of course, is easier said than done. Most firms struggle to achieve the delicate balance between the rates they need to charge and the rates clients are willing to pay. And all firms face the same fear: What if you miscalculate and lose your best clients?
Still, there comes a time when you have to increase your rates to stay profitable.
So, how do you implement a rate increase without driving away the client? It comes down to communication, metrics, timing and value. Here are some thoughts on how to go about it.
1. Get over the fear factor. Don’t let fear keep you from raising rates! Chances are, if you are making excuses to avoid a rate hike, those excuses are a cover for speculations based on fear.
2. Communicate the “whys.” When your firm has specific reasons for raising rates, tell your clients. Perhaps you froze rates during the recession out of consideration for your clients’ financial situations, or to keep their business. Maybe you wrote off a considerable amount of time each month resulting in even lower effective rates. No matter how big or small, letting clients know about these financial courtesies builds goodwill — and it can be a great client development tool.
3. Understand the metrics. Before deciding to increase your rates, know your firm’s economics. Do you know where your breakeven point is, profit-wise? How much it costs to produce a billable hour, or a brief? Or your costs by timekeeper? Understanding the economics makes it much easier to determine the increase. Keep in mind that smaller increases — 3 to 5 percent per year — are generally better, and are met with less resistance when they are implemented consistently (i.e., the same time each year). When setting rates, it’s not just about what the firm “needs” to charge to break even, but also about what the firm “wants” to generate in fees. Review your costs, calculate your breakeven point, and determine a suitable rate. You might also consider the 80/20 scenario: Identify the 20 percent of your clients who generate the least profit and either raise their rates or terminate them. If this sounds harsh, keep in mind that you are in business to generate profit — you cannot afford to carry unprofitable clients just because you like them.
4. Timing is everything — no surprises! The worst thing you can do is fail to tell clients about your rate increase, instead letting them find out when they open their next invoice. Let your clients know in writing that you are increasing rates and provide sufficient notice, perhaps 60 days. Also, as a best practice, make sure your engagement letters include language indicating the firm will, upon notice, adjust rates periodically. This should alleviate some pushback. Some clients will resist and attempt to negotiate the proposed rate increases. That opens the door for discussions about the actual value of legal services provided … and brings us to No. 5.
5. Talk about the value being delivered. Will you lose some clients who aren’t willing to pay a higher rate? Maybe. But if you do, your firm needs to ask an important question: Why doesn’t the client perceive the full value of the services provided? Get past the fear factor and help clients understand the value your firm delivers. At every chance, seize the opportunity to educate them!
Frederick J. Esposito, Jr. is Executive Director of Rivkin Radler. He has more than 20 years of law and accounting firm experience. He writes and speaks extensively on legal management topics, including billing, collections, financial and profitability models, risk management, human resource development, project management and alternative fee arrangements. Follow him @lawmgtguru.
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