How does a law firm make money?

Jul 11, 2022

Written By Thomas Cserep

It is no secret that working in law is a highly profitable career. But how do law firms make money in the first place? First we need to unpack what law firms are and how they operate.

Law firms – the basics

Contrary to popular belief, law firms are not necessarily big international businesses. A law firm is usually a business entity where at least two lawyers agree to work together and practice law.

In a partnership partners bear the profits and losses of the company, which encourages the lawyers involved to work towards the success of the law firm.

But how does the work of a law firm generate profit? Let’s take a closer look below.

Generating a profit as a law firm

Just like any other business, a law firm needs to maximise its revenue as much as possible, while reducing its losses and operational costs.

Law firms generate revenue from the fees they charge clients. Thus, a law firm will make money when the client fees are higher than the combined operational cost of the matter and the cost of having a lawyer work on the case.

A client will choose which law firm to hire for their case based on whether its fees are affordable and if it can help deal with their matter.

Types of client fees

Law firms charge a wide range of different client fees that contribute to the company’s profitability.

For the initial appointment, law firms usually charge clients a consultation fee. During the first appointment the client lays the case on the table and discusses with the lawyer from the law firm what legal avenues they could explore to resolve the matter and whether the process is feasible or not.

The lawyer then charges a retainer fee. This charge is not automatically added to the law firm’s profits. Instead, a set payment is deducted from the fee each time the client requests the services of the lawyer. This fee also ensures that the law firm is at hand for the client, which is especially important in high-value cases.

As you would expect, law firms charge clients for working on their case. An hourly rate payment arrangement involves the law firm estimating the amount of hours it will take to resolve the matter and charge the client based on an hourly billing rate.

An alternative method is to organise a fixed fee arrangement. Here, the law firm will provide the client a flat fee that they would charge to work on the case from start to finish.

Law firms are slowly moving towards billing fixed fees rather than hourly fees due to client demand. An upfront flat fee is better for clients as they are able to compare how much different law firms charge for their particular case.

This in turn increases competition between law firms and they have to become good at estimating the price of their services. Charge too much and you risk losing a client, charge too little and you make a loss.

Increasing a law firm’s profits

To guarantee stable revenues, law firms need to establish a client base on which they can rely on. In order to achieve this, law firms have to be successful in their work and stand out from the crowd.

Standing out from the crowd may involve specialising in a specific sector or area of law. A law firm should find its niche in a legal industry that is already very competitive. Additionally, a smaller law firm will gain less credibility if it markets itself as a generalist.

As we have elaborated here, law firms operate just like any other business, as they make money by increasing their revenue and lowering their costs. The revenue they generate will depend on whether they are able to find their niche in a particular area of law or sector and the amount of money they charge clients for dealing with their cases.

Becoming a Lawyer