Setting fees for legal services is obviously a major issue to consider, not only when establishing your practice, but throughout the life of your law firm. There are various ways to price your fees. Some methods require heavy calculations, while others simply require you to survey the market to help determine your fees.
There are three major pricing methods businesses use, according to research in the MIT Sloan Management Review:
- Cost-Based Pricing: relies on an analysis of the business' operating costs to determine how to set the price to break even or achieve a certain return.
- Competition-Based Pricing: looks at data on competitors to determine appropriate pricing levels.
- Customer Value-Based Pricing: focuses on the customer's perceived value to determine price.
Pricing for services versus products can be challenging, say the authors of Pricing of Services: An Interdisciplinary View, because the nature of services involves a level of intangibility, and the services are so intertwined with the provider of the service.
Applying Pricing Methods to Legal Services
1. Cost or Overhead Plus Method
This cost plus or overhead plus method of pricing requires that you determine your annual costs of operating a law practice. Annual operational cost is calculated by adding all expenses connected to your practice, such as office rent, equipment, salaries, supplies, taxes, insurance and utilities.
Then, calculate the number of hours billed in a year. Go back through time billing records to help determine this figure, or estimate the time spent on matters.
Next, divide the annual operating cost by the number of billable hours. This calculation will yield your practice's overhead cost per hour. The overhead cost per hour is the bare minimum you need to break even with your law practice.
Finally, add an amount to the overhead cost per hour to arrive at your hourly billing rate. The amount added should reflect the profit you realistically expect to realize from running your practice.
As the MIT research and the The Services Industries Journal article cited above both point out, the drawback of this method, when used on its own, is that it doesn't take into account what competitors are charging for similar services, nor what customers are willing to pay.
2. Competition Based Method
A second major method of setting prices is to survey the market for similar legal services in your community.
Determining other attorneys' prices can involve talking with other attorneys, investigating their advertising materials for some indication of what they charge for any given transaction or matter, or conducting research into average rates for similar services in your area.
3. Customer Value-Based Method
The customer value-based method looks to the customer’s perceived value of the service as the basis for the price. According to the cited articles, while this can be difficult to ascertain and does not take into account prevailing market rates, it can be particularly appropriate when an attorney is providing niche or specialized services.
Incorporating elements of each method may be beneficial, depending on the nature of the services you provide. The Pricing of Services: An Interdisciplinary View article contains a multi-step pricing procedure that utilizes certain aspects of each method.
Other factors can affect pricing, says the National Consumer Law Center's U.S. Consumer Law Attorney Fee Report, including: years of practice, firm size, location, specialization, reputation, advertising, and client relationships.
The scope of this article also does not address the many different types of client matters that may arise or issues specific to a particular case. For any given matter, however, you should ask yourself:
- How much time and effort is required to adequately handle this matter?
- Do you have any particular skill in handling this matter?
- How much money is involved in the matter?
- How and when do you get paid?
- Is the proposed fee reasonable under the circumstances?
- Does your proposed fee comply with your state's ethical rules?