The ‘Why’ and ‘How’ Behind Your 2022 Small Law Firm Rate Increases

As you check off items from your year-end to-do list, 2022 rate increases may be one of the most important items for your small law firm to consider. A hot legal market continued in 2021 — demand for firms was up 7% overall in the first nine months of the year, and revenue rose 14%. And while your small firm may not be considering the 5% to 10% rate increase predicted among the Am Law 100, now is the perfect time to figure out the right 2022 rates for your firm. 

The Why 

The first and most obvious reason any small law firm would increase its rates: It’s the easiest way to boost profits, one of the three primary goals of any law firm. Rate increases also can help balance out low collection rates; more money from your responsible clients can make up for the bill-dodgers. One caveat: Make sure your increases aren’t too high, or your rate of nonpayment may skyrocket and dash your careful planning. 

The How 

Set client expectations. From their insurance premiums to their streaming plans, clients are accustomed to annual rate increases from the services they rely on in their everyday lives. The same goes for your small law firm; if you’re providing clients with valuable legal support and delivering a positive result, they’ll understand the need to increase rates to support your continuous improvement.  

Depending on your area of law, you may want to include an annual rate increase in your retainer agreements. Spell out the reasoning when you’re signing contracts, including inflation and costs, to ensure transparency with clients. But firms in more empathy-based fields like family law likely won’t follow this path. 

Do your research. Consider competitors, your market, your area of law and your collection rate when figuring out your 2022 rate hikes to make sure you’re in line. Even a $10 hourly increase likely won’t dissuade someone from working with your firm, and can be used as a client recruiting tool. In law, clients get what you pay for, so a higher billable rate shows your expertise and trustworthiness. 

And just because you’re raising rates for one employee doesn’t mean a change needs to be made across the board. Rate increases should go hand in hand with promotions in line with your firm’s performance reviews; higher salaries need to be supported by higher billable rates. But it also may be a smart strategy to keep some attorneys at a lower billable rate for your more cost-hesitant clients. 

Apply your existing metrics. While you complete your daily work in Smokeball, you’re also developing the valuable metrics that inform smart 2022 rate increases.  

• Collection rate. If it’s extremely high, it’s likely a safe time to pull the trigger on your raising rates. If it’s lower, ask yourself if you’re ready to gamble. Do you keep your rates and your status quo? If you raise rates, will it balance out a lower rate of payment? 
• Smokeball firm insights. From matter-type profitability to referral revenue, these insights offer a real-time snapshot of your firm’s success. Understand each staff member’s volume of work on an individual matter; these numbers in particular help fixed-fee firms see the actual value of their services by comparing hours worked to fee collected. 
• Activity time tracking. Do you need to raise your prices, or just your productivity? Activity time tracking helps your firm calculate the actual cost of your time and understand your profit margins. Some firms are highly effective and just need to raise their prices, but many can become more efficient by using data to revise their processes.

Don’t forget! 

Make sure to update your client retainer agreements no later than Jan. 1, as well as your rates in Smokeball. Otherwise, you’ll kick off the new year with incorrect bills and cranky clients instead of a fresh start.