The high price of poor pricing

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’ve got to admit there’s something to that. We lawyers go on at great length about the value we deliver to our clients, the signal importance of having a lawyer on the case, the critical knowledge and skills we bring to the table, etc. 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 aren’t 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’re useless at pricing — and that’s okay. It’s 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 her wing when we first started out, we only learned the same scattershot substitutes for pricing that lawyers have been relying upon for decades.

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’s a problem now, and we need to solve it. Studies from multiple industries confirm that pricing is absolutely critical to profitability.

Here’s what The Deloitte Review says about the subject in an article titled “The Price of Pricing Effectiveness”:

Great companies do pricing very well. [T]he 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. …

While price setting is an essential piece of the pricing puzzle, the overall discipline of effective price management concerns itself with managing transaction-level profitability, which requires capabilities in pricing strategy, execution, analytics and governance. The discipline also requires coordination across many functions including sales, marketing, finance, product development and customer service.

Add to that these excerpts from an article in the MIT Sloan Management Review, “Is It Time to Rethink Your Pricing Strategy?” (HT to Andrew Terrett of Borden Ladner Gervais LLP, who pointed me to the article):

[N]umerous 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% or 50%. …

[S]uperior 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 realization). … 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.

Does that last sentence remind you of any legal organizations of your acquaintance? It should. Consultant Richard Burcher of Validatum describes this perfectly in his recent post, “Abdication of Pricing Responsibility: Whose Money Is It Anyway?”

How many businesses do you know where the employees are given a broad mandate to set the price of the products or services?  Would you invest as a shareholder in a business where the profitability fluctuated at the whim of often mid-level or even junior staff?

And yet this is what passes for business as usual in many law firms.  It’s not that realization rates, utilization rates, and other traditional law firm management metrics and wisdom aren’t important, but I see firms devoting time, effort and cost to these strategies, plugging pin-prick holes in the revenue bucket when there is a hole the size of a fist staring them in the face; the wrong people making pricing decisions.

I’ve 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:

  1. knowledge of and control over their own costs of doing business, coupled with:
  2. systems that minimize or eliminate variables that generate cost instability, producing:
  3. a sophisticated understanding of their internal profitability, which combines with:
  4. enforceable, enterprise-wide discipline over the setting of price, made possible by:
  5. decoupling individual compensation from individual billing, dovetailing with:
  6. an appreciation of clients’ circumstances and the value of legal services thereto, all of it supported by:
  7. the confidence to accept short-term losses and fluctuations in exchange for long-term sustainable profit.

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 don’t have enough of these tools, or any of them, then it’s 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’s it worth to us? What’s it worth to them? Answer these questions and adopt those seven tools, and you’ll start to master the art of pricing legal services.

Jordan Furlong delivers dynamic and thought-provoking presentations to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.


Comments are closed.