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Higher Hourly Rates Don't Always Mean More Revenue

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By Casey C. Sullivan, Esq. on October 25, 2016 12:57 PM

If you want to increase your law firm's revenue, think twice before raising your rates. That's the take away from a new report by Thomson Reuters Peer Monitor, which surveyed data among firms and found that those who raised their rates the slowest tended to have higher demand and revenue.

The report's results go against conventional practice, which typically sees firms raising billing rates in order to grow revenue -- a practice that could need some rethinking, in light of the study's findings.

Lower Increases, Higher Demand

The Peer Monitor report looked at data from the past three years in order to see how rate increases correlated to demand. That includes data across three cohorts: Am Law 100 firms, Am Law Second Hundred firms, and midsized firms. It found that slower rate growth is associated with more demand. For example, among the nation's largest firms, the average rate growth declined from 4.1 percent in the first half of 2014 to 3.0 percent in the first half of 2015, while demand grew from -0.1 percent to 1.3 percent. When rate growth bounced back up the next year, demand growth dropped again, to 0.2 percent.

In midsized firms, the drop and rate growth and the increase in demand was consistent throughout the years studied. Midsize firms cut back their rate increase from 2.5 percent in 2014 to 2.1 percent in 2016, while demand steadily climbed, from -0.8 percent in the first half of 2014 to 1.6 percent by the end of the three years.

What's It Mean for You?

Raising your rates might mean leaving money on the table, according to the report. Overall, Peer Monitor found that firms that increased their rates by higher than 2.7 percent saw an increase in fees of 2.4 percent. But those firms that increased their rates less than 2.7 percent saw their fees grow 3.2 percent.

So, should you cut your planned rate increases and make up revenue with skyrocketing demand? If only it were that easy! As the report notes, "For any given firm, increasing or decreasing their rate growth may not necessarily produce a similar effect on demand and revenues." But the data does show that the conventional approach of raising rates to increase revenue might need some reconsideration, or at least fine tuning.

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