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Law Practice Management – How To Determine Your Fees
Determining fees is a difficult law practice management task for most attorneys when thinking through their law firm marketing plans. In determining fees for certain services, attorneys often fall short of what they should charge. Too many attorneys are afraid of even charging the competitive price for their services when making their law firm marketing plans. Further, they make the pricing decisions often with no data or conceptual framework. Additionally, instead of focusing their efforts on how they can justify getting top dollar for what they offer, they charge a fee that is often way too low and often actually can scare off potential clients who think there is something missing from a service that is “cheap”. Additionally many attorneys don’t realize that most purchasers in the marketplace by far are “value purchasers” and not looking for “cheap”.
So before you sit down and begin thinking through your law practice management pricing strategy you need some distinctions around pricing commonly used in law firm marketing planning. Then add your pricing strategy to your law firm marketing plans. You need to be sure that you are charging a sufficient fee on everything to guarantee you a good profit not just a good living. Do know a law practice management law firm marketing plan is not effective if you only attract people who want to pay the lowest fee for a service. These are not loyal clients. Instead, you want to focus your law practice management and law firm marketing plans on attracting clients who will become long term assets to the firm. Low price clients are not building your base of long term clients I can promise you that.
There are basically four ways of determining how much you should be charging for your services. Lets move right into those now.
The Market Method In Law Practice Management Pricing
This is one good way of determining pricing. Get your assistant to support you in this law practice management task and spend some time discovering what the range of pricing is in the community. Have her do a “mystery shopper” study by calling around as if he/she were a potential client and find out what your competitors say on the phone to her around pricing. She may need to call from her home phone to avoid caller ID. As another option you could have him/her call other assistants or paralegals at your competitors and offer to exchange your fees for their fees or you could do that with other lawyers yourself in your market. If you really want to get into it and have maximum data you can write maybe a few dozen competitors in your marketplace and say you are doing a fee survey and if they would send you their fee list you will create a composite list that does not identify those responding and send them a copy of the results. To keep it simple for them include a stamped, self-addressed envelope with a list of the most common services offered in your practice area. Now you will see what people are charging for services similar to those you offer. You should be able to come up with a range of prices. Use this range to set prices for your own services. My recommendation in law firm marketing planning is to charge at the 75% level of the list. So you should be at or in the top 25% of the fees.
Remember that in general it is not a good law practice management strategy to compete on price. Most potential clients will see pricing that is too low as a signal that there is something missing either from the service, the provider, or the firm. And people who are looking for a low price will follow that low price wherever they can find it rather than becoming long-term clients. So be sure that your price covers your costs and a reasonable profit margin.
The Cost Method in Law Practice Management Pricing
This law practice management pricing method is very straightforward really. One simply determines what the costs are to deliver products or services and adds on a reasonable profit, somewhere between fifteen percent at the least and maybe thirty three percent at the most. The most common mistake in law practice management using this method is to neglect to include some form of your expense. Solo and small firm attorneys tend to not include their own salary!
OK, let me say it again. In law practice management often you count yourself out of the expenses and you should include yourself in the expenses. Why? Often you are doing at least some of the technical work. Yes? Often you are doing at least some of the management work. Yes? As the owner of the business you are due a reasonable profit. Yes? If you are all three of these in one, you should consider one salary as due you for your time and expertise as the technician and manager as well as a profit of fifteen to thirty percent due you as the owner. So be sure to include a reasonable cost for your technical and managerial work in the expenses part of this formula.
Fixed Rate Method in Law Practice Management Pricing
This is the method used by many auto mechanics (it is called “the flat rate book”) and other service providers. This method is where you determine a fixed rate for various jobs and charge that rate no matter what. If the mechanic spends less time than allotted for the job, he makes more. If he spends more time than allotted, he makes less. But in the end, it all evens out (well, usually to the mechanics’ favor if you ask me). Another example using this method is how managed health care has used this system with hospitals and doctors. Lawyers can use this system if they desire.
The “Rule of Three” in Law Practice Management Pricing
This “rule of thumb” called the “rule of three” used in law practice management is not what your CPA might tell you and it does not fail you either. Ask your CPA what they think about it and they will like it. To begin we are going to be thinking in thirds. For the first third we will take the total amount of salaries/bonuses (not benefits just salaries – benefits go into the second third coming next) for the revenue generators and/or timekeepers (this includes you if you are generating revenue) and call that our first third. So add up the salaries of the lawyers, paralegals, and legal secretaries who generate revenue or are timekeepers and call this your first third (lets just say that number was $100,000 to keep it simple). Whatever that number is take that number again and it is your second third which we will call your “overhead” (thus that second third is $100,000 and don’t forget you if you are doing some managing partner type duties since that part of your time goes here in overhead). Then take that same number and we will call that your last third, which we will call gross profits (another $100,000). What you need to do is take the total amount (in this example $300,000) and now figure out how much you must charge per billable hour, per fixed rate or how many contingency fee cases won to be sure you hit the target we must hit given our first third number times three (in this example $300,000).
This method shows you how much per hour you need to charge. Since you know how many billable hours each revenue generator can do per month, simply divide that into your total of all thirds ($300,000) to see what you need to charge per billable hour to make your numbers come out correctly. As long as you hit your targets you will be assured of a 15% to 30% net profit from your operations. After all if you are the owner of the practice you deserve a fair profit as well don’t you agree? This method is known as the Rule of Three. If this method is a bit too confusing do feel free to contact me and I will help you sort it out in a few minutes on the phone.
It is a good idea to think through all of these pricing methods in determining your law practice management pricing strategy before setting a price and moving ahead with a law firm marketing plan to ensure you are thoroughly exploring all options. Remember the tendency for most lawyers is to price too low. Don’t do that! In another article I will tell you how to speak to potential clients so you never have a problem getting the fee you deserve.
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