Lawyers: Beware Low Billing Rates

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Lawyers bill too little for two reasons. First, they believe that a lower fee will yield more clients. Alternatively, especially when they represent individuals and small business owners, lawyers feel sorry for their clients and end up billing what they think the client can pay — not what the lawyer is worth.

Do not fall victim to either of these faulty arguments.

Never, ever compete on cost

Other lawyers may bill less for their services than you do, and you may fear losing business to these low-cost competitors. Don’t. Chances are good that these lawyers are not making a profit and will soon go out of business. You don’t want to join them.

If I had excess capacity in my practice, I wouldn’t waste it by taking on legal work that loses money. This kind of “loss leader” work will only lead to more work of the same kind – unprofitable. It’s a dangerous spiral. I’d spend that time on face-to-face marketing activities before I wasted it on unprofitable legal work.

Clients who shop for lawyers based on rates alone will always find someone who charges less. All things seeming equal, these clients will abandon you for a lower-cost alternative. You want to make sure that all things are NOT equal. Use your social and legal skills to earn the trust and loyalty of your clients. Once you’ve done that, cost is less important and you can bill rates that reflect your true value.

Consider raising your billing rates

I regularly advise my lawyer coaching clients to raise their fees — and none has ever complained that he or she lost business as a result. The profits on less work performed at a higher rate will always exceed the profits on more work performed at a lower rate.

In fact, lawyers can even LOSE business if their rates are too low. There is a strong perception that higher rates equal higher quality — and vice versa. When I was an in-house counsel reviewing the rates of outside lawyers, my response to a low rate was never “I should hire him, he’s cheap,” but rather “I should avoid him, there must be something wrong.”

Clients expect legal services to be costly

Whether a client is the general counsel of a Fortune 500 company or a blue-collar worker in a small town, he or she expects that retaining a lawyer to solve a serious legal problem will cost a lot of money. They do not expect a “great deal” and a Best Buy or Wal-Mart experience. The key is to manage those client expectations by billing a rate based on fair — not discounted — market value for your services.

If you feel sorry for people, do more pro bono work — where you charge nothing to those who cannot afford legal services. You might have a good heart, but do not use it as a reason to discount your regular rates.

The only lawyer who might want to bill below market value for a short while is an absolute newbie. Otherwise, I recommend that my attorney coaching clients charge at least market rates for the service they provide.

How to bill a higher rate

Even better is the ability to bill above-market rates. To do this, you must identify some quality of your practice that strongly differentiates you from your competitors who are “just as good” at the law — something like personal skills, fast response time, a business/industry segment focus or a convenient location. As long as it’s not cost.

The more you can differentiate your practice, the more you can bill.

(photo: bank statement image from Shutterstock)

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  • Luckily (I think), I do more contingent fee work than hourly but our firm as a whole does a lot of hourly work. Roy (the author) has a lot of good points. But, in representing individuals and small businesses in a suburban or outlying area, some simply can’t afford to pay above a certain price point in my experience. So, while I’m not disagreeing with the author, there is a limit to what the ‘market’ will bear in a certain area for individuals and small businesses.

    • I’m sure Roy would agree with you. He’s not saying to charge more than your clients can afford, just not to bargain against yourself by cutting your rate before your clients even walk in your door.

      • Yes, I would agree with Dave. Lawyers must always be sensitive to what the market will bear. If the vast majority of clients in a certain area cannot afford a rate above a certain price point, than that price point, in effect, becomes the market rate.

    • James Bellefeuille

      I have to say that there are many attorneys that could charge more for their services if they operated less like a law firm and more like a small business. Many attorneys, do little to no marketing. Period.

      Admittedly, this is a choice that the attorney makes, to be a boutique firm, instead of growing into a larger firm, although I have to argue that many could keep the small number of clients, but simply make more money per client.

      Also with regards to transaction based legal work, like bankruptcies or divorces, it’s unlikely that you are going to be working with this client again in the future (let’s hope.) It would be in your interest to charge a higher fee, and demonstrate your unique value proposition to your potential clients.

      A unique value proposition, or as the MBAs like to call it UVP. Essentially means that anybody can file a bankruptcy claim, but why should the potential client choose your firm. Sadly, too many attorneys compete on price, which allows a handful of sharp attorneys to compete everywhere else, like convenience, experience, branding, creativity, different business models, the sky is the limit if you don’t compete on price. Disclaimer: As a Legal Leads Marketer, attorneys advertising for a change benefits me.

      This status quo couldn’t last in the business world, and hopefully it will not stand in the legal world any longer. I urge anyone reading this to build the firm that they want, and challenge them to advertise and market themselves creativly. It doesn’t need to be expensive, in fact the more creative you are the more likely that using a UVP will be more beneficial to you.

