Avoid These Mistakes Immediately for Your Law Firm’s Growth: A Comprehensive Guide

December 21, 2023
image of a watch and money showing how lawyers should calculate their billable hourly rate

How does your location effect your billable rate?

I’m going to be honest with you, this is the most important factor.

There’s three categories that I’ve created for figuring out how the city that you live in affects your rates.

Tier one cities, these are the most expensive cities to live in. I want you to look at the cost of living, the cost to buy a house. How much do groceries cost? What does gas cost? That is a tier one city. Tier one means New York, San Francisco, Boston, Seattle; very expensive cities where it costs a lot of money to buy things, especially property. This is where you see high hourly rates in the U.S, no matter what type of case you are handling.

Now I’m going to give you a tier three city next because it is the easiest to contrast. A tier three city is going to be a place where you can buy a home and have an easy, comfortable lifestyle without having to earn millions. You can buy a house for $300,000 to $400,000. It’s it’s easy living, it is affordable, gas doesn’t cost a lot, groceries are significantly cheaper, rent is cheaper. No insult to anyone if you are in a tier three city. If you are anywhere in Wyoming and Idaho in North Dakota, those are going to be your tier three cities, which means the cost of living is significantly affordable. This is obviously not an exhaustive list of cities and smaller towns that fall into this category. Go online and see what are the most affordable cities to live in today. The lawyer rate per hour in a tier three city is going to be the lowest average ratefrom the three tiers.

By default, tier two is going to fall right in between. I personally think I live in a two tier two city. I live in Atlanta, Georgia. It is not expensive, like New York, and it is not inexpensive, like any place in North Dakota, it is right in the middle. The cost of living here, the cost to buy groceries, is not as expensive as New York, but it’s also not as affordable as Wyoming. Same with housing. Same with rent all of those things. You can Google search mid-expensive cities to live in, and you will see more cities that fall under this category.

Once you figure out what city you live in (tier 1, tier 2, tier 3), you can move on to the next part, which is figuring out how your practice are effects hourly rate data.

image of the US

How does your practice area effect your billable rate?

If you are practicing general business law, employment law, or you are writing contracts for small business owners, or you are helping clients in small claims court, then you’re in general practice field of law. This is not a niche or specialty area of law.

If you are practicing immigration, copyrights or trademarks, if you are an estate planning attorney, if you are a personal injury attorney, I do not consider any of these niche areas of law.

What do I mean by specialized area of the law? For example: your colleague who went to MIT undergrad, has an undergraduate degree in engineering, then went to law school, and is now a patent attorney at a big shaving company and is filing patent applications for for them based on the various kinds of razors that they’re manufacturing, and understands the engineering mechanisms inside of those devices to be able to get utility patents and other kinds of patents for them and can also do patent litigation and patent prosecution. That is a specialized area of law.

If you are an insurance defense attorney, who worked in an insurance defense office for 15 years, and you’ve worked with very highly specialized areas of insurance, such as swaps for ISDA contracts, then yes, your practice area is a bit more specialized.

But it’s not as specialized as your colleague with the Engineering degree. Your average hourly rates are going to differ significantly, and your colleague with the degree is going to have rate increases that will likely surpass yours.

If you are a general business attorney who’s writing contracts, or you are an estate planning attorney, you are not specialized in the same way, and these two fields do not command higher rates (e.g., $900, $1,000 per hour).

How does the numbers of years you have been in practice effect your billable rate?

How does the number of years that you’ve been in practice impact your lawyer fee? Let me be honest with you, I’ve seen many experienced attorneys charging what new attorneys charge, and there is no justifiable reason for this, other than the newer attorney is more bold.

Maybe the newer attorney is working with a law firm consultant like me, who is advising them to charge over 300 per hour, even though they may want to charge in the range of 200 per hour.

What I’ve seen with attorneys who have been practicing for a longer period of time, and aren’t commanding those same rates, is that when they started practicing law, they charged $200 per hour. Then they slowly went to $225. Then they went to $250, and then there was talk of a recession. Then when they did increase their rates, maybe in 2021, they raised it to $300. But it was after 10 years in practice. Nod your head if you’ve heard this story before.

Maybe this is you, right now.

Please know that you may charge lower, but it’s going to take you that much longer to get to a higher billable hourly rate.

The number of years that you’ve been in practice is an indicator of experience.

For the same reason that you may take your car to the dealership, versus, the auto shop on the corner, you’re doing so because of the years of experience. You’re assuming that that dealership has people who have worked on these cars for years and years, not someone who graduated yesterday?

You want to make sure that your hourly rate captures, effectively, the number of years that you’ve been in practice.

image of a junk beat up car

What a low-ball lawyer hourly rate means for potential clients, especially corporate clients

Let’s now talk about what happens when you price yourself too low versus when you price yourself right, in line with the market based on where you’re located, the practice area and the years that you’ve been in practice.

Think about McDonald’s. When you go to McDonald’s and you order off the menu and you see the McChicken sandwich is it’s 99 cents. What do you think to yourself? Is that real meat? Am I going to be sick? Is this worth 99 cents? Maybe I should just spend a couple more dollars and go to Chick fil A instead?

