In my experience, lawyers aren’t that good at pricing. This is hardly surprising because for many years we have benefited from a “cost plus” methodology of pricing our work. This meant that we billed our clients by reference to an hourly rate, which was calculated by taking the salary cost of the lawyer plus the overhead cost of running the business and adding a profit margin. This approach was encouraged by the regulator and the courts for many years and became part of the DNA of the profession. Its consequences were profound. As salary inflation took hold of the profession in the boom times, law firms passed on to clients the increased costs of an ever more expensive workforce in higher and higher hourly rates (or fixed fees calculated by reference to hourly rates).
In a market where demand for legal service exceeded supply, clients had little choice but to pay, even if they didn’t like the inefficient way law firms operated. But as soon as supply exceeded demand, the cost plus model became redundant. Clients were now in a position to drive down the price and that is what has been happening for the last four years.
Price erosion has driven innovation amongst law firms as they seek to maintain margins, which is a positive outcome for both the profession and the consumer of legal services. The risk for the profession in this market, however, is that prices continue to fall as firms buy work to stay busy, and we see a rush to the bottom of the pricing chain. In a market where price becomes the only differentiator, law will inevitably becomes a commodity. Although there is a place for bulk commodity suppliers in the legal market that isn’t a good place for the whole market to be in, either for lawyers or for consumers of legal services
It doesn’t have to be like that. We all pay more for things we value. That’s why people drive BMWs, buy Coca Cola and wear Levis, instead of going for the cheapest option. Law firms, therefore, need to work out how we can operate in a more complex market and persuade clients that it is desirable to buy their legal services at a premium price.
Pricing in this way though is complicated. In most industries there are teams of experts who work out the optimum price to deliver the best return to shareholders. For these experts it isn’t generally about being the cheapest. It’s about differentiation, the brand proposition and an understanding of what influences the target audience to buy. The goal is to to achieve a perceived best value amongst the target audience, and, of course, to ensure the business makes a profit.
In law firms, however, prices are often decided by individual partners who have no training in pricing and who are generally motivated by a desire to win the work at almost any cost to stay busy and keep the client happy. That isn’t a sustainable position and needs to change.
Pricing, therefore, is a skill that the profession has to learn and learn fast. If lawyers are to avoid becoming a commodity purchase they must begin to understand pricing better and find a way of persuading buyers to pay more for the services they have to offer. Law firms have invested time and effort into becoming more efficient. We now need to turn our attention to pricing.