The decision to use one method over another, or some combination of the two, must be derived from your firm’s particular circumstances and competitive landscape.
Annapolis, Maryland (PRWEB) April 30, 2013
Setting fees for legal services is something that must be considered not just when establishing a practice, but continually as the firm develops and evolves. There are several methods to selecting an appropriate pricing structure for legal services. One primary method for establishing fees is focused more on surveying the market to help determine what is appropriate compensation, while another is more overhead calculation-heavy. An effective fee structure will help secure clients, grow the firm, and ensure a quality profit.
The simplest method of setting prices is to survey the market for similar legal services. Setting fees by surveying the market is more of an art than a science, and it requires extensive research through information provided by other attorneys, their staff, and perusing available advertising materials for insights into the rates that they charge for particular legal services.
The goal of this approach is to set a fee that effectively balances the prices of competitors against overhead. The survey method can be used for everything from establishing hourly fees, to setting flat rates for routine case work.
If this method is used to set your pricing structure, it is best to ask the following questions while keeping client demographic in mind:
- Does the firm have the resources to handle this case?
- Is this a legal concern that can comfortably resolved?
- How much time and other resources will this take up?
- What does the competition charge for similar legal action?
- How and when should the payment be arranged?
- What is at risk for the client, and what is it worth to him?
This calculation-heavy method of pricing requires that you first determine your annual costs of operating the practice. This can be calculated by adding all expenses connected to the practice, such as: cost of office space (including utilities), cost of support staff salaries, cost of office supplies and equipment, cost of local and federal taxes, and cost of insurance.
The next step is to calculate the number of hours billed in a year. For established practices, this can be as simple as going through past time billing records, but new firms will need to estimate the time spent on matters. It is better to overestimate than to be left short when all is said and done. Once these two figures are calculated, divide the annual operating cost by the number of billable hours. This calculation will yield "overhead cost per hour", which is the breakeven point.
The final step is to add a "desired profit" amount to the "overhead cost per hour" to arrive at an hourly billing rate. The amount added should reflect the desired profit from running the practice. This is known as the "billing rate" ("overhead cost per hour" + "desired profit"). A reasonable expectation for desired profit would be 35% of the overhead cost. It would be wise to compare your rate to the competition, and adjust up or down accordingly.
Obviously, if the billing rate is ever less than the overhead cost per hour, you will be operating in the red. Some firms chose to do this to remain competitive for certain services, and then make considerably higher margins on other services to account for the difference. Others prefer to offer all services for a solid profit, regardless of the price-point of the rest of the market, and then have the luxury of doing pro bono work.
The decision to use one method over another, or some combination of the two, must be derived from your firm’s particular circumstances and competitive landscape. Attorneys who are starting their own practices after working in firms usually have a clear idea of the market rates for their areas of practice, while fledgeling lawyers seeking to go solo or start a small firm would be best served by speaking with bar associations and other lawyers in their desired field to help determine a reasonable fee for legal services.
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