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.