I want you to think of your hourly rates the same way, when you are charging too little when you are not charging what is expected for someone with your level of experience and expertise, potential clients are thinking you’re McDonald’s. Nobody wants to go to McDonald’s and get sick. Nobody wants to hire you, and then regret having hired you.

Everyone is assuming that you get what you pay for. If you hire the $200 an hour family attorney who doesn’t have an office, guess what you’re getting? You are signaling to potential clients that you are the equivalent of a McDonald’s.

As a lawyer, you don’t want to be seen in that same level of a 99 cents menu.

image of a road sign that says cheap with expensive crossed off

What a higher attorney hourly rate (above 300 per hour) signals to clients

I want you to think about a luxury car. Are you thinking about Mercedes, BMW, Porsche? Odds are you’ve probably thought of one of these cars. As soon as I said, “luxury car,” what do you expect when you’re in a luxury car?

You expect a  fast engine, you expect leather seats, you expect a heated steering wheel. You expect to pay more for a luxury car. The same is true for your services.

You are signaling to people, you are luxury, people are going to get results from you. If you quote your rate at $300, $400, per hour, potential clients are thinking: “Wow, she must be really good at this if she’s charging this much.”

You’re going to have people who say “I can’t afford that” and hang up on you, which is okay. You will get 10 of those calls every week.

But for every 10 calls that hang up on you, you’ll get at least one who says “Sign me up. Let’s do this.”

It’s those nine calls that come in that prevent attorneys from charging what they should actually be charging, based on their location, their practice area, and years in practice,

Let’s keep talking about what I see attorneys doing, which is one of the biggest mistakes that they make when they are pricing themselves based on their hourly rate. Ready for the mistake? Here’s the mistake.

What most American lawyers don’t include in their attorney fees, even if they charge flat fee or have fee agreements

Every attorney I know does not take into consideration all the work that they went through to become a lawyer to justify their hourly rate. I’m going to take you through this exercise:

  1. You went through undergrad paid whatever you paid

  2. You took the LSAT, you probably paid for a prep course

  3. You applied to law schools, which by the way, wasn’t cheap. Even when I did it. I applied to 10 and each application was $75. I was a college kid paying almost $1,000 for law school applications, which is insane.

  4. Then you got into law school and spent the three years there. You spent the time and the money to be in law school and didn’t work during that time

  5. Then you paid for a bar exam course, whether it was Barbri or Kaplan, or whatever you took, and you spent money on that.

  6. Then you had to go through the Character & Fitness committee to finally become an Esq.

That’s everything you did to become a lawyer. That’s the minimum of what I did to become a lawyer.

And that only includes what you did from undergrad on that doesn’t include if you went to a private high school or private middle school, or if you interned somewhere at your dad’s law office.

You have spent so much time and money to become a lawyer that you forget to include that when people hire an attorney, like you.

And every single attorney I meet could 100% be charging more, but attorneys are likely scared to charge more. Attorneys must take this into consideration.

Nermin’s recommendations on increasing your billing rates, no matter what your practice area is

Now, before I share my recommendations, please know that some of this is going to be an experiment.

You can’t experiment by going from $300 to $500, an experiment is testing $475 or $500.

While you are experimenting, I would recommend starting higher for your legal services, because if you start lower you can’t go back. It’s better for you to charge higher, and then come down a little bit if you feel like people just aren’t biting. Come down by $25 or $30.

You should increase your hourly rate every year

Make sure you increase your hourly rate every single year. Even if it is by $15 $25. Every year. The cost of living goes up every year, when you go into Starbucks that 12 ounce coffee now costs 20 cents more than it did last year. That’s because you have to adjust for inflation.

Make sure that you communicate your increase in prices in advance to your client, this should be done no later than 60 days before the end of the year. What does that mean? That means on October 31, November 1, you are going to email, send out a paper copy, however you communicate with your clients; you’re going to let them know that prices are going up. You don’t need to justify it with a 15-paragraph letter.

There are two times in the year when it’s okay to increase your rates. My preference is for you to increase your rates at the end of the year so that you can start the new year at new rates. And everybody expects that. However, every so often, I will suggest to a lawyer that they increase their rates mid year. It means June 1. I usually do this for clients who haven’t increased their rates in 3 or more years and I don’t want to wait until next January for them to get a bump in revenue.

The road ahead for lawyers, post pandemic

The legal industry is changing, and the current legal landscape was impacted significantly by Covid. Many attorneys went from working in offices, to working from home. Many were let go from their law firms and have started their law firms to take control of their finances and their schedule. The legal profession will always be around and legal assistance will always be needed.

An attorney’s hourly rate, retainer, and fee arrangement is a reflection of their skills, experience, and market that they practice in.

Now, before I share my recommendations, please know that some of this is going to be an experiment.

You can’t experiment by going from $300 to $500, an experiment is testing $475 or $500.

While you are experimenting, I would recommend starting higher for your legal services, because if you start lower you can’t go back. It’s better for you to charge higher, and then come down a little bit if you feel like people just aren’t biting. Come down by $25 or $30.