Easing the squeeze – the keys to pricing success
Popular thoughts on how to improve the pricing of legal services include finding ways to be more efficient, killing the billable hour, and focusing on value. Could it be that studies into primate behaviour offer greater insight, asks Colin Jasper.
Many lawyers feel squeezed by pricing pressures.
On one side, they have firm management telling them how overheads are increasing, how staff costs are skyrocketing, and how they need to increase fees to maintain profitability. On the other side, they have clients explaining how they are under pressure to contain costs. Your average partner is stuck in the middle of the vice – trying to appease clients and firm management, but simply feeling under pressure from both sides.
Before discussing the keys to successfully easing the pressure, I would like to debunk some popular theories on how to resolve this issue.
It’s not about killing the billable hour
There are many consultants who argue that the billable hour is the cause of most pricing pressures. Likewise, there are certainly many clients who do not like hourly rates. However, shifting away from hourly rates will not resolve the issue outlined above.
There are two components of any price:
- Fee structure – how we charge
- Fee level – how much we charge.
Hourly rates are a type of fee structure. Changing the fee structure does not address the pressure around how much to charge and, therefore, does not ease the pricing pressure.
In addition, some clients prefer hourly rates. Firms need to offer fee structures that are appealing to their clients. To kill the billable hour limits the range of clients with whom you can work with, which ultimately makes it harder to build a profitable practice.
It’s not solved through efficiency
Others would argue that the pricing pressure can be resolved through efficiency. The use of legal project management techniques, precedent documents, technology, low-cost resources and in some areas, the implementation of AI support. No firm can succeed if they are inefficient in the long-term, however, unless your market is truly commoditised, you cannot cut costs to success.
Efficiency is necessary, but not sufficient to ease the pressure.
Increasing value is not sufficient
The most popular theory is that pricing pressure can only be eased through increasing value. While an increase in perceived value is necessary, it is not sufficient to encourage clients to pay more. Let me illustrate though some examples:
- Transport hub – A UK firm had a client that ran a transport hub on the outskirts of London. Several key clients had significant outstanding debtors. Attempts to encourage payment had been unsuccessful, so they briefed their law firm. The law firm provided a fixed fee to act against the debtors, but it then suggested an alternative approach. Lock the gates to the transport hub. The clients paid immediately.
- Consortium of insurers vs Obamacare – A consortium of insurance companies appointed Quinn Emmanuel to act on their behalf to sue the US Government over Obamacare. Quinn Emmanuel agreed to undertake the work on a full contingency basis. While the matter was expected to take four to five years to resolve, Quinn Emmanuel was able to obtain a settlement above what the consortium was seeking within six months.
- Recruitment fees – Here is an example from outside the legal market. A common fee structure in recruitment is to charge a percentage of the remuneration package. For this fee, the agency works with the client to define the role, agree on a search process, search, evaluate candidates, create a short-list, and then advocate on behalf of the client to encourage the successful candidate to accept the position. Occasionally, the recruitment firm will have an ideal candidate ready to go. The client will interview them and appoint them within a week.
In each of the above examples, the value created for the client increased substantially.
- With the transport hub, they received full payment, immediately. It was a permanent solution. They knew how to deal with clients who created outstanding debtors in the future.
- With the consortium of insurers, they received a higher return, years earlier than expected.
- With the client of the recruitment agency, they filled the position with an ideal candidate much earlier than expected.
Yet in each of the above examples, the clients were unwilling to pay the agreed price. Why? Because in each of the examples, despite value increasing, the price no longer seemed fair – and, when it comes to pricing, fairness is more important than value!
The keys to success
Contemporary pricing theory is not based on rational economics; rather, it is based on behavioural science. How do clients respond to our price?
I’ve recently been drawn to the work of Dutch ethologist Frans de Waal. His research into primate behaviour identified what he describes as two “pillars of morality”, namely fairness and compassion (or empathy).
It is our job to help clients see that our price is fair. Most clients first decide with whom they would most like to work, then assess if the price is fair. If they do not regard the price as fair, they may then choose an alternative firm. In this regard, price is not about the absolute number; rather, it is relative to something. In assessing if the price is fair, clients make comparisons. It may be relative to competitors, it may be relative to a budget, or it may be relative to something else. If we do not provide an appropriate comparison, the client will find their own comparison which may not serve them, or us.
It also helps if the client knows we have empathy for their needs to contain costs. We need to demonstrate to clients that we understand the cost pressures they are under, and we have thought about this when considering how to manage the matter.
While being efficient and demonstrating value both assist with pricing, if our goal is to avoid pricing being a barrier to purchase, we also need to focus on demonstrating of fairness and empathy.
Colin Jasper is a founder and principal of Positive Pricing, which helps professional services firms win more work at higher prices.