Law Firm Pricing 101: Guide to Charging for Legal Services
There are many factors clients consider when choosing the right law firm. They may ask: What areas does the firm specialize in? How many years of experience do they have? But above almost any other aspect, law firm pricing is often the deciding factor for many potential clients.
Effective law firm pricing is about much more than ensuring profitability—it also establishes your identity as a firm and dictates how clients perceive you in relation to your competitors in the market. Determining lawyer prices is one of the most crucial business decisions your law firm can make, but it’s far from easy.
With the rise of online services and the demand for more transparent and predictable pricing, many in the legal industry are rethinking their law firm pricing strategies. This change in the market raises several law firm pricing questions: Should your firm use a traditional pricing model or something else all together? How do law firms charge clients fairly while still staying competitive? Should you take a retainer? To create an effective law firm pricing strategy that will help you win more clients, it’s important to understand:
- What law firm pricing includes
- How law firm pricing impacts your firm, your branding, and your clients
- The available billing tools and models at your disposal to make changes
We’ll cover all of this and more in this article. Let’s dive in.
What Does Law Firm Pricing Mean?
To put it simply, law firm pricing is how much law firms charge clients for legal services. There are several common methods used by lawyers to bill clients, including charging flat fees, billing hourly, collecting retainers, and other alternative fee arrangements (AFA). Standard billing practice for most lawyers is to bill by the hour. While fairly common, the billable hour was not always as widespread as it is now and some see it as detrimental to the profession.
Lawyers that are pressing forward with traditional pricing models, whether out of habit or because they lack the accounting tools to change, are rapidly falling behind consumer demand for transparent pricing, flexible payments, and value-based models. Adding to that, many of today’s clients are more tech-savvy and willing to do research online when trying to find a lawyer. These are both important points when it comes to understanding what law firm pricing means in the modern context.
For modern clients, a legal service fee is not simply the amount they are expecting to pay, but a clear understanding of the value that fee represents.
3 Common Law Firm Pricing Strategies
With client expectations changing constantly, how do modern law firms determine what “fair” pricing is for their services? The most important thing your firm can do is to find a pricing strategy that is client-focused while helping you stand out among the competition. While there are myriad approaches one could take, these are some of the most frequently-used strategies that modern law firms use as a starting point for setting legal fees:
A cost-based pricing system uses the average costs required by the firm to perform a legal service plus an extra percentage markup to ensure a healthy profit margin. This is often calculated using a lawyer’s base hourly rate plus a fixed fee.
Many of today’s clients are comfortable doing extensive pricing research before choosing a lawyer. As a result, some law firms use a competition-based approach to pricing, which focuses on setting lawyer prices based on what competing law firms are charging. While this often translates to trying to explicitly undercut another law firm’s prices, the other firm’s fees can also simply be a reference point to stay competitive in the local market.
A customer-value-based approach charges legal service fees based on the potential value of those legal services to the client. More specifically, value-based pricing means determining lawyer fees based on a variety of factors including the type of case, market rates, overall risk, and more. This approach also can take into account the client’s goals and budget as well.
Perhaps more than any of the other models, value-based pricing is increasingly gaining steam among a wide number of legal professionals. Value-based pricing allows law firms to clearly quantify the value of their services, and facilitate an open discussion with clients about their needs and expectations upfront. In addition to happier clients, value-based models can also benefit firms by fostering collaboration, boosting cash flow, and increasing efficiency.
How Much Should a Lawyer Cost?
While choosing a pricing strategy is key, the actual rates you set are equally important. Ultimately, when starting a law firm, you must set prices that sustain your business and help it grow while also making sense to your client. If a client doesn’t clearly understand the relationship between your rate and the value it brings them, they are likely to go somewhere else and may tarnish your firm’s reputation with a bad review. To prevent this situation from occurring, you’ll need to set reasonable rates and effectively communicate your reasoning for those rates. While there is no one-size-fits-all pricing solution, there are a few places to start.
