The price is right?

31 01 2011

For a number of reasons, I’ve been thinking about price a lot this week.

The head of the dispute resolution team was unconvinced his business development director had got the price right on this bid

Firstly, the Holden Group’s excellent newsletter plopped through my virtual letter box with a leader on righting the wrongs of panic pricing. Next the Harvard Business Review had a very thought provoking article on adaptive pricing strategies, and finally, I went to an internal workshop with one of our group pricing specialists (looking at the link between product strategy and pricing).

Much is written about the death of the hourly rate and the new pricing models emerging in the legal profession, but there seems to be less material about the “why”, which to my mind is an important step before the “how”.

In the past, much law firm pricing often didn’t go much beyond volume based discount: If you spend £X (thousand/million – delete depending on size of account) with the firm in a year, we will discount our hourly rates by Y%.

The rationale presumably included a desire to make the pricing appear more competitive, to encourage a higher spend by the client, and to make the client feel “valued” (in reality of course, this strategy doesn’t do much to connect the firm’s activity to value delivered to the client at all, but that’s a subject for another post).

With law firm clients becoming more savvy purchasers these days, this type of model is likely to be met with questions about additional discounts for single sourcing, requests for further discounts coming from efficiency gains, and discussion about how the firm will provide an optimal team structure and resourcing model.

Now while it easy to find fault with what is a fairly unsophisticated model of discounts on hourly rates, I spoke to a general counsel of a listed company last year, who proudly told me how with one of his regular advisors, he regularly negotiates 50% discounts on his bills.

The idea of a notional discount (whether volume based or otherwise) clearly appealed to him, and he seemed genuinely surprised when I suggested that the law firm might be anticipating this conversation and factoring this into their pricing. I also made the point that negotiating bills every month might not be the best use of either his time or the partner at the (very well known!) law firm, but I began to wonder if he secretly enjoyed the process and the little victories it brought (I know, I know, I’m no Sigmund Freud).

When it comes to pricing strategies, the other other “old favourite” of the law firm tender is the “we’ll buy the work” approach – the idea that the firm will price very low (often at or even below cost) to win a significant piece of work, and then develop a relationship with a client which will allow the firm to secure an ongoing stream of more profitable work.

While of course penetration pricing is a proven strategy in plenty of other markets, my concern here is that many law firms don’t back this approach with the rigor needed to execute it successfully. Firstly, the scope of the project is often underestimated leading to higher costs than anticipated. Secondly, the price is set by reference to a figure that the law firm believes is needed to win the work. Rather than being based on real competitive intelligence, or with reference to a database of market prices, it is often just “gut feel” or based on informal signals from the client as to what will be needed. I’m a big believer in intuition in the right context (Blink by Malcolm Gladwell is well worth a read) but with a pricing decision, it should be one of many factors taken into account, rather than the only factor.

The post has meandered a little this week, but the key takeaway is before you start to build a pricing model, spend a few minutes to work out what you are trying to achieve. With that in mind you can then build a model that works, hopefully for you and the client, meaning that, as the game show says, everyone’s a winner…..

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6 responses

31 01 2011
Sally Calverley

Thanks Mark, as usual a thoughtful post and helpful in recognising that value and price are not the same!

I would also add that some of the problems you identify can be circumvented if firms have not just a pricing model but a pricing strategy. The overlay of the strategy recognises that not all clients are equal and guides partners as to when and how variations can (or can not) be agreed. Discounts are a very quick way of eroding profits if not handled carefully and with forethought. What’s more, unless backed by a clear resourcing strategy, there can be obvious (but hidden) opportunity costs attached to agreeing a discount for work when another client might well have accepted a non discounted fee. Having a pricing strategy helps to manage this.

What’s more, the discussions that lead up to the creation and implementation of the strategy can in themselves be valuable. They will uncover a whole host of unspoken assumptions about pricing and which clients are worth negotiating with. Some of the assumptions iwll be incorrect and simply correcting these and applying a more consistent approach can have a direct and positive impact on a firm’s profitability.

Sally

1 02 2011
Intelligent Challenge

Thanks Sally – great comment.

To take it a step further, I’d like to see firm’s have a product strategy that would then inform the pricing strategy for that particular product. However, given as many firms lack a coherent market strategy in many areas, I may be being a bit optimistic!

22 02 2011
Moses Clive

Great post Mark. We are developing a pricing model for our clients and this has been very insightful.

22 02 2011
Intelligent Challenge

Thanks Clive, and good luck applying the model. If you are interested in exploring further, I highly recommend Mark Burton’s book, “Pricing with confidence”

5 12 2011
The end of the beginning « The Intelligent Challenge

[…] focus in this area was on consumer focussed legal services, but in the world of commercial law, pricing models continued to vex the profession, with pressure on profits resulting from a growing rejection of […]

7 06 2012
Changes in the Law Firm Market | LAW [beta] | Digital Marketing for Law Firms

[…] the focus in this area was on consumer-focused legal services, but in the world of commercial law, pricing models continued to vex the profession, with pressure on profits resulting from a growing rejection of the […]

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