The balance of power has shifted. In-house counsel, increasingly concerned with legal spend, are putting the pressure on law firms to control costs. In turn, many law firms, scared of losing work, fall victim to suicide pricing. Clients actively seek control of legal costs by demanding greater discounts, requesting alternative fee arrangements and meddling in resource allocation. Colin Jasper, principal of Jasper Consulting, said that all of these factors create a growing challenge for law firms, since pricing has a bigger effect on profitability than any other lever.
In his presentation during the April LMA Midwest Luncheon titled “Pricing legal services in a challenging environment,” Colin discussed the challenges firms face in setting a fair price, and ways they can improve price-setting discretion and avoid commoditization.
What is the “right” price?
Colin polled the audience on the characteristics of the right price. As hands went up across the room, “profitability,” “perceived value,” “sustainable rate,” and “responsive to the market” were among the responses. Colin agreed that all of these are important considerations and that the right price is one that is fair to the client and fair to the firm. Three implications flow from this:
It is the client’s responsibility to fight for what’s fair to them, and we should not begrudge them for doing so.
- It’s our responsibility to fight for what’s fair for the firm.
- We have a role to play in influencing our clients’ perceptions of fairness.
He described three common methods for setting a price:
- The cost-plus method, which uses multiples and margins to determine cost. This method reflects an accounting mindset.
- The market-based method asks “what will it take to win?” and sets a price that is competitive with others in the market and employs a sales mindset.
- Value-based pricing is the most talked about and perhaps least understood. It sets prices based on the value of the service to the client.
At its most basic level, pricing is the process of determining what a firm will receive in exchange for its services. It is important, said Colin, to think of pricing as a process, not as an event. The pricing process is comprised of key inputs (such as objectives, costs, competitors and client value), process elements (roles, strategies, tools and monitor, control and feedback) and components (fee level, fee structure).
If you never lose work because of price, you are pricing too low.
“We are taught that we need to pay attention to client feedback, but that’s true only to a point,” he said. “Client feedback tends to define our place in the market.” He noted that losing work because of price is absolutely bound to happen as long as you are maintaining your competitive position and pricing. A premium firm, for example, will have high pricing and greater benefits. Their clients will say “we love your benefits, but you’re expensive.” The mid-market firms will hear similar. Economy firms, with low prices and fewer benefits, will hear the opposite (“we love your price, but wish we were getting better results and/or service”).
I just don’t want to be ripped off.
When it comes to pricing structures, clients are steering away from the hourly rate, which Colin says is overused in the legal profession. Other structures, such as fixed fees, event fees, monthly retainers, value billing and hybrid structures, are preferred instead. These bear much more resemblance to value billing and allocate risk between the client and the firm. With hourly fees, a disproportionate amount of risk falls on the client.
All of this does not make for a greedy client. Instead, said Colin, clients are buying emotionally and justifying rationally. They are saying “I’m happy to pay what’s fair, but I don’t want to be ripped off.” Clients are looking for signals as to whether the resulting price is fair and that they got good value for their spend. One of our roles as legal marketers is to influence the client’s perception of value. Many factors come into play when clients are determining the fairness of price. They are comparing price to a range of alternatives, including competitors, benefits, discounts, estimates, options and even competitors in a different market position. The heightened role of procurement in these purchase decisions has further exacerbated these comparisons.
The key, says Colin, is to have clients focus on what is at stake. If you’re the firm who can do this, you automatically have an advantage. Additionally, the biggest area marketers can see improvement is in communicating the firm’s value. The more we can do so, the less pushback we will get on price.
There is no such thing as a price sensitive client.
When a client perceives that the benefits of one firm are equal to the benefits of the others, your work is seen as a commodity. Colin said, “there is no such thing as a price sensitive client, only a client who has grown indifferent to your differentiation.” However, there are so many ways that legal services differ from firm to firm, that they are really not commodities by nature. In conclusion, Colin offered three ways to combat commoditization:
- Become the low cost provider.
- Fight the good fight of differentiation and help them understand how the benefits you offer are greater than the benefits of others.
- Change clients and transition away from clients who are pushing you down. Know your “walk away” position.
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