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Billing Rates - An Art, Not Science

When you are running your own business, one of the most difficult things to do is to decide how much you are going to charge. You want to price your services at a point where your customers feel like they are getting value for what they paid for but, at the same time you need to make a fair profit. Here are some points that you should consider before determining the price for your services. Always remember, the rate is not cast in stone it can, and probably should, change over time as you gain more experience and more practice at pricing your services.

The Basis of Setting the Rates: When determining your rate, you have three different methodologies options to choose from:

  • market-based

  • cost-based

  • value-based

Let’s go over each one individually.

Market-Based – This simply means figuring out what other lawyers are charging. Sounds easy, but sometimes getting at and evaluating this info can be a bit challenging. When I first started out, I just picked up the phone, pretended to be a prospective client and flat out asked what it would cost to do an individual tax return for me, my home-based business and my rental property. So, now I had this whole list of tax preparers and a whole range of rate quotes for the exact same tax return. Now what!

Next step was to say, okay, why are the rates different. Some factors that can impact rates are location, credentials, experience, or specialties. Example, if the firm I called to do my pretend tax return was in San Francisco, I would expect the tax return to be more expensive then a comparable firm in Walnut Creek. Or, if the tax preparer I called had only 2 years of experience and would expect them to be less expensive than a similar tax preparer with 20 years of experience. Same process applies to lawyers.

Cost-Based – Depending upon the health and completeness of your books and records, this could be easy or challenging. To put it in a nutshell, this methodology is based upon how much it costs you to be in business and using that number to determine your billing rate. An example:

Operating costs like: rent, subscriptions, phone, etc $ 50,000/yr

Amount you would like to make $150,000/yr

Total cost to operate your firm $200,000/yr

Target billable hours per year – 1,000

Calculation: Total cost/billable hours per year = $200/hr ($200,000/1,000)

Tricky part here is making sure you meet your billable hours target per year. For example, if you targeted 1,000 billable hours per year, you will cover your total costs of $200,000. If your actual billable hours came in at 750 instead of 1,000, then you are only able to cover $150,000 of costs. Ugh – that means your income is going to suffer.

Value-Based – This method involves pricing each transaction individually from the viewpoint of the client and the value the client assigns to the service. Once you figure that out, you can make the choice of whether or not that meets your minimum in order to stay in business. An example will make this clearer. Potential client walks through the door and wants a simple will. After interviewing the client and asking all the appropriate probing question, you determine that the client has assigned a value of $500 to that simple will. In order for this transaction to move forward, the value to you of preparing that simple will must be at or less than the $500. Obviously, this method does not work well for many practice areas, but in places where the project is well defined with few variables, it might be an appropriate methodology.

So, I am going to say it again, your rate is not cast in stone. It will and should change as you gain more information, experience, or understanding of the competition in your area. And, as you develop your unique value in your market, don’t be afraid to re-evaluate your rates. Takes a bit of courage and a bit of risk, but it might be worth it.

Side note, remember there are ethical rules governing charging a reasonable rate and contingent fees, check with the Bar Association in your state if you have questions.

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