Each year, the bar association puts out a report of the average hourly rate for lawyers across different demographics and practice areas. It’s sold as an economic survey, but really it’s an excuse for lawyers to keep charging astronomical rates because, look,
Setting pricing can be difficult, so I understand the appeal of simply using the rate the guy down the street charges. While using the billable hour is one of the worst business decicions you can make, whatever billing model you use, the cost of your business and the value to the client should be what drives your pricing.
To explain what I mean, I’ll walk through the steps I took to figure out my pricing. (Spoiler alert: it didn’t involve surveying other lawyers.)
Step 1: Determine Your Fixed Costs
To start, identify the fixed costs you pay each year. If you know your numbers (and you should), these will be your operating costs. Anything you need to pay to keep the lights on. For
- Advertising and marketing
- Association
dues - Cleaning and trash removal
- CLEs
- Credit card processing fees
- Filing fees
- Internet
- Liability insurance
- License renewals
- Loan payments
- Office supplies
- Parking and transportation
- Phone and answering service
- Postage and delivery
- Rent
- Software
- Support staff
- Taxes
- Utilities
- Website and hosting
Once you’ve got your list, identify how much you pay for each expense per year. If the cost isn’t always the same, figure out an average. Once you’ve got the yearly number, divide it by 12 to get the average cost per month. Then, total everything up to get your total fixed costs per month.
Step 2: Determine Your Ideal Compensation
Next, figure out what you would ideally like to earn each year. This number should be pre-tax, so if you are thinking of what you’d like to take home, you’ll need to reverse engineer to figure out what your pre-tax compensation would be. (I know, math, right?)
Got your number? Great, divide it by 12. That’s how much you’d like to earn each month.
Step 3: Calculate Your Target Revenue
Take your average monthly costs and your desired monthly earnings and add them together. This number is what you need to bring in each month to keep the lights on and pay yourself. This number is your monthly revenue target.
That wasn’t so bad, was it? Ok, let’s keep going.
Step 4: Identify Sources of Income
Now that you know your target revenue, next we’ll focus on how to get there. To start, make a list of all the sources of income your firm can generate. For most of us, this list will be the different types of cases we handle. If you do other services, however, like mediation or court-appointed investigations, your list should include those as well.
Once you’ve listed your sources of income, identify how many you could complete each month, considering the totality, how diversified you want to be, and how much you want to work. If certain types of cases take longer than a month to complete, but you know, for example, you could handle one worker’s comp case every quarter, indicate 0.25 next to that case type.
Before you move on, take a step back and look at your numbers. Are they realistic? If you brought in that number of cases next month, would you be ok? Are you setting yourself up to be burnt out and unable to provide the best level of service to your clients? Or, are you selling yourself short? Could you add another case or two?
Alright, now that we know where the revenue will come from that will cover our monthly costs, let’s pull it all together. (Drumroll, anyone?)
Step 5: Calculate Your Price
To figure out pricing, take your target revenue and divided it by the total number of cases you indicated you could complete each month to get the average price per case. For example, if my target revenue is $10,000 per month and I can complete 5 cases a month, the average price per case should be $2,000. Or, if I’m working on a subscription model, if I can serve 10 clients a month, the average subscription fee should be $1,000 per month.
Take a look back at your income sources. I’m sure for some types that number will be far too high and for some, it will be far too low. That’s why it’s an average. You can play around and tweak things. The important thing to remember is the average is all you need. It’s all you need to cover your monthly costs and pay yourself what you said you wanted to earn each month. And, no, it’s probably not what Joe Lawyer down the street charges, but that’s ok because his clients aren’t actually paying him because he’s too expensive.
Once you’ve got your average price per income source, you can take whatever additional steps are necessary to drill into your particular billing model. If you work on a flat fee basis, congratulations, you’re done! If you’re using a subscription model, you can establish different levels of service and calculate the cost based on your required average fee. If you are still using the billable hour (and you really shouldn’t be), you can divide the average price by the average number of hours required to get the work done to get your hourly rate.
At the end of the day, what clients buy is the value we provide not how much effort we expend. Regardless of your billing model, the price should reflect the value to the client.
What many of us will find is that we don’t need to charge as much as we think we do. The hourly rates posted in the economic surveys are based on ego and not data. The truth is, they look shiny but are not gold. The majority of that rate is never actually earned because clients don’t see the value in it and, frankly, can’t afford it.
By setting pricing based on what you and your business actually needs, you’ll find you aren’t chasing down payments but instead watching your economic growth soar.
How are you figuring out your pricing? Can you set time aside this month to work through these steps and figure out what your business actually needs?