      I have a tendency to rant about things I find important. Please find a concise text book definition below:

      A UVP should include the following:

      1. Your Target Market (example: married women, aged 30-55, in the twin cities)
      2. The benefit your product or service provides? (example: Bankruptcy – Financial Relief, Reset, Fresh Start, security for your children’s future, etc.)
      3. A description of your product or service(example: What is a Chapter 7,13, etc)
      4. What makes you unique in your marketplace – This is where the rubber meets the road, imagine you’re the USA and you are choosing what product to create and sell to the world. Brazil sells the best bananas, and Brazil makes a killing. You Don’t Sell Bananas! You sell something that Brazil has no ability to sell. Colorado Peaches. Something different unique and original. For example, a divorce child custody law firm that designs their marketing campaigns and messages towards men, who surprisingly make up about half of all divorce cases.

      The Short Version: Take a weekend and develop a unique value proposition and a marketing plan. It will save you butt-loads of cash.

      Cordially, Your friendly neighborhood legal marketer.

      James

  • My question is, how exactly do we find out what the “market rate” is for a certain area of law, besides calling up other firms to see what they would charge?

    I’m a 31 year old solo practitioner, covering family law, criminal defense, and bankruptcy, among others. These all tend to be areas of law where the greatest demand is from low-income clients.

    I have been told by a number of other attorneys that my rates are too low, but I don’t know exactly how to go about raising them to what the market price is, without either trial & error or calling up firms to see what they charge.

    And if a lawyer does increase his rates, what is the best way to deal with a referral from a past client? If a past family law client was happy with the job I did, and referred me to a cousin of theirs, can I really get away with charging them several hundred dollars more than I did the first time around, because I have become more keen to what the real market price and what I should really be charging for these cases?

    • Sounds like we need two new posts: “how to set your rate” and “how to raise your rate.”

    • Seth,

      Odds are that the demand for your services is at least somewhat elastic, meaning demand changes based on price. So it’s pretty easy to figure out how much you can charge. I’m going to use a flat fee as an example because the math is easier to type here (we are lawyers after all), but the basic premise applies across the board. I’m also going to pull numbers out of my butt for pricing purposes.

      Let’s say you charge a flat fee of $500 for a simple divorce and you sign up 10 new clients a month on average. That $5000. And you have averaged this over the last year so you have a good idea of your baseline.

      So, next month, you start quoting $550 dollars. Lo and behold, you still sign 5 new divorces. Thats $5500.

      The next month you quote $650 and sign 7 new clients. That’s $4550. Uh oh, we’re headed in the wrong direction.

      Or are we? You are now doing 70% of the work you were doing at $500 bucks a month for 90% of the profit. You can use that other 30% of your time for other new clients.

      As far as a referral from another client, quote the price you are charging now. 95% of them won’t say a word about it. In my experience clients who quibble over small amounts of money are clients you don;t want anyway.

      Ask the client if you want a good lawyer or a cheap lawyer?

  • Laurie

    I highly recommend getting out your local bar directory, do a section search, and make phone calls! That’s what I did. Since I am new, I do charge less- as Roy suggested. Now that I have a few cases under my belt, I have increased my rates somewhat, but still lower than the market. One thing to remember is that as a new lawyer, you spend a lot more time doing things than experienced lawyers who aren’t still ‘making their own forms’ every time they need to file a document. I don’t think it’s fair to the client to charge what experienced attys charge until I become more efficient in performing the legal work.
    One experienced atty told me that it’s not really how much you charge per hour, it’s what your final charge is!

    • I think we’re getting the meaning of “market rate” confused here. If new attorneys are less efficient, then the market rate for new attorneys is necessarily lower than it is for more-experienced attorneys.

      Likewise, if the “market rate” in a rural area is lower, as a commenter above observed, then you would be silly to charge the market rate for a nearby urban area.

      What Roy is saying not to do is charge less than the market rate, whatever the market rate may be for your area, experience, etc.

    • We should exercise discretion in this practice, particularly in any public discussion. Bar list-servs are not a good place to talk price as that sort of thing may get the lawyers and associations involved in unpleasant antitrust exposure – rare but it does happen every so often.

  • Jeremy

    In private practice I found that negotiating hourly rates got me nowhere, except for a client either expecting that my final (discounted) rate was the “normal” rate (then still looking for additional discounts) or they would realize that I was in need of business and my price was negotiable. I found it better to either provide a discount on the backend (for example, “I took 15% off because I know you’re a new business and I, too, am a small business) or provide certain services pro bono or at a reduced fee. (1) I could discuss it specifically with the client, which was an opportunity to remind them that my time wasn’t free but that I valued them. It’s difficult to remind a client on every bill that your hourly rate was reduced. (2) I think it helped them understand the cost of legal services. Being able to charge the time on a bill for a particular service but then zero it out put a cost to my time and the service that everyone could clearly see.

  • When clients ask what my hourly rate is I give them my rate and the range of rates for the lawyers and paralegals in our office. I then quickly move to a discussion of what the matter is likely to cost the client. I get clients to think differently about what and how lawyers charge by asking rhetorically, ” what else do you purchase only knowing the rate ( the unit of measure ) but not what the actual cost is? ” It almost alwys redu ces the cleints stress about how expensive I am on an hourly basis.

