While looking for something I wrote a while back on measuring marketing ROI (I still haven’t found it), I ran across this short post from Attorney At Work from five years ago. This process is certainly not the same as you would get by engaging the services of a serious branding organization like Right Hat

My biggest takeaway from last week’s CES show in Vegas is that as 2018 begins, voice assistants, especially Amazon Alexa and Google Home, are the hottest things going. Similar tech is offered by Apple’s Siri and Microsoft’s Cortana, but they lag far behind. Just about everyone seems convinced that voice interfaces are here to stay

When I started this blog seven months ago (and posts to a Facebook group about a year ago), I mentioned several times that law firms would be well advised to include mention of AI in their alerts, blog posts and other content marketing to show that they “get it” regarding this important technology, and to


This is the third and final installment in my series on using Business Intelligence and Competitive Intelligence to optimally price legal services.

Pricing fundamentals and the considerations unique to law firms are discussed here.

The three types of pricing and their dependence on Competitive Intelligence and Business Intelligence are covered here.


 

Putting it all together

Cost-based pricing

This calculation is based entirely on data from the firm’s financial systems [Business Intelligence] and therefore very accurate–at least once the politics around various allocation assumptions have been resolved. (This is represented by “Profitable Work” in the following graph.)

Historically, firms have often told their clients that they cannot offer fixed prices because they can’t anticipate how much work will eventually be entailed. This excuse is increasingly falling on deaf ears as clients respond that they are being held to budgets, and a firm claiming to have deep experience should be in a much better position than they are to anticipate costs, at least for each phase of a matter. So you’d better be able to forecast profit.

Competition-based pricing

Sources of such data are readily available [Competitive Intelligence], and at the date they are published, generally accurate. Assumptions may be required to get to the specificity needed by market and practice, but the results should still be pretty accurate. (This is represented by “Competitor Rates” in the following graph.)

Customer value-based pricing


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This is the second installment of my three-part Pricing series. The first is here.

This installment covers the three essential elements of pricing legal services.

Tomorrow, in the final installment, I will show how to use Competitive Intelligence and Business Intelligence to develop the optimal price.


Pricing

The MIT Sloan Management Review7 identifies three factors to be considered in pricing (all apply to legal services):

  1. Cost-Based Pricing:relies on an analysis of the business’ operating costs to determine how to set the price to break even or achieve a certain return.
  2. Competition-Based Pricing: looks at data on competitors to determine appropriate pricing levels.
  3. Customer Value-Based Pricing: focuses on the customer’s perceived value to determine price.

Let’s consider each in some detail.

Cost-based pricing

This is directly relevant to the profit discussion in Part One of this series. Cost-based pricing means calculating the total cost of the work, including all allocated direct and indirect expenses. If ALL firm expenses are allocated to matters, any work priced above its cost will be profitable. Firms should be very reluctant to approve any new work projected to be unprofitable. Some firms have pricing committees established for the purpose of acting as gatekeepers in this regard.

Remember, the total amount of any discount fully hits your bottom line profit. Many partners are quick to give in to clients’ requests for discounts, but these should be given only as a last resort after exhausting other methods of increasing the value of your services to this client. (See “Customer Value-Based Pricing” below.)

This may be hard to believe, but I have seen it happen several times. Some in-house counsel receive bonuses based, in part, on the discounts they manage to negotiate from outside counsel. (This seems to have been more common a few years ago than today.) So, law firms would increase the entries on their rate sheet a bit only so they could then give the client the desired discount.
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Introduction

“(Pricing) can just destroy you if you don’t do it right. It doesn’t matter whether you’re putting out a novel you’ve written or providing a service through a pest control company or you’re a veterinarian. The bottom line is that pricing is extraordinarily important.”1

Charles Toftoy

Background

Until the past decade, most law firms simply billed clients according to their current rate sheet (with occasional discounts) and gave pricing scant thought. In today’s market, that won’t do. Pricing is much more important than in those good old days, not just in terms of the amount charged, but in terms of the billing structure (e.g., caps, collars, fixed fees, contingencies, hold-backs, success bonuses.)

With law firm margins thinner than before, it’s necessary to understand the profitability of each matter and client. Effective pricing means structuring fees so the firm wins the work and that the work is profitable. This is also a marketing opportunity in that optimal pricing helps clients meet their strategic goals (e.g., predictability, and “win at all costs” when needed); and it’s an opportunity to strengthen client relationships by increasing transparency.

Business Intelligence and Competitive Intelligence can substantially help manage the risk inherent in those pricing decisions. Optimal pricing requires three types of intelligence:

  1. Profitability of the matter and of the client under various fee models.
  2. Understanding of the fees being charged by competitors for similar services.
  3. Buyer price sensitivity.

At its core, the pricing of legal services is like pricing anything else, a matter of supply and demand, elasticity, competitive forces and buyer values.

Pricing Fundamentals

Definitions


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