So, what should I charge? Maybe you’ve started your own law firm or have recently been named partner. Regardless, this is a tough question to answer, especially when the decision will impact how much revenue you (or your firm) earns.
There are a variety of factors to consider, and your job is to find that middle ground that balances your needs as a business with what your clients are willing and able to pay.
Setting your law firm up for long-term financial success may sound like a daunting task, but you don’t need to be a financial wizard, or even a “numbers person,” to understand and calculate a few key financial metrics.
Here are five easy steps for evaluating whether your services are priced appropriately:
1. Think about the product(s) you’re offering
Legal services can be packaged in a variety of ways to deliver value to the client. Viewing your professional services as a product can be uncomfortable (don’t worry, you’re not commoditizing the work you do), but doing so allows you to more easily develop a unique value proposition for what you sell—an important step when it comes to value-based pricing.
In thinking about the products you offer, get as narrow as possible: Are you a cannabis lawyer in Oregon? Or perhaps you’re a family law attorney for same-sex couples? Finding a market niche is a great way to make your services more exclusive to your clients’ needs.
2. Identify your revenue model
There are two important things to consider here: 1) market forces or client requirements and 2) operational requirements.
Always start with what the market is demanding. If you represent small business owners, they may want an hourly arrangement so they can engage with you as unique things pop up. Or maybe you serve the startup industry, so your clients demand a flat fee because they need insight into total cost of services.
Next, look at the operational requirements of your revenue model. If you bill by the hour, you need a way to easily track your work and issue simple invoices based on hourly rates.
Tools like Tali make it incredibly easy and simple to accurately capture all of your billable time, and practice management solutions like Clio, Rocket Matter and Practice Panther make it easy to manage your cases and issue invoices.
If you do flat-fee billing, you still need to issue invoices. But guess what? You also need to track your time! Flat-fee billing requires an operational process around regularly analyzing your price list and doing a lookback analysis to determine how much income you generated from your flat-fee projects.
3. Consider your customer acquisition costs
The unfortunate truth is that it costs money to find clients, but knowing how much it costs will help price your services appropriately.
In short, customer acquisition cost (CAC) represents the time, effort and marketing dollars you spend on getting leads and converting those leads into paying customers. These costs will differ by practice area and geography, but every law firm, including yours, can calculate this number.
For law firms, your CAC should include any marketing spend (paid social media ads, targeted mailings, etc.), as well as the time you and your staff spent acquiring clients.
4. Determine your case value and customer lifetime value
Once you know how much it costs to acquire a new client, you should understand:
- the average amount you earn on a case for that client (i.e., the case value); and
- how long that client remains a client and how much business value is received over that time (i.e., the customer lifetime value).
Start with revenue—look at your bill rate or flat fee on a particular type of project or for a particular practice area.
Next, look at how much profit margin you’re generating on this revenue. Consider the cost of the time you spend on each case. (This is exactly why you need to track your time, regardless of whether you bill by the hour or do flat-fee billing!)
Then, consider the lifetime value of your customers. If you’re a family law divorce attorney, your clients are most likely (but not always) one and done. However, if you have a real estate practice, you could see continued business from the same client.
5. Understand your fixed costs
Lastly, you need a firm grasp on how much money you are spending to support your law firm as a whole. These are fixed costs that exist whether you have one client or 100, and are not directly attributable to revenue-generating activities. Legal technology (like your practice management system), rent, and support staff would fall into this category.
Tracking these key metrics not only helps you set your pricing but most importantly, helps you understand whether your law firm is sustainable in the long term.
By focusing on unit economics (specifically, customer acquisition cost and lifetime value), you can determine whether your pricing (i.e., revenue) or service levels (i.e., your time) need to be adjusted in order to run a financially viable business for years to come—something that will make you, and your clients, happy.