Law firms are a business. Like any service business, law firms must find clients, offer valuable services, price those services, deliver them and pay those that help deliver them. What’s left is gravy. The better the price and the lower the cost, the more gravy left over. Unfortunately, some service businesses (including law firms) are leaving money on the table through the use of the billable hour.
The key to better pricing involves setting prices that capture value – and value, I’m afraid, is subjective and ever changing. For example, airlines really understand the principle of value pricing. They constantly adjust pricing of a single ticket based on changes in traveler-centric variables such as number of connections, how far out you are booking, flexibility in travel dates, desire for comfort/upgrades, and sections of the plane.
I know what you are thinking. Why should you even consider adjusting the way you price your legal services? For one, your competitors are doing it. Your business, whether you think so or not, is inherently defined by the value you bring to your clients - what they actually get for their money, not how much they pay overall. How you service your clients, as well as how you price your services, speaks volumes about what value you bring to the table. But know this: value depends more on the vantage point of your client. And you have to price accordingly.
Value pricing, in contrast to billing clients by the hour after services are completed, is an upfront discussion about what your services would be worth to a client. It is essential that both your firm and your client benefit (profit) from the relationship and the exchange of dollars for services. Does this example ring any bells?
Firm estimates that a matter will cost the client $25,000 based on $250 x 100 hours to complete the work. Client balks. Firm reduces price to $20,000. Client accepts thinking they got a deal, but firm is now annoyed for having to take a $5,000 cut. Firm enters into the agreement reluctantly and decides to stay “tight on budget” and “avoid going the extra mile.” Client is underwhelmed by the outcome, may pay late, probably won’t refer any additional work, and chances are, client won’t rehire the firm in the future. Firm must continue to look for that next client.
FACT #1: Clients do not evaluate the value of your services by the time it takes you to complete a task. They evaluate you by the result, the outcome, the deliverable that you produce for them.
FACT #2: The lowest price does not necessitate the optimal outcome. Sometimes, you need to say “no” to a prospect, especially if they refuse to be reasonable when it comes to pricing.
FACT #3: Lawyers have been billing by the hour since before you were probably born.
So why don’t more firms value price? The trend in alternative fee arrangements is beginning to take hold. This is being led primarily by large firms and by GC’s who are putting increased pressure on their legal service providers. But there are still some major road blocks standing in the way:
Status quo – change is difficult
Time sheets – prestigious handcuffs, pride
Real and perceived costs – changes required in compensation systems; billing systems; legal project management; training; “profit per partner”
One size doesn’t fit all – this goes for clients and firms
Here are some insights I’ve collected from my time working with small firms, helping them navigate the saturated market for legal services, and even in my journey of pricing my own services.
1) Know your costs upfront, not after – make sure before you get started you understand who will be doing the work, how much they will get paid to do the work and other firm costs that will directly affect this work. Forget hourly bill rates and look at business costs to deliver services such as salary, benefits, overhead, research and filing costs. These are the effective costs that at the end of the year will determine your profit. If you want to evaluate profitability by matter, allocate a portion of these costs commensurate to the same time period you will be working on the matter.
2) Pick a client as a test run…Have at least two detailed conversations with them – use these conversations as a window into a) what the client really needs from you – the business need for legal services, b) the circumstances of how they need you and c) what they would be willing to pay for it. We have example conversation points and probing questions in our training materials, but make sure you plan the conversation in advance. It takes many years and many failures to be good at “winging it.” Discuss what your prospective client expects from you as well – and actively listen to their answers. They can give you clues as to what aspects of your services they highly value.
3) Regroup – once you’ve collected information on scope and price sensitivity, you need to formulate a pricing plan. Until you master this process (the art and science of it), I suggest you spend time away from the prospect and in concert with a trusted advisor or business partner. Prioritize what your prospect said…what is most important to them? Speed? Quality? Expertise? Service? Price? Or perhaps they value one specific service more than another. Make an outline of what their business priorities are. Consider weighing the value of each in your process. Make sure you answer: what is the outcome or result that this prospect is looking for and what is the perceived value of that result? Also - know what is happening inside your firm and what resources you do and don’t have available. Look to break more complicated matters into smaller, more digestible steps that can be priced in phases.
4) Price the customer and the outcome not the time it takes to work for them – this is a multi-step process to determine the value to the prospect of the expertise and the solution(s) you bring to the table. This requires you stop being a lawyer for a moment and become a consumer of legal services. Ron Baker (VeraSage Institute) has been working with services providers for years and outlines the development of three pricing options for each piece of work or a portfolio of work:
A Reservation Price – your basement price, useful for clients who are overly price sensitive
A Moderate Price – one that both sides should be comfortable with, and
An Aspirational Price – one that would deliver exceptional value. Start with this price or you will never get it.
5) Provide options – if you give a prospect a single price or a single option as to the breadth of work you will do, they only have two options for a response: “yes” or “no.” If you provide a range of options, you open the door to negotiating the price, the scope of the work, the circumstances involved and many other items. This is a much “stickier” way to build a relationship because it encourages dialogue.
6) Seek closure and feedback– once the matter/project is complete, conduct an after action review to determine whether the work and the results were successful. This should capture both client feedback and your own – specifically around the value delivered and the fee arrangement. Learn from your mistakes and don’t make them again on the next one.