    We are agresively moving into alternative forms of billing other than by the hour. That’s a discussion for another post.

  • Jim

    Always a fascinating topic, but in reality if you focus only on the hourly rate and the hours, you lose the fact that what we really offer our clients are solutions. Solutions have different values and are not often well measured by the time it takes to formulate them. For example, on one of my few really good days, the solution to a difficult problem came to me about 10 minutes after the client hung up the phone. Does that mean I am entitled to only .2 x my hourly rate for a really good solution to a client’s problem? The solution may save the client a lot of money. On the other hand, simple solutions sometimes take forever to find, but are not worth forever x my hourly rate to the client. If you are trying to be fair to yourself and your client, perhaps the right rate is a reasonable value for the solution you provided.

    • I agree that value does not always equate to time. But if time is the measure you agree on with your client, then that’s all you get.

      Which is why I don’t bill by the hour any more, unless it truly does feel like the best way to measure value.

  • I agree with your points. It’s always better to value your skills and charge reasonably. Some people really do equate quality with how much you charge and people know that legal fees are expensive. Personally, I also don’t bill by the hour but take it as a whole. Like Jim said, it’s the solution to their problem or issues that counts.

  • William Chuang

    You need strict metrics on your performance to set your rates. It’s the flip side to market rates—are you making money based on what you’re charging? Getting Quickbooks or other accounting software is the first step any solo or small firm attorney should do. With these tools, and the strict discipline necessary to keep your books properly, you can see if you’re making money, losing money, or breaking even on individual cases on a month-to-month basis. Therefore, you can experiment on whether or not loss-leader work can bring more business in. (My experience: it doesn’t.) Quickbooks also lets you charge things to a “discount” account. Instead of underbilling, you can consider issuing a discount to a client. Again, you can see how much money you are issuing in discounts.

    Getting a few ten thousand dollar checks may make you feel rich, but then you have to pay the rent, advertising, office supplies (do you know much much you spend each month on paper—I do, and it’s ridiculous), Internet, phones, garbage bags, and the like. The overhead alone can eat up all of your income but unless you know what’s going on, you’re setting rates blindly.

  • Suzie Easter

    My practice mainly serves clients who are struggling somewhat financially. Thus, my fees are lower than the norm. They aren’t discounted fees, it’s just what I charge. However, I do not market myself as a cheap or discount lawyer.

    I am in a fortunate position because my student loans and truck are paid off. In addition, my parents and my husband and I own our house and share the expenses. I am happy to live in one nice house and to have one reliable vehicle. Finally, I only take on as much as I can handle by myself. It’s working great for me and my clients.

  • worker bee

    Market rates… I have completed my first 8 months of being a lawyer. I have spent most of this time trying to determine what the market rates are. I live in the Atlanta area, which, compared to lots of the southeast has higher fees. But lower fees than the urban Northeast and midwest. A good way to adjust for your local market is to compare the price per sq. ft of residential real estate with that in Atlanta. Here, an experienced lawyer with a good track record charges $500/per hour. Her sr. associates charge $225 – $275/hour. The entry level associate $200/hour. This is based on an advance retainer of $7500.00, which might get through administrative remedies, depending on complexity of the matter. $500 – $5000 for business formation. $500-$1200 uncontested divorce. $400 per page legal document review. $5000-$7500 social security disability, $5000-$7500 ERISA dispute.

    I spoke with a lawyer a few weeks ago who said the retainer for a Federal crime is $100k. Not sure what the hourly rate is there.

    For contingent fees, the market for PI and wrongful death I am seeing 33% with the fees going to 40% if the case goes to trial.

    An inexperienced lawyer was disciplined recently because her fee of $550/hour was determined unreasonable.

    I am undercutting the market, not only because I’m new, but I keep my overhead at rock-bottom. Also, I have had some successes and am not as worried about profit as I am getting quality representation to those who need it. I don’t know of many lawyers who will do pro bono civil litigation. But I know LOTS of people who have valid civil claims, I aim to help it be more affordable for them.

    anyway, FWIW… when you are litigating on advance retainer it is a hard sell. It’s not that I “feel sorry” for clients, it’s that if I have $5000-$7000 dollars to invest … It’s hard to pony up several thousand dollars for anything, let alone a lawyer. However, if a claim is valid, a client will get a quicker and higher return on their retainer than a mutual fund, stock, or lottery ticket. So sell it! If a person has a valid claim in your area of expertise, don’t let them get away without investing!

    • AFK

      Whoa, $400 per page of legal document review? That seems high. If it takes you 20 minutes to review a page (seems reasonable to me), that translates to an effective billing rate of $1,200/hour!

  • Great article, Roy!! I completely agree with your assessment. My first couple of years in practice, I would always discount my rate. I now believe that I am worth every penny I charge. If a potential client questions that, I do not waste my time trying to convince them otherwise.