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Law firm management

Law firm pricing: Focusing on the right problem

It’s now commonly accepted that law firms lost their pricing power during the last recession. Up until around 2009, law firms could set their fees as they saw fit, with few clients having the audacity to push back. Annual rate increases above CPI were the norm. And while estimates might be provided for defined matters, they were generally ballpark indications rather than capped fees to which we were willing to be held accountable. Ah, the good old days.

If we accept the proposition that law firms have lost pricing power, then how should they respond? First, we need to accept the price proposed (or demanded) by the client for a particular matter or package of matters. We have no option. If we don’t accept the client’s desired price, then we will lose the opportunity and the revenue from it. Having accepted the price, we then need to find a way to deliver the service more efficiently or alternatively be willing to take a hit to our firm’s profit margin for the work. While this may be the “right solution,” we believe it is focused on the “wrong problem.”

Focusing on the right problem

All prices, whether for legal services, consumer services or fast-moving consumer goods are an agreement between buyer and seller. If the buyer does not see value, they will choose not to buy. But if the seller is uncomfortable with the price, they can choose not to sell. In this sense, both buyer and seller always have pricing power. So if law firms haven’t lost pricing power, what’s a better definition of the problem we should be trying to solve?

Perhaps the real issue is that we would like to sell our services for more. We may even believe our services are worth more, but unfortunately some of our clients don’t agree. Clients know they have options and often find it difficult to justify paying more, particularly when they are under increasing budget pressures from various constituents within their organizations (procurement, legal operations, etc.). And clients can always find a less expensive firm. Perhaps the real issue is our inability to  justify our fee to our clients.

It’s not a market problem

Reframing the problem from “a loss of pricing power” to “our inability to justify our fee” has a significant impact. The problem is no longer external (a market challenge), but rather is internal (a capability or differentiation issue). While we generally have little influence over market issues, the good news is that we can address capability and differentiation issues. We are suddenly in control of the solution.

We often hear partners complain that clients struggle to identify – and value – high-quality legal advice. But this is not the client’s responsibility. In all markets, it’s the responsibility of the seller to help the client understand the value of their offering. It’s not inappropriate for the client’s starting point to be that they don’t see a difference between two firms. It’s the firm’s responsibility to not only help the client see the difference between firms, but also to understand why these differences matter. It’s our role to convince clients of the superior value of our offering.

Defining value

The term “value” is used in a broad range of ways in the legal profession. To some, a “value offering” means cheap. To others a “high value offer” means expensive. The term “value-based pricing” is often (falsely) believed to be any pricing that is not based on hourly rates. Firms also talk about “value-adds” which generally means providing benefits without charging for them. If our goal is to convince clients of the superior value of our offering, we need to be clear on what value is.

Value = Benefits/Price

When clients look at the value of our offering, they are assessing the benefits provided, relative  to the price sought. Usually they will look at the value of our offering relative to the value offered  by competing firms. The only time clients focus on price alone is if they see no difference between the benefits we offer and those offered by competitors. All clients aim to obtain the best value, not necessarily the cheapest. If we wish to succeed, we need to demonstrate we can deliver superior value.

Value is in the eye of the beholder

We need to be clear on how we can deliver superior value to our clients. If we do not understand the value we deliver, we will have no chance of convincing clients. Ultimately which strategies are appropriate will depend both on the matter and the client. Some clients do buy on price. If these are the clients we wish to serve, then we need to structure our business model to have the lowest cost structure. Alternatively, we can choose to target clients who are willing to pay for a higher fee for superior benefits. This requires not only demonstrating that we can deliver superior benefits, but also showing that for this matter it is worth paying more. We should not forget that it’s our role to justify why we should be chosen, even if we are more expensive.

By reframing the problem from having “lost pricing power” to “our inability to justify our fee,” we focus the issue on what’s in our control. In doing so we can identify strategies to help increase the value delivered to clients and effectively communicate this value. It creates a formula for success in a market that expects “more for less.”


About the authors

Colin Jasper Colin Jasper is the director of Jasper Consulting. Jasper works with professional service firms around the world to improve pricing outcomes.
Susan Raridon Lambreth Susan Raridon Lambreth is a founding Principal at LawVision Group and is nationally recognized as one of the top leadership, practice group and project management consultants for law firms.

 


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