Articles
Poor pricing a costly mistake for firms
Law firms’ historical neglect of proper pricing strategies is no longer acceptable in a changing environment for legal services, writes Jordan Furlong.
The cynic knows the price of everything and the value of nothing. The average lawyer, by contrast, knows the value of everything, but the price of nothing. You have to admit there is something to that notion. We lawyers go on at great length about the value we deliver to our clients, the importance of having a lawyer on the case and the critical knowledge and skills we bring to the table. A lawyer will leave his client in no doubt about the value he supplies. But that same lawyer, in almost every case, will be unable to assign a price to that value.
We can provide rates, sure – but rates are not prices, in the same way that speed is not distance unless you add time. Unless the matter is utterly routine and predictable, most lawyers cannot or will not answer the most straightforward client question in the world: “How much will I pay you for this?” We panic. We freeze up. We die a little. We resort to myths and excuses and, as we natter on, we see the client’s face fall …
We, as a profession, are terrible at pricing. Awful. Lost. Clueless. Atrocious. Self-immolatory. I could go on, but only to hammer home the point, so that we can come to accept it more easily. The shoe fits, so we might as well wear it. We are useless at pricing — and that is okay. It is understandable. No one ever trained us in pricing, either in law school or during our Bar admissions procedure. Even if a senior lawyer took us under their wing when we first started out, we only learned the same scattershot substitutes for pricing that lawyers have been relying upon for decades.
Time for a mindset change
This was never a problem before because we were the only people serving the legal market and clients had to accept our services on our terms. It is a problem now, and we need to solve it. Studies from multiple industries confirm that pricing is absolutely critical to profitability.
In an article entitled “The Price of Pricing Effectiveness”, Deloitte Review states:
“Great companies do pricing very well. The link between pricing and profitability recurs both anecdotally and in more detailed analysis. One study suggests that pricing has two to four times the potential to influence profitability relative to other business levers. Companies that actively pursue pricing as an important part of their strategy typically outperform industry peers on several financial metrics …”
Add to that these excerpts from an article in the MIT Sloan Management Review, “Is It Time to Rethink Your Pricing Strategy?”:
“Numerous studies have confirmed that pricing has a substantial and immediate effect on company profitability. Studies have shown that small variations in price can raise or lower profitability by as much as 20 per cent or 50 per cent … Superior pricing is almost always based on skill. The companies we found that had achieved better pricing all had top managers who championed the development of skills in price setting (price orientation) and price getting (price realisation). … Without managerial engagement, companies typically use historical heuristics, such as cost information, to set prices and yield too much pricing authority to the sales force.”
Seven key elements for success
I have come to believe that our failure to price well, as a profession, is our single greatest vulnerability in the new legal market. Our competitors, many of whom are not lawyers, can and do set a reliable price on their legal services. They can do this because they possess several things that most lawyers and law firms lack:
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If you want to institute truly game-changing pricing in your law firm, you need to start by addressing these seven missing elements. Some will be easier to fix than others, and some will be excruciatingly difficult (4 and 5, in particular). But these are the tools with which your rivals, old and new, are attacking your hold on your clients and your share of the market. If you do not have enough of these tools, or any of them, then it is not going to be a fair fight, or a particularly long one.
Price, ultimately, is about knowing and meeting our clients’ needs and expectations in the context of our business goals and our competitive environment. What is it worth to us? What is it worth to them? Answer these questions and adopt those seven elements, and you will start to master the art of pricing legal services.
Jordan Furlong is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises. He is a Canada-based legal industry analyst who advises law firms and legal organisations throughout the United States and Canada on the future of the legal services marketplace.