First, it can be a good idea to look at the average lawyer fees for your state. This will give you an idea of what a reasonable range is for the cost of specific legal services in your area. However, it’s worth emphasizing that this is only a starting point—fees can vary drastically based on practice areas and experience levels of individual lawyers. While setting fees that allow you to be profitable is always important, they must also be fair to clients. Offering fair prices isn’t just in your best interest as a business, but part of the ethical rules laid out by The American Bar Association.
How to Calculate the Cost of your Legal Services
Setting the exact rate for your services is a bit of a balancing act between sustaining your business and showing your potential value to a client. A high rate may be great for growth but turn off clients who think they can find similar services for cheaper—too low and you’ll constantly be chasing new work to keep the lights on.
When setting prices at your firm there are a number of factors you should take into account:
- Experience level
- Practice area(s)
- The amounts involved and what stands to be gained
- Type of case and complexity
- What pricing model you use (more on this below)
Another thing that you may need to consider is whether you’re offering any discounts or incentives to clients. However, for firms that are moving towards a more value-based approach, the choice of pricing model is critical. Without a set hourly rate, it’s more important to use financial forecasting and budgeting tools in order to set prices that will maintain the cash flow you need.
Law Firm Pricing Models
Deciding on a pricing model is crucial to both the health of your business and how potential clients will view it. There are many ways you can charge clients, and you may even choose to mix and match different pricing models as you see fit. Every option comes with distinct advantages and disadvantages, which are important to understand to make the right decision for your firm.
An hourly rate is the most common form of pricing in many law firms. In this model, a lawyer tracks their time and bills based on the hours spent working on the case. Hourly rates are typically set based on the type and complexity of the case and a lawyer’s experience level. Hourly billing is a very simple model of pricing, which is in large part why it still holds so much appeal for many firms. It’s also fairly straightforward to calculate your caseload based on your desired salary and the number of hours you can reasonably work.
However, hourly billing is increasingly coming under fire from both those in the industry as well as clients. For clients, hourly billing can be a huge source of anxiety since they are unsure of what the final costs of a case will be until it’s done. There is also some criticism that hourly billing has led to a culture where some lawyers try to pad their time. Another big disadvantage of this model is that it can discourage clients from proactively communicating and cooperating with their attorney since they may be unsure if even a short communication will incur another charge.
A flat-rate fee is when a client is told exactly how much they will pay in advance. This type of fee is the most straightforward for clients as there will be no surprises when they get the bill. Flat fees can also be set up to be paid upfront or in installments, usually based on certain milestones, making the process even more predictable.
A flat -rate fee is a little different from a capped fee, which simply states that a client won’t be charged above an agreed-upon amount. Both have the advantage of giving clients more transparent pricing, but a capped fee might be a better fit if the complexity of the case isn’t certain from the outset.
However, a flat-rate structure really only makes sense when the casework is fairly routine and predictable. For example, many lawyers offer a flat fee for predictable workloads like uncontested divorce cases, reviewing and creating contracts, or immigration applications.
Also called “contingency” pricing, a success-dependent fee is one where an attorney agrees to take a certain percentage of the client’s payout if their case is successful. This arrangement is laid out using a Conditional Fee Agreement (CFA) to clearly define the specific outcome that will result in a payout. This pricing model is typically used in cases where a client may have trouble paying for legal services upfront.
A retainer is a fee that is paid in advance to reserve legal services that have not yet been performed. All retainers are put into a client trust account, and an attorney cannot access a retainer until work has been performed and the client has been billed. This is ideal for long-term clients and for cases requiring ongoing work so that a lawyer can pay themselves more easily. However, when taking retainers it is extremely important to be overly communicative with clients so that they know exactly when they will be billed, for how much, and if their retainer amount is running low.
Implementing Flexible Pricing with Modern Tools
Having a variety of flexible pricing options is just one of the ways to modernize your law firm and make it stand out from the competition. However, without the right tools and software, implementing different pricing models can add a lot of complexity and stress to your day-to-day operations.
This is why thousands of forward-thinking law firms across the country are increasingly relying on legal payment platforms like LawPay to streamline their billing and payments. LawPay was designed from the ground up for the legal profession and helps attorneys get paid an average of 39% faster. To easily implement new payment models in your office that can increase your cash flow, schedule a demo today.