Understand how discounts cut into firm profit margins, and drive demand for more volume

For this post, keep in mind your primary law firm. If its average standard rate is $400 per hour with a gross margin of 35 percent, the firm makes a profit of $140 each hour. The 10-percent discount ($40 per hour) you request reduces that profit by nearly 30 percent. Hence, the firm needs 40 percent more fee volume to earn the same total profit it would have enjoyed without the discount. Legal Week, Vol. 9, Dec 6, 2007 at 26, explains this dynamic.

Here is an example. If the firm logged 100 hours at standard rates, it would bill $40,000 and earn a profit of $14,000. If the firm discounts its $400 an hour rate by 10 percent to $360 an hour, it would bill $36,000 and earn a profit of $10,000, which is $4,000 less. To recoup that lost profit, the firm would need to bill approximately 140 hours at the same 10 percent discount level ($360 per hour times 140 hours at 28.5% margin) = $14,364.

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